Alpha Natural Resources, Inc. - FORM 10-Q - November 6, 2014

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EXCEL - IDEA: XBRL DOCUMENT - Alpha Natural Resources, Inc.Financial_Report.xls
EX-10.3 - CONSULTING AGREEMENT, DATED SEPTEMBER 1, 2014 - Alpha Natural Resources, Inc.anr-2014930x10qexhibit103.htm
EX-32.B - CERTIFICATION PURSUANT TO 18 U.S.C. 1350 - Alpha Natural Resources, Inc.anr-2014930x10qexhibit32b.htm
EX-95 - MINE SAFETY DISCLOSURE EXHIBIT - Alpha Natural Resources, Inc.anr-2014930x10qexhibit95.htm
EX-32.A - CERTIFICATION PURSUANT TO 18 U.S.C. 1350 - Alpha Natural Resources, Inc.anr-2014930x10qexhibit32a.htm
EX-31.A - CERTIFICATION PURSUANT TO RULE 13A-14(A) UNDER THE SECURITIES EXCHANGE ACT - Alpha Natural Resources, Inc.anr-2014930x10qexhibit31a.htm
EX-10.1 - GENERAL RELEASE AND NON-DISPARAGEMENT, DATED JULY 18, 2014 - Alpha Natural Resources, Inc.anr-2014930x10qexhibit101.htm
EX-10.2 - GENERAL RELEASE, DATED SEPTEMBER 1, 2014 - Alpha Natural Resources, Inc.anr-2014930x10qexhibit102.htm
EX-12.1 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - Alpha Natural Resources, Inc.anr-201493010qexhibit121.htm
EX-31.B - CERTIFICATION PURSUANT TO RULE 13A-14(A) UNDER THE SECURITIES EXCHANGE ACT - Alpha Natural Resources, Inc.anr-2014930x10qexhibit31b.htm
EX-12.2 - COMPUTATION OF OTHER RATIOS - Alpha Natural Resources, Inc.anr-2014930x10qexhibit122.htm

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
 
 (Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014

OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from           to

Commission File No. 001-32331

ALPHA NATURAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
42-1638663
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
One Alpha Place, P.O. Box 16429, Bristol, Virginia
 
24209
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(276) 619-4410

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes   ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes   ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
x Large accelerated filer
o Accelerated filer
o Non-accelerated filer
o Smaller reporting company
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes   x   No

Number of shares of the registrant’s Common Stock, $0.01 par value, outstanding as of October 31, 2014 - 221,571,545


TABLE OF CONTENTS
 






Item 1.
Financial Statements

ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(Amounts in thousands, except share and per share data)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Coal revenues
$
920,833

 
$
1,028,847

 
$
2,792,906

 
$
3,292,412

Freight and handling revenues
111,816

 
135,931

 
362,356

 
448,316

Other revenues
17,943

 
26,316

 
61,201

 
119,080

Total revenues
1,050,592

 
1,191,094

 
3,216,463

 
3,859,808

Costs and expenses:
 
 
 
 
 
 
 
Cost of coal sales (exclusive of items shown separately below)
864,998

 
988,995

 
2,589,530

 
3,082,330

Freight and handling costs
111,816

 
135,931

 
362,356

 
448,316

Other expenses
17,988

 
120,698

 
39,873

 
155,479

Depreciation, depletion and amortization
170,895

 
196,292

 
562,262

 
650,021

Amortization of acquired intangibles, net
9,166

 
2,748

 
27,909

 
908

Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)
34,798

 
38,899

 
119,752

 
120,664

Asset impairment and restructuring
11,544

 
2,017

 
23,633

 
24,358

Goodwill impairment
—

 
253,102

 
308,651

 
253,102

Total costs and expenses
1,221,205

 
1,738,682

 
4,033,966

 
4,735,178

Loss from operations
(170,613
)
 
(547,588
)
 
(817,503
)
 
(875,370
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(75,688
)
 
(62,233
)
 
(211,662
)
 
(182,587
)
Interest income
574

 
1,008

 
1,730

 
3,133

Gain on sale of marketable equity securities
16,435

 
—

 
16,435

 
—

Gain (loss) on early extinguishment of debt
—

 
158

 
(2,022
)
 
(33,039
)
Gain on exchange of equity method investment
—

 
—

 
250,331

 
—

Miscellaneous income, net
379

 
7,277

 
2,493

 
24,131

Total other income (expense), net
(58,300
)
 
(53,790
)
 
57,305

 
(188,362
)
Loss before income taxes
(228,913
)
 
(601,378
)
 
(760,198
)
 
(1,063,732
)
Income tax benefit
43,938

 
143,137

 
6,898

 
309,022

Net loss
$
(184,975
)
 
$
(458,241
)
 
$
(753,300
)
 
$
(754,710
)
Basic loss per common share
$
(0.84
)
 
$
(2.07
)
 
$
(3.40
)
 
$
(3.42
)
Diluted loss per common share
$
(0.84
)
 
$
(2.07
)
 
$
(3.40
)
 
$
(3.42
)
Weighted average shares - basic
221,491,811

 
220,960,449

 
221,342,088

 
220,850,020

Weighted average shares - diluted
221,491,811

 
220,960,449

 
221,342,088

 
220,850,020


See accompanying Notes to Condensed Consolidated Financial Statements.


1

ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(Amounts in thousands)

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Net loss
$
(184,975
)
 
$
(458,241
)
 
$
(753,300
)
 
$
(754,710
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Amortization of and adjustments to employee benefit costs, net of income tax of ($1,033) and ($76,795), and $2,125 and ($81,081) for the three and nine months ended September 30, 2014 and 2013, respectively
(31,122
)
 
100,753

 
(35,838
)
 
109,931

Settlement of cash flow hedges, net of income tax of $265 and $788, and $1,304 and $2,575 for the three and nine months ended September 30, 2014 and 2013, respectively
(404
)
 
(946
)
 
(1,981
)
 
(3,998
)
Change in fair value of marketable securities, net of income tax of $21,505 and ($173), and ($14,202) and $27 for the three and nine months ended September 30, 2014 and 2013, respectively
(32,663
)
 
300

 
21,572

 
(41
)
Total other comprehensive income (loss), net of tax
(64,189
)
 
100,107

 
(16,247
)
 
105,892

Total comprehensive loss
$
(249,164
)
 
$
(358,134
)
 
$
(769,547
)
 
$
(648,818
)

See accompanying Notes to Condensed Consolidated Financial Statements.

2

ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
 
September 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
809,411

 
$
619,644

Trade accounts receivable, net
317,684

 
287,655

Inventories, net
305,285

 
304,863

Short-term marketable securities
374,528

 
337,069

Prepaid expenses and other current assets
264,425

 
439,193

Total current assets
2,071,333

 
1,988,424

Property, equipment and mine development costs, net
1,528,163

 
1,798,648

Owned and leased mineral rights and land (net of accumulated depletion of $1,310,602 and $1,167,912, respectively)
6,984,875

 
7,157,506

Goodwill, net
—

 
308,651

Other acquired intangibles (net of accumulated amortization of $362,887 and $422,737, respectively)
112,696

 
158,465

Other non-current assets
495,758

 
387,564

Total assets
$
11,192,825

 
$
11,799,258

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
176,945

 
$
29,169

Trade accounts payable
245,311

 
234,951

Accrued expenses and other current liabilities
703,309

 
978,695

Total current liabilities
1,125,565

 
1,242,815

Long-term debt
3,714,976

 
3,398,434

Pension and postretirement medical benefit obligations
1,024,896

 
990,124

Asset retirement obligations
723,479

 
728,575

Deferred income taxes
828,070

 
901,552

Other non-current liabilities
455,296

 
465,892

Total liabilities
7,872,282

 
7,727,392

 
 
 
 
Commitments and Contingencies (Note 18)
 
 
 
Stockholders’ Equity
 
 
 
Preferred stock - par value $0.01, 10.0 million shares authorized, none issued
—

 
—

Common stock - par value $0.01, 400.0 million shares authorized, 233.7 million issued and 221.6 million outstanding at September 30, 2014 and 232.8 million issued and 221.0 million outstanding at December 31, 2013
2,337

 
2,328

Additional paid-in capital
8,204,829

 
8,185,222

Accumulated other comprehensive income (loss)
(73,395
)
 
(57,148
)
Treasury stock, at cost: 12.1 million and 11.8 million shares at September 30, 2014 and December 31, 2013, respectively
(273,129
)
 
(271,737
)
Accumulated deficit
(4,540,099
)
 
(3,786,799
)
Total stockholders’ equity
3,320,543

 
4,071,866

Total liabilities and stockholders’ equity
$
11,192,825

 
$
11,799,258


See accompanying Notes to Condensed Consolidated Financial Statements.

3

ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
 
Nine Months Ended
September 30,
 
2014
 
2013
Operating activities:
 
 
 
Net loss
$
(753,300
)
 
$
(754,710
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation, depletion, accretion and amortization
647,298

 
733,282

Amortization of acquired intangibles, net
27,909

 
908

Mark-to-market adjustments for derivatives
4,641

 
1,312

Stock-based compensation
21,170

 
18,360

Goodwill impairment
308,651

 
253,102

Asset impairment and restructuring
23,633

 
24,358

Employee benefit plans, net
43,879

 
43,352

Loss on early extinguishment of debt
2,022

 
33,039

Gain on exchange of equity-method investment
(250,331
)
 
—

Gain on sale of marketable equity security
(16,435
)
 
—

Deferred income taxes
(4,785
)
 
(306,488
)
Other, net
13,005

 
(16,020
)
Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable, net
(30,029
)
 
118,216

Inventories, net
(422
)
 
61,116

Prepaid expenses and other current assets
80,882

 
30,728

Other non-current assets
8,255

 
7,052

Trade accounts payable
11,204

 
(28,332
)
Accrued expenses and other current liabilities
(304,212
)
 
152,816

Pension and postretirement medical benefit obligations
(31,752
)
 
(36,647
)
Asset retirement obligations
(43,225
)
 
(31,519
)
Other non-current liabilities
(11,206
)
 
(125,346
)
Net cash provided by (used in) operating activities
(253,148
)
 
178,579

Investing activities:
 
 
 
Capital expenditures
(128,174
)
 
(163,129
)
Purchases of marketable securities
(507,804
)
 
(738,800
)
Sales of marketable securities
548,758

 
680,452

Proceeds from exchange of equity-method investment, net
96,732

 
—

Other, net
13,516

 
7,075

Net cash provided by (used in) investing activities
23,028

 
(214,402
)
Financing activities:
 
 
 
Principal repayments of long-term debt
(35,993
)
 
(951,894
)
Principal repayments of capital lease obligations
(13,028
)
 
(12,151
)
Proceeds from borrowings on long-term debt
500,000

 
964,369

Debt issuance and modification costs
(28,185
)
 
(24,317
)
Common stock repurchases
(1,392
)
 
(1,352
)
Other
(1,515
)
 
(1,453
)
Net cash provided by (used in) financing activities
419,887

 
(26,798
)
Net increase (decrease) in cash and cash equivalents
189,767

 
(62,621
)
Cash and cash equivalents at beginning of period
619,644

 
730,723

Cash and cash equivalents at end of period
$
809,411

 
$
668,102


See accompanying Notes to Condensed Consolidated Financial Statements.

4

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

(1)
Business and Basis of Presentation

Business

Alpha Natural Resources, Inc. and its consolidated subsidiaries (the “Company” and “Alpha”) are primarily engaged in the business of extracting, processing and marketing steam and metallurgical coal from surface and deep mines, and mainly sell to electric utilities, steel and coke producers, and industrial customers. The Company, through its subsidiaries, is also involved in marketing coal produced by others to supplement its own production and, through blending, provides its customers with coal qualities beyond those available from its own production.

Basis of Presentation

The accompanying interim Condensed Consolidated Financial Statements of the Company are unaudited and prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for Form 10-Q. Such rules and regulations allow the omission of certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America as long as the financial statements are not misleading. In the opinion of management, these interim Condensed Consolidated Financial Statements reflect all normal and recurring adjustments necessary for a fair presentation of the results for the periods presented. Results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014 or any other period. These interim Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements of the Company included in its Annual Report on Form 10-K for the year ended December 31, 2013.

The Company’s Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the Company’s Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include inventories; mineral reserves; allowance for non-recoupable advanced mining royalties; asset impairments; reclamation obligations; pensions, postemployment, postretirement medical and other employee benefit obligations; useful lives for depreciation, reserves for workers’ compensation and black lung claims; current and deferred income taxes; reserves for contingencies and litigation and fair value of financial instruments. Estimates are based on facts and circumstances believed to be reasonable at the time; however, actual results could differ from those estimates.

New Accounting Pronouncements

On April 10, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”), which changes the criteria for reporting discontinued operations and requires additional disclosures about discontinued operations. The standard requires that an entity report as a discontinued operation only a disposal that represents a strategic shift in operations that has a major effect on its operations and financial results. ASU 2014-08 is effective prospectively for new disposals that occur within annual periods beginning on or after December 15, 2014. Early adoption is permitted and the Company adopted ASU 2014-08 during the three months ended June 30, 2014. Adoption of the standard did not have a material impact on the Company's results of operations.
On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

On June 19, 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”). The standard requires a reporting entity to treat a performance target that affects vesting and that could be achieved after the requisite service

5
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

period as a performance condition. ASU 2014-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted and the Company adopted ASU 2014-12 during the three months ended September 30, 2014. Adoption of the standard did not have a material impact on the Company's results of operations.

Reclassifications

Certain reclassifications have been made to the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2013 to conform to the current year presentation.

(2)    Asset Impairment and Restructuring

The Company recorded severance expenses of $11,544 and $13,942 during the three and nine months ended September 30, 2014, respectively. The Company recorded impairment expenses of $8,797 and $926 related to certain other non-current assets within the Company’s All Other category during the three months ended March 31, 2014 and June 30, 2014, respectively. Additionally, the Company recorded other expenses of ($32) during the nine months ended September 30, 2014.

The Company recorded severance expenses of ($266) and $12,781 and professional fees and other expenses of $393 and $9,687 for the three and nine months ended September 30, 2013, respectively. Additionally, during the three months ended September 30, 2013, the Company tested certain of its long-lived asset groups for impairment due primarily to a longer than expected recovery in the metallurgical coal markets and lower production and shipment levels compared with previous estimates and recorded asset impairment charges totaling $1,890 related to mineral reserves in an asset group in its All Other category.

(3)    Goodwill, Net

During the second quarter of 2014, the Company performed an interim goodwill impairment test due primarily to continued weakness in the global metallurgical coal markets which indicated that the fair value of a reporting unit within its eastern coal operations may have been below its carrying value.

The Company performed its interim goodwill impairment test using a two-step approach. Step one compared the fair value of a reporting unit to its carrying value. The valuation methodology utilized to estimate the fair value of the reporting unit was based on both a market and income approach and is within the range of fair values yielded under each approach. The income approach is based on a discounted cash flow methodology in which expected future net cash flows are discounted to present value, using an appropriate after-tax weighted average cost of capital. The market approach is based on a guideline company and similar transaction method. Under the guideline company method, certain operating metrics from a selected group of publicly traded guideline companies that have similar operations to the Company’s reporting unit are used to estimate the fair value of the reporting unit. Under the similar transaction method, recent merger and acquisition transactions for companies that have similar operations to the Company’s reporting unit are used to estimate the fair value of the Company’s reporting unit.
 
In step two of the goodwill impairment test, the Company compared the carrying value of goodwill to its implied fair value. In estimating the implied fair value of goodwill at a reporting unit, the Company assigned the fair value of the reporting unit to all of the assets and liabilities associated with the reporting unit as if the reporting unit had been acquired in a business combination.

As a result of applying the approach discussed above at its interim impairment testing date of June 1, 2014, the Company recorded an impairment charge to write down goodwill to its implied fair value as follows:

6
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

 
Balance December 31, 2013
 
 Impairments
 
Balance September 30, 2014
Goodwill:
 
 
 
 
 
Eastern operations
$
3,024,308

 
$
—

 
$
3,024,308

 
 
 
 
 
 
Accumulated impairment losses:
 
 
 
 
 
Eastern operations
$
(2,715,657
)
 
$
(308,651
)
 
$
(3,024,308
)
 
 
 
 
 
 
Goodwill, net:
 
 
 
 
 
Eastern operations
$
308,651

 
$
(308,651
)
 
$
—



7
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

(4)    Accumulated Other Comprehensive Income (Loss)

The following table summarizes the changes to accumulated other comprehensive income (loss) during the nine months ended September 30, 2014 and 2013:

Balance December 31, 2013
 
Other comprehensive
income (loss) before reclassifications
 
Amounts reclassified
from accumulated other comprehensive income (loss)
 
Balance
September 30, 2014
Employee benefit costs
$
(59,102
)
 
$
(34,168
)
 
$
(1,670
)
 
$
(94,940
)
Cash flow hedges
1,941

 
—

 
(1,981
)
 
(40
)
Available-for-sale marketable securities
13

 
31,483

 
(9,911
)
 
21,585


$
(57,148
)
 
$
(2,685
)
 
$
(13,562
)
 
$
(73,395
)

 
Balance December 31, 2012
 
Other comprehensive
income (loss) before reclassifications
 
Amounts reclassified
from accumulated other comprehensive income (loss)
 
Balance
September 30, 2013
Employee benefit costs
$
(171,394
)
 
$
108,985

 
$
946

 
$
(61,463
)
Cash flow hedges
4,755

 
(972
)
 
(3,026
)
 
757

Available-for-sale marketable securities
41

 
(103
)
 
62

 
—

 
$
(166,598
)
 
$
107,910

 
$
(2,018
)
 
$
(60,706
)

The following tables summarize the amounts reclassified from accumulated other comprehensive income (loss) and the statement of operations line items affected by the reclassifications during the three and nine months ended September 30, 2014 and 2013:


8
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

Details about accumulated other comprehensive income (loss) components
Amounts reclassified from accumulated other comprehensive income (loss)
 
Affected line item in the Condensed Consolidated Statements of Operations
Three Months Ended September 30, 2014
 
Three Months Ended September 30, 2013
 
 
 
Employee benefit costs:
 
 
 
 
 
     Amortization of actuarial loss
$
47

 
$
777

 
(1) 
     Amortization of prior service credit
(947
)
 
(955
)
 
(1) 
Total before income tax
(900
)
 
(178
)
 
 
Tax benefit
343

 
73

 
Income tax benefit
Total, net of tax
$
(557
)
 
$
(105
)
 
 
 
 
 
 
 
 
Cash flow hedges:


 
 
 

     Commodity swaps-coal
$
(1,012
)
 
$
(1,514
)
 
Coal revenues
     Commodity swaps-diesel fuel
343

 
(220
)
 
Cost of coal sales
Total before income tax
(669
)
 
(1,734
)
 

Tax benefit
265

 
788

 
Income tax benefit
Total, net of tax
$
(404
)
 
$
(946
)
 



 
 
 

Available-for-sale marketable securities:


 
 
 

     Unrealized gains and losses
$
(16,435
)
 
$
123

 
Interest income
Tax benefit (expense)
6,525

 
(45
)
 
Income tax benefit
Total, net of tax
$
(9,910
)
 
$
78

 



9
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

Details about accumulated other comprehensive income (loss) components
Amounts reclassified from accumulated other comprehensive income (loss)
 
Affected line item in the Condensed Consolidated Statements of Operations
Nine Months Ended September 30, 2014
 
Nine Months Ended September 30, 2013
 
 
 
Employee benefit costs:
 
 
 
 
 
     Amortization of actuarial loss
$
139

 
$
4,363

 
(1) 
     Amortization of prior service credit
(2,841
)
 
(2,864
)
 
(1) 
     Other
—

 
58

 
(1) 
Total before income tax
(2,702
)
 
1,557

 
 
Tax benefit (expense)
1,032

 
(611
)
 
Income tax benefit
Total, net of tax
$
(1,670
)
 
$
946

 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
     Commodity swaps-coal
$
(3,252
)
 
$
(3,304
)
 
Coal revenues
     Commodity swaps-diesel fuel
(33
)
 
82

 
Cost of coal sales
     Commodity swaps-natural gas
—

 
(1,866
)
 
Other revenues
     Commodity options-natural gas
—

 
113

 
Other revenues
Total before income tax
(3,285
)
 
(4,975
)
 
 
Tax benefit
1,304

 
1,949

 
Income tax benefit
Total, net of tax
$
(1,981
)
 
$
(3,026
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale marketable securities:
 
 
 
 
 
     Unrealized gains and losses
$
(16,436
)
 
$
103

 
Interest income
Tax benefit (expense)
6,525

 
(41
)
 
Income tax benefit
Total, net of tax
$
(9,911
)
 
$
62

 
 

(1) These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit costs for pension, other postretirement benefit plans and black lung. See Note 16.

(5)    Earnings Per Share

The number of shares used to calculate basic earnings per common share is based on the weighted average number of the Company’s outstanding common shares during the respective periods. The number of shares used to calculate diluted earnings per common share is based on the number of common shares used to calculate basic earnings per share plus the dilutive effect of stock options and other stock-based instruments held by the Company’s employees and directors during each period, the Company’s outstanding 4.875% convertible senior notes due 2020 (the “4.875% Convertible Notes”), 3.75% convertible senior notes due 2017 (the “3.75% Convertible Notes”), 2.375% convertible senior notes due 2015 (the “2.375% Convertible Notes”), and 3.25% convertible senior notes due 2015 issued by Alpha Appalachia Holdings, Inc. (the “3.25% Convertible Notes”). The 4.875% Convertible Notes, 3.75% Convertible Notes, 2.375% Convertible Notes and 3.25% Convertible Notes become dilutive for earnings per common share calculations in certain circumstances and in specified periods. The shares that would be issued to settle the conversion or conversion spread are included in the diluted earnings per common share calculation when the conversion option is in the money or the notes are otherwise convertible. In periods of net loss, the number of shares used to calculate diluted earnings per share is the same as basic earnings per share.

(6)    Inventories, net

Inventories, net consisted of the following:

10
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

 
September 30,
2014
 
December 31,
2013
Raw coal
$
53,093

 
$
39,830

Saleable coal
168,176

 
171,240

Materials, supplies and other, net
84,016

 
93,793

Total inventories, net
$
305,285

 
$
304,863


(7)    Marketable Securities

In 2010, the Company entered into a 50/50 joint venture (the “Alpha Shale JV”) with Rice Drilling C LLC, a wholly owned subsidiary of Rice Drilling B LLC, in order to develop a portion of Alpha’s Marcellus Shale natural gas holdings in southwest Pennsylvania. On December 6, 2013, the Company, Rice Drilling C LLC and Rice Energy Inc. (“Rice Energy”) entered into a transaction agreement (the “Transaction Agreement”). Pursuant to the Transaction Agreement, the Company agreed to transfer its 50% interest in the Alpha Shale JV to Rice Energy in exchange for total consideration of $300,000, consisting of $100,000 of cash and $200,000 of shares of Rice Energy common stock, based upon Rice Energy’s initial public offering (the “Offering”). On January 29, 2014, Rice Energy completed the Offering, and on the same date, issued the Company 9,523,810 shares of common stock and paid $100,000 in cash. The exchange of interest in Alpha Shale resulted in a gain of $250,331 in the first quarter of 2014. On August 19, 2014, the Company sold approximately 3.1 million shares of Rice Energy common stock in exchange for $81,846 of cash and recorded a gain of $16,435. The remaining approximately 6.4 million shares of Rice Energy are subject to customary lockup provisions that will expire on November 11, 2014. The Rice Energy common stock is accounted for as an available for sale marketable security and reported within other non-current assets on the Condensed Consolidated Balance Sheet as of September 30, 2014.

Short-term marketable securities consisted of the following:
 
September 30, 2014
 
 
 
Unrealized
 
 
 
Cost
 
Gain
 
Loss
 
Fair value
Short-term marketable securities:
 
 
 
 
 
 
 
U.S. treasury and agency securities(a)
$
59,515

 
$
5

 
$
(3
)
 
$
59,517

Corporate debt securities(a)
315,111

 
3

 
(103
)
 
315,011

Total short-term marketable securities
$
374,626

 
$
8

 
$
(106
)
 
$
374,528

 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
Unrealized
 
 
 
Cost
 
Gain
 
Loss
 
Fair value
Short-term marketable securities:
 
 
 
 
 
 
 
U.S. treasury and agency securities(a)
$
81,484

 
$
17

 
$
(4
)
 
$
81,497

Corporate debt securities(a)
255,567

 
49

 
(44
)
 
255,572

Total short-term marketable securities
$
337,051

 
$
66

 
$
(48
)
 
$
337,069

(a) 
Unrealized gains and losses are recorded as a component of stockholders’ equity.

Long-term marketable securities included in other non-current assets, consisted of the following:

11
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

 
September 30, 2014
 
 
 
Unrealized
 
 
 
Cost
 
Gain
 
Loss
 
Fair value
Long-term marketable securities:
 
 
 
 
 
 
 
Corporate equity securities (a)
$
134,589

 
$
35,890

 
$
—

 
$
170,479

Mutual funds held in Rabbi Trust(b)
7,384

 
4,160

 
(1,725
)
 
9,819

Total long-term marketable securities
$
141,973

 
$
40,050

 
$
(1,725
)
 
$
180,298

 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
Unrealized
 
 
 
Cost
 
Gain
 
Loss
 
Fair value
Long-term marketable securities:
 
 
 
 
 
 
 
Mutual funds held in rabbi trust(b)
$
7,261

 
$
3,637

 
$
(1,568
)
 
$
9,330

(a) 
Unrealized gains and losses are recorded as a component of stockholders’ equity.
(b) 
Unrealized gains and losses are recorded in current period earnings.

(8)     Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:
 
September 30, 2014
 
December 31, 2013
Prepaid insurance
$
14,988

 
$
12,273

Insurance and indemnification receivables (1)
124,176

 
195,228

Notes and other receivables
14,255

 
10,381

Deferred income taxes - current
39,287

 
118,757

Deferred long wall move expenses
12,559

 
10,766

Refundable income taxes
7,483

 
19,708

Derivative financial instruments
3,554

 
8,898

Prepaid freight
23,346

 
26,445

Deposits
9,002

 
13,671

Other prepaid expenses
15,775

 
23,066

Total prepaid expenses and other current assets
$
264,425

 
$
439,193

(1) See Note 10.

(9)    Property, Equipment and Mine Development Costs

Property, equipment and mine development costs consisted of the following:

 
September 30, 2014
 
December 31, 2013
Plant and mining equipment
$
3,626,191

 
$
3,731,282

Mine development
316,002

 
299,334

Office equipment, software and other
49,882

 
61,000

Construction in progress
61,195

 
62,457

Total property, equipment and mine development costs
4,053,270

 
4,154,073

Less accumulated depreciation and amortization
2,525,107

 
2,355,425

Total property, equipment and mine development costs, net
$
1,528,163

 
$
1,798,648


12
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)


(10)     Accrued Expenses and Other Current Liabilities
 
Accrued expenses and other current liabilities consisted of the following:
 
September 30, 2014
 
December 31, 2013
Wages and employee benefits
$
117,295

 
$
117,561

Current portion of asset retirement obligations
84,632

 
70,851

Taxes other than income taxes
105,479

 
123,361

Freight
9,423

 
4,650

Current portion of self insured workers’ compensation obligations
14,189

 
14,189

Interest payable
78,060

 
22,321

Current portion of postretirement medical benefit obligations
46,678

 
46,678

Deferred revenue
40,573

 
41,250

Litigation (1)
129,060

 
447,214

Other
77,920

 
90,620

Total accrued expenses and other current liabilities
$
703,309

 
$
978,695

(1) The Company has recorded related receivables of $124,176 and $195,228 from insurance coverage and indemnifications in prepaid expenses and other current assets as of September 30, 2014 and December 31, 2013, respectively.
 
(11)    Long-Term Debt

Long-term debt consisted of the following:
 
September 30, 2014
 
December 31, 2013
6.25% senior notes due 2021
$
700,000

 
$
700,000

7.50% senior secured second lien notes due 2020
500,000

 
—

6.00% senior notes due 2019
800,000

 
800,000

9.75% senior notes due 2018
500,000

 
500,000

Term loan due 2020
615,625

 
620,313

4.875% convertible senior notes due 2020
345,000

 
345,000

3.75% convertible senior notes due 2017
345,000

 
345,000

3.25% convertible senior notes due 2015
109,201

 
128,182

2.375% convertible senior notes due 2015
44,458

 
65,889

Other
60,777

 
73,305

Debt discount
(128,140
)
 
(150,086
)
Total long-term debt
3,891,921

 
3,427,603

Less current portion
(176,945
)
 
(29,169
)
Long-term debt, net of current portion
$
3,714,976

 
$
3,398,434


Repurchases of 2.375% and 3.25% Convertible Senior Notes due 2015

During the nine months ended September 30, 2014, the Company completed the repurchase of approximately $21,431 of its outstanding 2.375% convertible senior notes due 2015 and approximately $18,981 of its outstanding 3.25% convertible senior notes due 2015 and recorded a loss on early extinguishment of debt of $2,022.

Accounts Receivable Securitization Facility


13
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

On September 19, 2014, ANR Second Receivables Funding, LLC (“ANR Second Receivables Funding”), a special purpose indirect subsidiary of Alpha Natural Resources, Inc. (the “Company”), entered into a Credit and Security Agreement (the “A/R Facility”) with General Electric Capital Corporation, as a lender, a swing line lender, an LC Lender (as defined therein) and the administrative agent, and Webster Business Credit Corporation, as an LC Lender and as a Lender, and certain financial institutions from time to time parties thereto, as Lenders (as defined therein). Under the A/R Facility, ANR Second Receivables Funding may borrow cash from the Lenders or cause the LC Lenders to issue letters of credit, on a revolving basis, in an amount up to $200,000, subject to certain limitations set forth therein. The funding pursuant to the A/R Facility is available through the earlier of September 19, 2018 or 90 days prior to the earliest scheduled maturity date of: (1) the Company’s Fourth Amended and Restated Credit Agreement, dated as of May 22, 2013, as amended from time to time (the “Fourth Amended and Restated Credit Agreement”), with Citicorp North America, Inc. and all other parties thereto from time to time, as such maturity date may be amended from time to time in a manner that meets the requirements set forth in the A/R Facility (which requirements were met by the Amendment described below under the caption “Fifth Amended and Restated Credit Agreement”), (2) any successor to, or replacement of, the Fourth Amended and Restated Credit Agreement meeting the requirements set forth in the A/R Facility, or (3) the earliest scheduled maturity date of any obligations for Indebtedness (as defined therein) (a) maturing after December 31, 2015, and (b) having an outstanding principal balance in excess of $100,000 on such 90th day.

The obligations of the Lenders to make cash advances and of the LC Lenders to issue letters of credit pursuant to the A/R Facility are secured by certain trade receivables owned by ANR Second Receivables Funding. The receivables are originated by Alpha Coal Sales Co., LLC (“Alpha Coal Sales”), an indirect subsidiary of the Company and the sole member of ANR Second Receivables Funding, as sales agent on behalf of certain operating subsidiaries of the Company, and arise from the fulfillment of customer contracts entered into by Alpha Coal Sales. The A/R Facility provides that a specified percentage of billed and unbilled receivables meeting certain criteria are eligible to be counted for purposes of determining the amount of financing available to ANR Second Receivables Funding, subject to customary limits and reserves, including limits and reserves based on a dilution rate (calculated using factors including whether any portion of the receivable was reduced, canceled or written-off or is subject to dispute, offset, counterclaim or other defense), a loss rate and certain obligor and payment characteristics of the receivables. On each transfer date during the term of the A/R Facility, Alpha Coal Sales will sell and/or contribute receivables to ANR Second Receivables Funding. Alpha Coal Sales will service those receivables on behalf of ANR Second Receivables Funding and may be required to repurchase receivables in the event of a breach of certain representations or warranties made pursuant to the A/R Facility.

The Lenders and the LC Lenders will be entitled to receive interest payments with respect to the outstanding amount of each advance (including letter of credit participations) made or maintained under the A/R Facility by each Lender or LC Lender during each applicable settlement period. In addition, ANR Second Receivables Funding will pay General Electric Capital Corporation a fee as administrative agent. Certain other fees and expenses are payable to the participating financial institutions. Collections on the receivables, as well as amounts required to remain on deposit in certain accounts under the A/R Facility, will be available to pay the interest, fees and expenses, as well as to collateralize the letters of credit, if required under the A/R Facility, and repay principal on cash advances.

The A/R Facility and related documents contain affirmative, negative and financial covenants customary for financings of this type, including restrictions related to, among other things, liens, payments, merger or consolidation and amendments to the contracts pursuant to which the receivables were originated. The A/R Facility includes termination events customary for facilities of this type (with typical grace periods, where applicable), including, among other things, breaches of covenants, inaccuracies of representations and warranties, bankruptcy and insolvency events, changes in the rate of default, delinquency or dilution of the receivables above specified levels, failure to comply with a springing fixed charge coverage ratio which is only applicable when certain borrowing capacity ratios have been reached, occurrence of a change of control and existence of material judgments. A termination event would permit the administrative agent to terminate the program and enforce any and all rights under the A/R Facility and certain agreements related thereto. Additionally, the A/R Facility contains cross-default provisions, which would allow the administrative agent to terminate the program in the event of non-payment of other material indebtedness when due, and any other event which results in the acceleration of the maturity of material indebtedness.

Although the Lenders and the LC Lenders bear the risk of non-payment by any obligor of the receivables, the Company has agreed to guarantee the performance of its subsidiaries, other than ANR Second Receivables Funding, under the A/R Facility and agreements related to the A/R Facility for the benefit of the Lenders and the LC Lenders.


14
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

As of September 30, 2014, there were no letters of credit outstanding, no cash borrowing transactions had taken place and $200,000 was available under the A/R Facility.

Fifth Amended and Restated Credit Agreement

On September 24, 2014, the Company entered into an amendment agreement (the “Amendment”), pursuant to which certain terms of the Fourth Amended and Restated Credit Agreement were amended and the Fourth Amended and Restated Credit Agreement was restated in its entirety (as amended and restated, the “Fifth Amended and Restated Credit Agreement”). The Amendment, among other things:

•
extends the maturity of approximately 75% of previous revolving credit facility commitments (the “Extended Maturity Revolver Facility Commitments”) from June 30, 2016 to September 30, 2017, with the remaining approximately 25%, or $276,000, of revolving credit facility commitments expiring, as previously, on June 30, 2016;
•
reduces the amount of the Extended Maturity Revolver Facility Commitments by 25% to $618,000 and provides for an increase in the interest rate payable to holders of the Extended Maturity Revolver Facility Commitments on borrowings under the revolving credit facility, effective as of the date of the Amendment; and
•
makes other changes to the Fourth Amended and Restated Credit Agreement, including eliminating the interest coverage financial covenant previously scheduled to apply starting in the first quarter of 2016, extending the minimum liquidity covenant through September 30, 2017, accelerating the date by which certain real property is added as collateral and adding provisions to facilitate future extensions and refinancing under the Fifth Amended and Restated Credit Agreement.

Amendment No. 2 to the Fourth Amended and Restated Credit Agreement

On May 7, 2014, the Company entered into an amendment (“Amendment No. 2”) to the Fourth Amended and Restated Credit Agreement dated as of May 22, 2013, which was amended on October 2, 2013 by Amendment No. 1 thereto, (as amended, the “Credit Agreement”) with the lenders party thereto, the issuing banks party thereto, Citicorp North America, Inc., as administrative agent and as collateral agent, and all other parties thereto from time to time. The principal changes to the Credit Agreement effected by the Amendment No. 2 to the Fourth Amended and Restated Credit Agreement include the following: suspending the interest coverage ratio until the first quarter of 2016, replacing the senior secured leverage ratio with a first lien senior secured leverage ratio, reducing the size of the restricted payment basket, extending the minimum liquidity covenant through the end of 2015, increasing by $400,000 the amount of additional debt permitted to be incurred either pursuant to the “accordion” feature of the Credit Agreement or a notes offering, and requiring the first $800,000 of additional debt incurred pursuant to the accordion or a notes offering (including the debt represented by the 7.50% senior secured second lien notes due 2020 issued in May 2014) to be unsecured debt or second lien secured debt.

The terms of the Credit Agreement (i) restrict the ability of the Company and its subsidiaries to make investments, loans and acquisitions, incur additional indebtedness, and pay dividends on its capital stock or redeem, repurchase or retire its capital stock; and (ii) require the Company to provide additional collateral consisting of receivables to secure the obligations under the Credit Agreement when not used to secure a permitted receivables facility.

Indenture and New Senior Secured Second Lien Notes

On May 20, 2014, Alpha, certain of Alpha’s wholly owned domestic subsidiaries, as guarantors (collectively, the “Guarantors”), and Wilmington Trust, National Association (“Wilmington Trust”), as trustee, entered into an indenture (the “Indenture”) governing Alpha’s newly issued 7.50% senior secured second lien notes due 2020 (the “New Secured Notes”) at 100% of par value. The New Secured Notes will pay interest semiannually in arrears on February 1 and August 1 of each year, beginning on February 1, 2015, at a rate of 7.50% per year, and will mature on August 1, 2020.

The New Secured Notes are guaranteed by each of Alpha’s current and future wholly owned domestic subsidiaries that guarantee Alpha’s obligations under the Credit Agreement. The New Secured Notes are Alpha’s senior secured obligations, ranking equal in right of payment with all of Alpha’s existing and future indebtedness that is not subordinated in right of payment to the New Secured Notes; secured by a second priority lien on Alpha’s assets that secure Alpha’s indebtedness under the Credit Agreement, and thus effectively junior to Alpha’s indebtedness that is permitted to be secured by first priority liens on the collateral securing the New Secured Notes, including indebtedness under the Credit Agreement, and to indebtedness

15
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

secured by assets that are not part of the collateral securing the New Secured Notes, in each case to the extent of the value of the assets securing such indebtedness; senior in right of payment to all of Alpha’s future debt that is subordinated in right of payment to the New Secured Notes; and structurally subordinated to any existing and future indebtedness and other liabilities of any non-guarantor subsidiary.
    
Alpha may redeem the New Secured Notes, in whole or in part, at any time prior to August 1, 2016, at a price equal to 100% of the aggregate principal amount of the New Secured Notes plus a “make-whole” premium, plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date. In addition, Alpha may redeem up to 35% of the aggregate principal amount of the New Secured Notes with the net cash proceeds from certain equity offerings, at any time prior to August 1, 2016 at a redemption price equal to 107.5% of the aggregate principal amount of the New Secured Notes, plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date if at least 65% of the aggregate principal amount of New Secured Notes issued under the Indenture remains outstanding after the redemption. Alpha may also redeem the New Secured Notes, in whole or in part, at any time on or after August 1, 2016, at the redemption prices specified in the Indenture, plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date.

Upon the occurrence of a change of control repurchase event with respect to the New Secured Notes, unless Alpha has exercised its right to redeem the New Secured Notes, Alpha will be required to offer to repurchase each holder’s New Secured Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the date of repurchase.

The Indenture contains covenants that limit, among other things, Alpha’s ability to:

•
incur, or permit its subsidiaries to incur, additional debt;
•
issue, or permit its subsidiaries to issue, certain types of stock;
•
pay dividends on its or its subsidiaries’ capital stock or repurchase its capital stock;
•
make certain investments;
•
enter into certain types of transactions with affiliates;
•
incur liens on certain assets to secure debt;
•
limit dividends or other payments by its restricted subsidiaries to it and its other restricted subsidiaries;
•
consolidate, merge or sell all or substantially all of its assets; and
•
make certain payments on its or its subsidiaries’ subordinated debt.

These covenants are subject to a number of important qualifications and exceptions. These covenants may not apply at any time after the New Secured Notes are assigned a credit grade rating of at least BB+ (stable) from Standard & Poor’s Ratings Services and of at least Ba1 (stable) from Moody’s Investors Service, Inc.

(12)    Asset Retirement Obligations

The following table summarizes the changes in asset retirement obligations for the nine months ended September 30, 2014:
Total asset retirement obligations at December 31, 2013
$
799,426

Accretion for the period
42,268

Sites added during the period
1,569

Revisions in estimated cash flows
8,073

Expenditures for the period
(43,225
)
Total asset retirement obligations at September 30, 2014
$
808,111

Less current portion
(84,632
)
Long-term portion
$
723,479


(13)    Fair Value of Financial Instruments and Fair Value Measurements

The estimated fair values of financial instruments are determined based on relevant market information. These estimates involve uncertainty and cannot be determined with precision.


16
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

The carrying amounts for cash and cash equivalents, trade accounts receivable, net, prepaid expenses and other current assets, trade accounts payable, and accrued expenses and other current liabilities approximate fair value due to the short maturity of these instruments.

The following tables set forth by level, within the fair value hierarchy, the Company’s long-term debt at fair value as of September 30, 2014 and December 31, 2013, respectively.


September 30, 2014

Carrying
Amount
 
Total Fair
Value
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
6.25% senior notes due 2021
$
700,000

 
$
421,260

 
$
421,260

 
$
—

 
$
—

7.50% senior secured second lien notes due 2020
500,000

 
452,500

 
452,500

 
—

 
—

6.00% senior notes due 2019
800,000

 
472,000

 
472,000

 
—

 
—

9.75% senior notes due 2018(1)
497,488

 
373,950

 
373,950

 
—

 
—

Term loan due 2020(2)
613,107

 
601,217

 
—

 
601,217

 
—

4.875% convertible senior notes due 2020(3)
270,658

 
204,309

 
204,309

 
—

 
—

3.75% convertible senior notes due 2017(4)
299,241

 
250,643

 
250,643

 
—

 
—

3.25% convertible senior notes due 2015(5)
107,814

 
106,624

 
106,624

 
—

 
—

2.375% convertible senior notes due 2015(6)
42,836

 
43,018

 
43,018

 
—

 
—

Total long-term debt
$
3,831,144

 
$
2,925,521

 
$
2,324,304

 
$
601,217

 
$
—



December 31, 2013

Carrying
Amount
 
Total Fair
Value
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
6.25% senior notes due 2021
$
700,000

 
$
602,000

 
$
602,000

 
$
—

 
$
—

6.00% senior notes due 2019
800,000

 
694,872

 
694,872

 
—

 
—

9.75% senior notes due 2018(1)
496,547

 
560,250

 
560,250

 
—

 
—

Term loan due 2020(2)
617,460

 
617,291

 
—

 
617,291

 
—

4.875% convertible senior notes due 2020(3)
264,283

 
372,606

 
372,606

 
—

 
—

3.75% convertible senior notes due 2017(4)
290,219

 
360,956

 
360,956

 
—

 
—

3.25% convertible senior notes due 2015(5)
125,142

 
126,904

 
126,904

 
—

 
—

2.375% convertible senior notes due 2015(6)
60,647

 
65,882

 
65,882

 
—

 
—

Total long-term debt
$
3,354,298

 
$
3,400,761

 
$
2,783,470

 
$
617,291

 
$
—

(1) 
Net of debt discount of $2,512 and $3,453 as of September 30, 2014 and December 31, 2013, respectively.
(2) 
Net of debt discount of $2,518 and $2,853 as of September 30, 2014 and December 31, 2013, respectively.
(3) 
Net of debt discount of $74,342 and $80,717 as of September 30, 2014 and December 31, 2013, respectively.
(4) 
Net of debt discount of $45,759 and $54,781 as of September 30, 2014 and December 31, 2013, respectively.
(5) 
Net of debt discount of $1,387 and $3,040 as of September 30, 2014 and December 31, 2013, respectively.
(6) 
Net of debt discount of $1,622 and $5,242 as of September 30, 2014 and December 31, 2013, respectively.

The following tables set forth by level, within the fair value hierarchy, the Company’s financial and non-financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2014 and December 31, 2013, respectively. Financial and non-financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair

17
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

value measurement requires judgment, and may affect the determination of fair value for assets and liabilities and their placement within the fair value hierarchy levels.

 
September 30, 2014
 
Total Fair
Value
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial assets (liabilities):
 
 
 
 
 
 
 
U.S. treasury and agency securities
$
59,517

 
$
59,517

 
$
—

 
$
—

Mutual funds held in Rabbi Trust
$
9,819

 
$
9,819

 
$
—

 
$
—

Corporate equity securities
$
170,479

 
$
170,479

 
$
—

 
$
—

Corporate debt securities
$
315,011

 
$
—

 
$
315,011

 
$
—

Forward coal sales
$
1,247

 
$
—

 
$
1,247

 
$
—

Commodity swaps
$
(2,828
)
 
$
—

 
$
(2,828
)
 
$
—


 
December 31, 2013
 
Total Fair
Value
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial assets (liabilities):
 
 
 
 
 
 
 
U.S. treasury and agency securities
$
81,497

 
$
81,497

 
$
—

 
$
—

Mutual funds held in Rabbi Trust
$
9,330

 
$
9,330

 
$
—

 
$
—

Corporate debt securities
$
255,572

 
$
—

 
$
255,572

 
$
—

Forward coal sales
$
(398
)
 
$
—

 
$
(398
)
 
$
—

Commodity swaps
$
10,403

 
$
—

 
$
10,403

 
$
—


The following methods and assumptions were used to estimate the fair values of the assets and liabilities in the tables above. 

Level 1 Fair Value Measurements

U.S. Treasury and Agency Securities, Corporate Equity Securities and Mutual Funds Held in Rabbi Trust - The fair value is based on observable market data.

6.25% senior notes due 2021, 7.50% senior secured second lien notes due 2020, 6.00% senior notes due 2019, 9.75% senior notes due 2018 (collectively, the “Senior Notes”), 4.875% Convertible Notes, 3.75% Convertible Notes, 2.375% Convertible Notes, and 3.25% Convertible Notes (collectively, the “Convertible Notes”) - The fair value is based on observable market data.

Level 2 Fair Value Measurements

Corporate Debt Securities - The fair values of the Company’s corporate debt securities are obtained from a third-party pricing service provider. The fair values provided by the pricing service provider are estimated using pricing models, where the inputs to those models are based on observable market inputs including credit spreads and broker-dealer quotes, among other inputs. The Company classifies the prices obtained from the pricing services within Level 2 of the fair value hierarchy because the underlying inputs are directly observable from active markets. However, the pricing models used entail a certain amount of subjectivity and therefore differing judgments in how the underlying inputs are modeled could result in different estimates of fair value.
 

18
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

Forward Coal Sales - The fair values of the forward coal sale contracts were estimated using discounted cash flow calculations based upon actual contract prices and forward commodity price curves. The curves were obtained from independent pricing services reflecting broker market quotes. The fair values are adjusted for counter-party credit risk, when applicable.

Commodity Swaps - The fair values of commodity swaps are estimated using valuation models which include assumptions about commodity prices based on those observed in the underlying markets. The fair values are adjusted for counter-party credit risk, when applicable.

Term Loan due 2020 - The fair value of the term loan due 2020 is estimated based on market rates of interest offered for debt of similar maturities.

(14)    Derivative Financial Instruments
  
Forward Contracts

The Company manages price risk for coal sales and purchases through the use of coal supply agreements. The Company evaluates each of its coal sales and coal purchase forward contracts to determine whether they meet the definition of a derivative and if so, whether they qualify for the normal purchase normal sale (“NPNS”) exception. For those contracts that do meet the definition of a derivative, certain contracts also qualify for the NPNS exception based on management’s intent and ability to physically deliver or take physical delivery of the coal. Contracts that meet the definition of a derivative and do not qualify for the NPNS exception are accounted for at fair value and, accordingly, the Company includes the unrealized gains and losses in current period earnings or losses.

Swap Agreements

Commodity Swaps

The Company uses diesel fuel in its production process and incurs significant expenses for its purchase. Diesel fuel expenses represented approximately 6% of cost of coal sales for the nine months ended September 30, 2014. The Company is subject to the risk of price volatility for this commodity and as a part of its risk management strategy, the Company enters into swap agreements with financial institutions to mitigate the risk of price volatility for diesel fuel. The terms of the swap agreements allow the Company to pay a fixed price and receive a floating price, which provides a fixed price per unit for the volume of purchases being hedged. As of September 30, 2014, the Company had swap agreements outstanding to hedge the variable cash flows related to 34% and 41% of anticipated diesel fuel usage for the remaining three months of 2014 and calendar year 2015, respectively. The average fixed price for these diesel fuel swaps is $2.87 per gallon and $2.76 per gallon for the remaining three months of 2014 and calendar year 2015, respectively. All cash flows associated with derivative instruments are classified as operating cash flows in the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013.

The Company enters into coal sales agreements for steam coal with customers outside of the U.S. A portion of these steam coal contracts contain clauses that tie the price of the coal to be sold to the API-2 Coal Index. As part of the Company’s overall risk management strategy, the Company may enter into swap agreements with financial institutions to mitigate the risk of price volatility for its coal sales that are tied to the API-2 Coal Index. The terms of the swap agreements allow the Company to receive a fixed price and pay a floating price, which provides a fixed price per ton of coal, excluding transportation and other variable items that are included in the total price of the coal. As of September 30, 2014, the Company had swap agreements outstanding for approximately 65 tons of coal at an average price of $88.56.

The following tables present the fair values and location of the Company’s derivative instruments within the Condensed Consolidated Balance Sheets:

19
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

 
 
 
Asset Derivatives
Derivatives not designated as
cash flow hedging instruments
Statement of Financial Position Location
 
September 30,
2014
 
December 31,
2013
Commodity swaps
Prepaid expenses and other current assets
 
$
2,307

 
$
8,898

Commodity swaps
Other non-current assets
 
—

 
1,772

Forward coal sales
Prepaid expenses and other current assets
 
1,247

 
—

Total asset derivatives
 
 
$
3,554

 
$
10,670


 
 
 
Liability Derivatives
Derivatives not designated as
cash flow hedging instruments
Statement of Financial Position Location
 
September 30,
2014
 
December 31,
2013
Commodity swaps
Other non-current liabilities
 
$
838

 
$
31

Commodity swaps
Accrued expenses and other current liabilities
 
4,297

 
236

Forward coal sales
Accrued expenses and other current liabilities
 
—

 
398

Total liability derivatives
 
 
$
5,135

 
$
665


The following tables present the gains and losses from derivative instruments for the nine months ended September 30, 2014 and 2013 and their location within the Condensed Consolidated Financial Statements:

Derivatives designated as
cash flow hedging instruments
 
Gain reclassified
from accumulated other
comprehensive income (loss) to earnings
 
Loss recorded
in accumulated other
comprehensive income (loss)
 
2014
 
2013
 
2014
 
2013
Commodity swaps(1) (3)
 
$
1,981

 
$
3,094

 
$
—

 
$
(909
)
Commodity options(2) (3)
 
—

 
(68
)
 
—

 
(63
)
 
 
$
1,981

 
$
3,026

 
$
—

 
$
(972
)
(1) 
For the nine months ended September 30, 2014, amounts included in cost of coal sales and coal revenues in the Condensed Consolidated Statements of Operations. For the nine months ended September 30, 2013, amounts included in cost of coal sales, other revenues and coal revenues in the Condensed Consolidated Statements of Operations.
(2) 
Amounts are recorded in other revenues in the Condensed Consolidated Statements of Operations.
(3) 
Net of tax.

Derivatives not designated as
cash flow hedging instruments
 
Gain (loss) recorded in earnings
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Forward coal sales(1)
 
$
(159
)
 
$
(5,149
)
 
$
1,645

 
$
(6,354
)
Forward coal purchases(1)
 
—

 
(4
)
 
—

 
4

Commodity swaps(2)
 
(8,491
)
 
5,340

 
(6,286
)
 
5,038

 
 
$
(8,650
)
 
$
187

 
$
(4,641
)
 
$
(1,312
)
(1) 
Amounts are recorded as a component of other revenues in the Condensed Consolidated Statements of Operations.
(2) 
Amounts are recorded as a component of coal revenues, cost of coal sales and other expenses in the Condensed Consolidated Statements of Operations.

Unrealized gains and losses recorded in accumulated other comprehensive income (loss) are reclassified to income or loss as the financial swaps settle and the Company purchases the underlying items that are being hedged. During the next twelve months, the Company expects to reclassify approximately $84, net of tax, to earnings.

(15)    Income Taxes

20
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)


A reconciliation of the statutory federal income tax benefit at 35% to the actual income tax benefit is as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Federal statutory income tax benefit
$
(80,119
)
 
$
(210,482
)
 
$
(266,069
)
 
$
(372,306
)
Increases (reductions) in taxes due to:
 
 
 
 
 
 
 
Percentage depletion allowance
(3,593
)
 
(7,062
)
 
(22,566
)
 
(27,909
)
State taxes, net of federal tax impact
(7,506
)
 
(9,151
)
 
(9,247
)
 
(19,190
)
State statutory tax rate change, net of federal tax impact
—

 
(2,524
)
 
—

 
(2,524
)
Non-deductible fines and penalties
613

 
1,253

 
2,174

 
12,472

Non-deductible goodwill impairment
—

 
88,585

 
108,028

 
88,585

Reversal of reserves for uncertain tax positions
—

 
—

 
(8,090
)
 
—

Change in valuation allowance
43,655

 
(5,070
)
 
181,258

 
2,614

Other, net
3,012

 
1,314

 
7,614

 
9,236

Income tax benefit
$
(43,938
)
 
$
(143,137
)
 
$
(6,898
)
 
$
(309,022
)

Under ASC 740-270, “Income Taxes - Interim Reporting”, a company should calculate an estimated annual effective tax rate and apply the estimated tax rate to the year-to-date operating results. If a company is unable to make a reliable estimate of the annual effective tax rate, then the actual effective tax rate for the year-to-date period should be used as the best estimate of the annual effective tax rate (the “discrete method”). For the three and nine months ended September 30, 2014, the Company concluded that the use of the discrete method was more appropriate than the estimated annual effective tax rate method due to the sensitivity of the change in valuation allowance resulting from changes in deferred tax balances and their related reversal timing.

The Company recorded an increase of $43,655 and $181,258 to its deferred tax asset valuation allowance during the three and nine months ended September 30, 2014, respectively. The change in valuation allowance results from an increase in net operating losses and other deferred tax assets for which the Company is unable to support realization. The Company currently is relying primarily on the reversal of taxable temporary differences, along with consideration of taxable income via carryback to prior years, and tax planning strategies to support the realization of deferred tax assets. The Company updates its assessment regarding the realizability of its deferred tax assets including scheduling the reversal of its deferred tax liabilities each quarter to determine the amount of valuation allowance needed. Scheduling the reversal of deferred tax asset and liability balances requires judgment and estimation. The Company believes the deferred tax liabilities relied upon as future taxable income in its assessment will reverse in the same period and jurisdiction and are of the same character as the temporary differences giving rise to the deferred tax assets that will be realized. The valuation allowance recorded represents the portion of deferred tax assets for which the Company is unable to support realization through the methods described above. The Company has concluded that it is more likely than not that the remaining deferred tax assets, net of valuation allowances, are realizable.

During the quarter ended June 30, 2014, the Company settled audits with the Internal Revenue Service for the 2009 and 2010 tax years. As a result, the Company determined that particular uncertain tax positions were deemed to be effectively settled, resulting in a decrease in unrecognized tax benefits of $26,020 and the recording of an income tax benefit of $8,090. The settlement of the audits resulted in no material impact on cash paid for income taxes.

(16)    Employee Benefit Plans

The Company sponsors or participates in several benefit plans for its employees, including postretirement health care and life insurance, defined benefit and defined contribution pension plans, and provides black lung benefits.

Components of Net Periodic Pension Costs

The components of net periodic benefit credits are as follows:

21
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Interest cost
$
7,802

 
$
8,220

 
$
23,407

 
$
22,673

Expected return on plan assets
(8,802
)
 
(10,001
)
 
(26,405
)
 
(28,145
)
Amortization of net actuarial loss
45

 
205

 
134

 
712

Loss on settlement
—

 
—

 
—

 
58

Net periodic benefit credit
$
(955
)
 
$
(1,576
)
 
$
(2,864
)
 
$
(4,702
)

Components of Net Periodic Costs of Other Postretirement Benefit Plans

The components of net periodic benefit costs are as follows:

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Service cost
$
2,920

 
$
3,329

 
$
8,762

 
$
10,612

Interest cost
10,723

 
10,183

 
32,169

 
29,799

Amortization of prior service credit
(947
)
 
(955
)
 
(2,841
)
 
(2,864
)
Amortization of net actuarial loss
—

 
410

 
—

 
2,871

Net periodic benefit cost
$
12,696

 
$
12,967

 
$
38,090

 
$
40,418


Components of Net Periodic Costs of Black Lung

The components of net periodic benefit costs are as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Service cost
$
539

 
$
657

 
$
1,615

 
$
2,076

Interest cost
1,800

 
1,691

 
5,399

 
4,825

Expected return on plan assets
(59
)
 
(30
)
 
(175
)
 
(46
)
Amortization of net actuarial loss
2

 
162

 
5

 
780

Net periodic benefit cost
$
2,282

 
$
2,480

 
$
6,844

 
$
7,635


In connection with the announcement of certain changes for non union employees to the Company's retiree medical plan and the announcement of production curtailments at certain mines during the three months ended September 30, 2014, the Company remeasured its obligations under its retiree medical plan and its black lung obligations. The discount rates for each plan were updated. The weighted average discount rate for each of the plans remeasured was 4.18%. As a result, the Company increased its liabilities for its retiree medical plan and black lung obligations by $18,033 and $11,155, respectively, with an offset recorded in accumulated other comprehensive income (loss).

(17)    Stock-Based Compensation Awards

On May 22, 2014, the Company's stockholders approved the Amended and Restated 2012 Long-Term Incentive Plan (the “2012 LTIP”). The principal purpose of the 2012 LTIP is to advance the interests of the Company and its stockholders by providing incentives to certain eligible persons who contribute significantly to the strategic and long-term performance objectives and growth of the Company. On May 22, 2014, the Company's stockholders approved an additional 3,100,000 shares of common stock for issuance under the 2012 LTIP Plan. The 2012 LTIP Plan is currently authorized for the issuance of awards of up to 13,100,000 shares of common stock, and as of September 30, 2014, 4,141,434 shares of common stock were available for grant under the plan.

22
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)


During the nine months ended September 30, 2014, the Company awarded certain of its executives and key employees 1,411,824 time-based restricted share units and 1,378,486 performance-based restricted share units under its existing stock plans. Additionally, during the nine months ended September 30, 2014, the Company also awarded certain of its executives and key employees 2,077,491 time-based restricted cash units and 1,378,486 performance-based restricted cash units which are accounted for as liability awards and subject to variable accounting. The liability for these awards totaled $1,424 as of September 30, 2014.

The time-based units vest, subject to continued employment, ratably over three years or cliff vest after three years (with accelerated vesting upon a change of control and certain retirement scenarios). The performance-based units cliff vest after three years, subject to continued employment and the satisfaction of the performance criteria (with accelerated vesting upon a change of control and certain retirement scenarios). The performance-based units have the potential to be distributed from 0% to 200% of the awarded amount, depending on the actual results versus the pre-established performance criteria over the three-year period.

At September 30, 2014, the Company had three types of stock-based awards outstanding: restricted share units (both time-based and performance-based), restricted cash units (both time-based and performance based), and stock options. Stock-based compensation expense totaled $7,249 and $5,762 for the three months ended September 30, 2014 and 2013, respectively. Stock-based compensation expense totaled $21,170 and $18,360 for the nine months ended September 30, 2014 and 2013, respectively. For the three months ended September 30, 2014 and 2013, approximately 82% and 73%, respectively, of stock-based compensation expense was reported as selling, general and administrative expenses and the remainder was recorded as cost of coal sales. For each of the nine months ended September 30, 2014 and 2013, approximately 77% of stock-based compensation expense was reported as selling, general and administrative expenses and the remainder was recorded as cost of coal sales.

The Company is authorized to repurchase common shares from employees (upon the election by the employee) to satisfy the employees’ minimum statutory tax withholdings upon the vesting of restricted stock and restricted share units (both time-based and performance-based). Shares that are repurchased to satisfy the employees’ minimum statutory tax withholdings are recorded in treasury stock at cost. During the nine months ended September 30, 2014 and 2013, the Company repurchased 280,502 and 165,709, respectively, of common shares from employees at an average price paid per share of $4.96 and $8.16, respectively.

(18)    Commitments and Contingencies

(a) General

Estimated losses from loss contingencies are accrued by a charge to income when information available indicates that it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the consolidated financial statements when it is at least reasonably possible that a loss may be incurred and that the loss could be material.

(b) Commitments and Contingencies

Commitments

The Company leases coal mining and other equipment under long-term capital and operating leases with varying terms. In addition, the Company leases mineral interests and surface rights from land owners under various terms and royalty rates.

The Company has obligations for a federal coal lease, which contains an estimated 222,000 tons of proven and probable coal reserves in the Powder River Basin. The annual installments of $42,130 in the period from 2014 through 2015 are due each November until the obligation is satisfied.

The Company also has obligations under certain coal transportation agreements that contain minimum quantities to be shipped each year. Minimum amounts due under these contracts for 2015, 2016, 2017, 2018 and beyond are $25,584, $59,111, $17,540, $12,930 and $279,254, respectively.
 

23
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

Contingencies
 
Extensive regulation of the impacts of mining on the environment and of maintaining workplace safety, and related litigation, has had or may have a significant effect on the Company’s costs of production and results of operations. Further regulations, legislation or litigation in these areas may also cause the Company’s sales or profitability to decline by increasing costs or by hindering the Company’s ability to continue mining at existing operations or to permit new operations.

During the normal course of business, contract-related matters arise between the Company and its customers. When a loss related to such matters is considered probable and can reasonably be estimated, the Company records a liability. During the first quarter of 2013, the Company recorded a gain of ($55,454) in other expenses in the Condensed Consolidated Statement of Operations related to the resolution of a contract-related matter.
 
(c) Guarantees and Financial Instruments with Off-Balance Sheet Risk
 
In the normal course of business, the Company is a party to certain guarantees and financial instruments with off-balance sheet risk, such as bank letters of credit, performance or surety bonds, and other guarantees and indemnities related to the obligations of affiliated entities which are not reflected in the Company’s Condensed Consolidated Balance Sheets. The Company is self bonded with respect to certain performance obligations, including reclamation, for $637,913. Management does not expect any material losses to result from these guarantees or other off-balance sheet financial instruments.
 
Letters of Credit
 
As of September 30, 2014, the Company had $178,284 of letters of credit outstanding under its revolving credit facility.

(d) Legal Proceedings
The Company’s legal proceedings range from cases brought by a single plaintiff to purported class actions. These legal proceedings, as well as governmental examinations, involve various business units and a variety of claims including, but not limited to, contract disputes, personal injury claims, property damage claims (including those resulting from blasting, trucking and flooding), environmental and safety issues, and employment matters. While some matters pending against the Company or its subsidiaries specify the damages claimed by the plaintiffs, many seek an unquantified amount of damages or are at very early stages of the legal process. Even when the amount of damages claimed against the Company or its subsidiaries is stated, (i) the claimed amount may be exaggerated or unsupported; (ii) the claim may be based on a novel legal theory or involve a large number of parties; (iii) there may be uncertainty as to the likelihood of a class being certified or the ultimate size of the class; (iv) there may be uncertainty as to the outcome of pending appeals or motions; and/or (v) there may be significant factual issues to be resolved. As a result, the Company may be unable to estimate a range of possible loss for matters that have not yet progressed sufficiently through discovery and development of important factual information and legal issues. Other matters have progressed sufficiently that the Company is able to estimate a range of possible loss. Accordingly, for those legal proceedings and governmental examinations disclosed below as to which a loss is reasonably possible in future periods and for which the Company is able to estimate a range of possible loss, the current estimated range is up to $100,000 in excess of the accrued liability (if any) related to those matters. This aggregate range represents the Company’s estimate of additional possible loss in excess of the accrued liability (if any) with respect to these matters and net of third party indemnification arrangements (if any, other than insurance) as described below related to those matters, based on currently available information, including any damages claimed by the plaintiffs, and is subject to significant judgment and a variety of assumptions and inherent uncertainties. For example, at the time of making an estimate, the Company may have only preliminary, incomplete, or inaccurate information about the facts underlying a claim; its assumptions about the future rulings of the court or other tribunal on significant issues, or the behavior and incentives of adverse parties, regulators, indemnitors or co-defendants, may prove to be wrong; and the outcomes it is attempting to predict are often not amenable to the use of statistical or other quantitative analytical tools. In addition, from time to time an outcome may occur that the Company had not accounted for in its estimate because it had considered that outcome to be remote. Furthermore, as noted above, the aggregate range does not include any matters for which the Company is not able to estimate a range of possible loss. Accordingly, the estimated aggregate range of possible loss does not represent the Company’s maximum loss exposure. The legal proceedings and governmental examinations underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate. The Company intends to defend these legal proceedings vigorously, litigating or settling cases where in the Company’s judgment it would be in the best interest of shareholders to do so.


24
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

For purposes of FASB ASC Topic 450 (“ASC 450”), an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely” and an event is “remote” if “the chance of the future event or events occurring is slight.” ASC 450 requires accrual for a liability when it is (a) “probable that one or more future events will occur confirming the fact of loss” and (b) “the amount of loss can be reasonably estimated.” If a range of loss is estimated, the best estimate within the range is required to be accrued. If no amount within the range is a better estimate, the minimum amount of the range is required to be accrued.
 
The Company evaluates, on a quarterly basis, developments in legal proceedings and governmental examinations that could cause an increase or decrease in the amount of the reserves previously recorded. Excluding fees paid to external legal counsel, the Company recognized expense, net of expected insurance recoveries, associated with litigation-related reserves of $184 and $116,552 during the three months ended September 30, 2014 and 2013, respectively.
 
Federal Securities Class Actions

Upper Big Branch (“UBB”) Purported Securities Class Action
 
On April 29, 2010 and May 28, 2010, two purported class actions that were subsequently consolidated into one case were brought against, among others, Massey, now the Company’s subsidiary Alpha Appalachia Holdings, Inc. (“Alpha Appalachia”), in the United States District Court for the Southern District of West Virginia (the “Court”) in connection with alleged violations of the federal securities laws. The lead plaintiffs allege, purportedly on behalf of a class of former Massey stockholders, that (i) Massey and certain former Massey directors and officers violated Section 10(b) of the Securities and Exchange Act of 1934, as amended, (the “Exchange Act”), and Rule 10b-5 thereunder by intentionally misleading the market about the safety of Massey’s operations and that (ii) Massey’s former officers violated Section 20(a) of the Exchange Act by virtue of their control over persons alleged to have committed violations of Section 10(b) of the Exchange Act. The lead plaintiffs sought a determination that this action was a proper class action; certification as class representatives; an award of compensatory damages in an amount to be proven at trial, including interest thereon; and an award of reasonable costs and expenses, including counsel fees and expert fees.
 
On February 16, 2011, the lead plaintiffs moved to partially lift the statutory discovery stay imposed under the Private Securities Litigation Reform Act of 1995. On March 3, 2011, the United States moved to intervene and to stay discovery until the completion of criminal proceedings allegedly arising from the same facts that allegedly give rise to this action. On July 9, 2012, the court entered an order maintaining the stay of discovery until the earlier of either the completion of the United States’ criminal investigation of the UBB explosion or January 15, 2013. The court extended the stay several times.
 
On April 25, 2011, the defendants moved to dismiss the operative complaint. On March 27, 2012, the court denied the defendants’ motion to dismiss. On July 16, 2012, the Company filed its answer to the consolidated amended class action complaint.

In October and December 2013, the parties participated in mediation. In December 2013, the parties reached agreement on all material terms of settlement, including a cash payment of $265,000. In February 2014, the parties reached agreement on definitive settlement documentation, subject to court approval, and on February 5, 2014, the lead plaintiffs moved the court for preliminary approval of the settlement. On February 19, 2014, the Court entered an order preliminarily approving the settlement subject to a final determination following a settlement hearing on June 4, 2014. On February 25, 2014, pursuant to the terms of the settlement, the Company made an initial payment of $30,000 into an escrow account and on June 3, 2014, the Company deposited the remaining $235,000 of the settlement amount into the escrow account. The Company received approximately $70,000 of insurance proceeds in connection with the settlement. On June 4, 2014, the Court entered an order approving the settlement and dismissed the class action with prejudice.
Emerald Purported Securities Class Action

On July 13, 2012, a purported class action brought on behalf of a putative class of former Massey stockholders was filed in Boone County, West Virginia Circuit Court. The complaint asserts claims under the Securities Act of 1933, as amended, against the Company and certain of its officers and current and former directors, and generally asserts that the defendants made false statements about the Company’s Emerald mine in its public filings associated with the acquisition of Massey by the Company (the “Massey Acquisition”). The plaintiff seeks, among other relief, an award of compensatory damages in an amount to be proven at trial.

25
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)


On August 16, 2012, the defendants removed the case to the United States District Court for the Southern District of West Virginia. On August 30, 2012, the plaintiff filed a motion to remand the case back to the Circuit Court of Boone County, West Virginia. On September 13, 2012, the defendants filed an opposition to the plaintiff’s motion to remand.

The defendants filed a motion to dismiss the action on October 19, 2012, and the plaintiff filed an opposition to that motion on November 2, 2012. On November 5, 2012, the federal court remanded the case back to the Boone County Circuit Court (without ruling on the pending motion to dismiss). The plaintiff filed an amended complaint in the Boone County Circuit Court on February 6, 2013. The defendants filed motions to dismiss the amended complaint on March 22, 2013 and March 29, 2013. On March 27, 2014, the Boone County Circuit Court held a hearing regarding the motions to dismiss. The motions remain pending.
On April 25, 2014, the named plaintiff in the West Virginia Circuit Court action described above filed a second complaint in Greene County, Pennsylvania, Court of Common Pleas, again asserting claims under the Securities Act of 1933, as amended, against the Company and certain of its officers and current and former directors, and generally asserts that the defendants made false statements about the Company’s Emerald mine in its public filings associated with the Massey Acquisition. The plaintiff seeks, among other relief, an award of compensatory damages in an amount to be proven at trial.

UBB Explosion and Related Investigations and Litigation
 
On April 5, 2010, before the Massey Acquisition by the Company, an explosion occurred at the UBB mine, resulting in the deaths of twenty-nine miners. The Federal Mine Safety and Health Administration (“MSHA”), the Office of Miner’s Health, Safety, and Training of the State of West Virginia (“State”), and the Governor’s Independent Investigation Panel (“GIIP”) initiated investigations into the cause of the UBB explosion and related issues. Additionally, the United States Attorney for the Southern District of West Virginia (the “Office”) commenced a grand jury investigation. The GIIP published its final report on May 19, 2011; MSHA released its final report on December 6, 2011; and the State released its final report on February 23, 2012.
 
On December 6, 2011, the Company, the Office and the United States Department of Justice entered into a Non-Prosecution Agreement (the “Agreement”) resolving the criminal investigation against Massey and its affiliates relating to the UBB explosion and other health and safety related issues at Massey, and the Company also reached a comprehensive settlement with MSHA resolving outstanding civil citations, violations, and orders related to MSHA’s investigation arising from the UBB explosion and other non-UBB related matters involving legacy Massey entities prior to the Massey Acquisition. The Agreement does not resolve individual responsibilities related to the UBB explosion.
 
Under the terms of the Agreement and MSHA settlement, the Company agreed to pay outstanding MSHA fines, and agreed to invest in additional measures designed to improve miner health and safety, provide restitution to the families of the fallen miners and two individuals injured in the UBB explosion, and create a charitable organization to research mine safety. The Company further agreed to cooperate fully with all governmental agencies in all continuing investigations and prosecutions against any individuals that arise out of the UBB explosion and related conduct described in the Agreement until such investigations and prosecutions are concluded.
 
On February 10, 2014, the Company announced that it had fully complied with the terms of the Agreement and that the Office and the United States Department of Justice had closed the Agreement.
The Company cannot predict the outcome of these investigations, including whether or not any individual will become subject to possible criminal and civil penalties or enforcement actions. In order to accommodate these investigations, the UBB mine was initially idled. On April 20, 2012, the Company was authorized by regulatory authorities to close the UBB mine permanently, and on June 19, 2012, the sealing of the mine was completed.

On June 28, 2012, sixteen individuals who claim to have been injured in the UBB explosion filed a petition in the United States District Court for the Southern District of West Virginia to amend or set aside the Agreement. On July 27, 2012, Alpha and Alpha Appalachia filed a motion to dismiss. The injury claims of those sixteen individuals were separately settled in August 2012, and on August 29, 2012, the court ordered that the action be dismissed and stricken from the docket.


26
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

On October 19, 2012, the administrators for the estates of three miners who died in the UBB explosion filed an action against Alpha and Alpha Appalachia in the United States District Court for the Southern District of West Virginia claiming they are entitled to “criminal restitution” under the Agreement and amended the complaint on January 23, 2013. On May 10, 2013, the court dismissed the amended complaint. The plaintiffs filed an appeal of the dismissal with the United States Court of Appeals for the Fourth Circuit on June 5, 2013. On October 18, 2013, the Court of Appeals dismissed the appeal for lack of jurisdiction.

On July 17, 2013, the same plaintiffs filed another complaint seeking “criminal restitution” under the Agreement, which defendants moved to dismiss on August 12, 2013. On October 30, 2013, the court granted defendants’ motion to dismiss the complaint with prejudice. The plaintiffs appealed this dismissal order.

On September 17, 2014, the Court of Appeals determined that the plaintiffs had failed to establish that the District Court had jurisdiction over the case. Accordingly, the Court of Appeals vacated the District Court’s dismissal of the case and remanded the case with instructions to dismiss the case without prejudice for lack of jurisdiction. On September 22, 2014, the plaintiffs filed a motion to amend the July 17, 2013 complaint, which is currently pending before the District Court.

Wrongful Death and Personal Injury Suits
 
Twenty of the twenty-nine families of the deceased miners filed wrongful death suits against Massey and certain of its subsidiaries in Boone County Circuit Court and Wyoming County Circuit Court. In addition, as of July 19, 2013, two seriously injured employees had filed personal injury claims against Massey and certain of its subsidiaries in Boone County Circuit Court seeking damages for physical injuries and/or alleged psychiatric injuries, and thirty-nine employees had filed lawsuits against Massey and certain of its subsidiaries in Boone County Circuit Court and Wyoming County Circuit Court alleging emotional distress or personal injuries due to their proximity to the explosion. On April 19, 2012, the Company filed a motion to transfer the Wyoming County lawsuits to Boone County.

On October 19, 2011, the Boone County Circuit Court ordered that the cases pending before it be mediated by a panel of three mediators. These mediations are, per order of the court, strictly confidential. The Company reached agreements to settle with all twenty-nine families of the deceased miners as well as the two employees who were seriously injured. The settlements reached with the families of the deceased miners have received court approval. The settlements relating to the two serious injuries did not require court approval.

On May 4, 2012, the Boone County Circuit Court ordered that the remaining personal injury and emotional distress claims continue to be mediated through July 6, 2012. Until that date, a stay was in place for all remaining cases until further order from the court. The stay was lifted on July 6, 2012 but mediation was ordered to continue. On July 20, 2012, the stay was reinstated for discovery-related activities at the request of the United States Attorney and by agreement of the parties. On August 19, 2013, at the request of the United States Attorney, the stay was extended until the earlier of either the completion of the United States’ criminal investigation of the UBB explosion or January 15, 2014. Mediation efforts in August 2012 successfully resolved all but two of the personal injury and emotional distress claims. On June 26, 2013, the court granted the Company’s motion to dismiss in part, dismissing plaintiffs’ claims alleging the tort of outrage and negligent infliction of emotional distress. Plaintiffs’ two remaining claims have been resolved. The Wyoming County lawsuits were settled and dismissed prior to the court ruling on the Company’s motion to transfer.

On April 5, 2012, the family of one of the deceased miners filed a class action suit in Boone County Circuit Court, purportedly on behalf of the families that settled their claims prior to the mediation, alleging fraudulent inducement into a contract, naming as defendants Massey, the Company and certain of its subsidiaries, the Company’s CEO and the Company’s Board of Directors.

On June 17, 2013 and August 29, 2013, two complaints were filed in Boone County Circuit Court alleging personal injury claims relating to the UBB explosion. The Company moved to dismiss both complaints on July 17, 2013 and October 16, 2013, respectively. On July 21, 2014, the Circuit Court granted the Company's motion to dismiss in one of the two cases. The second motion remains pending.
 
Uniform Fraudulent Transfers Act Action
 

27
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

On June 1, 2011, certain of the plaintiffs who had filed wrongful death cases filed a complaint against Massey, Massey Coal Services, Inc., Performance Coal Company, and certain individuals in the Circuit Court of Boone County, West Virginia, alleging that the Massey Acquisition represented a fraudulent transfer intended to prevent plaintiffs from recovering damages in their wrongful death actions. Plaintiffs requested that the court order defendants to post a bond of at least $500,000. Each plaintiff in this action has agreed to settle their wrongful death cases, as discussed above, and as part of those settlements, has also agreed to dismiss this action. On May 14, 2012, the court entered an order dismissing this case with prejudice.
  
Derivative and Related Class Action Litigation

UBB-Related Derivatives Actions
 
A number of purported former Massey stockholders have brought lawsuits derivatively, purportedly on behalf of Massey, in West Virginia and Delaware state courts, in connection with the April 5, 2010 explosion at the UBB mine and in connection with claims allegedly arising out of the Massey Acquisition. Certain of these former stockholders have also initiated contempt proceedings in West Virginia state court in connection with alleged violations of the settlement of a previous derivative lawsuit. In addition, these and other purported former Massey stockholders have asserted class action claims allegedly arising out of the Massey Acquisition in Delaware and West Virginia state courts and Virginia federal court. These cases are summarized below.

Delaware Chancery Court Suit
 
In a case filed on April 23, 2010 in Delaware Chancery Court, In re Massey Energy Company Derivative and Class Action Litigation (“In re Massey”), a number of purported former Massey stockholders (the “Delaware Plaintiffs”) allege, purportedly on behalf of Massey, that certain former Massey directors and officers breached their fiduciary duties by failing to monitor and oversee Massey’s employees, allegedly resulting in fines against Massey and the explosion at UBB, and by wasting corporate assets by paying allegedly excessive and inflated amounts to former Massey Chairman and Chief Executive Officer Don L. Blankenship as part of his retirement package. The Delaware Plaintiffs also allege, on behalf of a purported class of former Massey stockholders, that certain former Massey directors breached their fiduciary duties by agreeing to the Massey Acquisition. The Delaware Plaintiffs allege that defendants breached their fiduciary duties by failing to secure the best price possible, by failing to secure any downside protection for the acquisition consideration, and by purportedly eliminating the possibility of a superior proposal by agreeing to a “no shop” provision and a termination fee. In addition, the Delaware Plaintiffs allege that defendants agreed to the Massey Acquisition to eliminate the liability that defendants faced on the Delaware Plaintiffs’ derivative claims. Finally, the Delaware Plaintiffs allege that defendants failed to fully disclose all material information necessary for Massey stockholders to cast an informed vote on the Massey Acquisition.
 
The Delaware Plaintiffs also name the Company and Mountain Merger Sub, Inc. (“Merger Sub”), the Company’s wholly-owned subsidiary created for purposes of effecting the Massey Acquisition, which, at the effective time of the Massey Acquisition, was merged with and into Massey, as defendants. The Delaware Plaintiffs allege that the Company and Merger Sub aided and abetted the former Massey directors’ alleged breaches of fiduciary duty and agreed to orchestrate the Massey Acquisition for the purpose of eliminating the former Massey directors’ potential liability on the derivative claims. Two additional putative class actions were brought against Massey, certain former Massey directors and officers, the Company and Merger Sub in the Delaware Court of Chancery following the announcement of the Massey Acquisition, which were consolidated for all purposes with In re Massey on February 9, 2011 and February 24, 2011, respectively.
 
The Delaware Plaintiffs seek an award against each defendant for restitution and/or compensatory damages, plus pre-judgment interest; an order establishing a litigation trust to preserve the derivative claims asserted in the complaint; and an award of costs, disbursements and reasonable allowances for fees incurred in this action. The Delaware Plaintiffs also sought to enjoin consummation of the Massey Acquisition. The court denied their motion for a preliminary injunction on May 31, 2011.
 
On June 10, 2011, Massey moved to dismiss the Delaware Plaintiffs’ derivative claims on the ground that the Delaware Plaintiffs, as former Massey stockholders, lacked the legal right to pursue those claims, and the Company and Alpha Appalachia Merger Sub moved to dismiss the purported class action claim against them for failure to state a claim upon which relief may be granted. On June 10 and 13, 2011, certain former Massey director and officer defendants moved to dismiss the derivative claims and filed answers to the remaining direct claims.
 
On September 14, 2011, the parties submitted a Stipulation Staying Proceedings, which stayed the matter until March 1, 2012, without prejudice to the parties’ right to seek an extension or a termination of the stay by application to the court. The

28
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

court approved the stipulation and entered the stay that same day. The court extended the stay several times and the most recent stay expired on October 31, 2014.

On October 17, 2014, the Delaware Plaintiffs filed an amended complaint which maintains claims against Massey and certain former Massey directors and officers but no longer asserts claims against the Company or Mountain Merger Sub, Inc. Under a schedule approved by the court, the defendants have until December 5, 2014 to respond to the amended complaint.
 
West Virginia State Court Derivative Suit
 
In a case filed on April 15, 2010 in West Virginia state court, three purported former Massey stockholders (the “West Virginia Plaintiffs”) allege, purportedly on behalf of Massey, that certain former Massey directors and officers breached their fiduciary duties by failing to monitor and oversee Massey’s employees, allegedly resulting in fines against Massey and the explosion at UBB. The West Virginia Plaintiffs seek an award against each defendant and in favor of Massey for the amount of damages sustained by Massey as a result of defendants’ alleged breaches of fiduciary duty and an award to the West Virginia Plaintiffs of the costs and disbursements of the action, including reasonable attorneys’ fees, accountants’ and experts’ fees, costs, and expenses.
 
On May 2, 2011, the West Virginia Plaintiffs moved for leave to amend their complaint to add Alpha and Merger Sub as additional defendants and to add claims allegedly arising out of the then-proposed Massey Acquisition. In their proposed amended complaint, the West Virginia Plaintiffs allege that certain former Massey directors breached their fiduciary duties by failing to obtain the highest price reasonably available for Massey and by failing to disclose material information to Massey’s then-stockholders in connection with the stockholder vote on the Massey Acquisition. The West Virginia Plaintiffs also allege that Massey, Merger Sub and the Company aided and abetted the former Massey directors’ breaches of fiduciary duty. The West Virginia Plaintiffs further allege that certain former Massey directors wasted corporate assets by failing to maintain sufficient internal controls over Massey’s safety and environmental reporting; failing to properly consider the interests of Massey and its stockholders, including the value of the derivative claims asserted by the West Virginia Plaintiffs in the Massey Acquisition; failing to conduct proper supervision; paying undeserved incentive compensation to certain Massey executive directors, particularly former Massey Chairman and CEO Don L. Blankenship during Massey’s alleged years of noncompliance with safety regulations and more recently as part of Blankenship’s retirement package; incurring millions of dollars in fines due to safety and environmental violations; and incurring potentially hundreds of millions of dollars of legal liability and/or legal costs to defend defendants’ allegedly unlawful actions. Finally, the West Virginia Plaintiffs’ proposed amended complaint alleges that certain former Massey directors were unjustly enriched by their compensation as directors.
 
On May 25, 2011, the West Virginia Plaintiffs filed a petition with the West Virginia Supreme Court for a preliminary injunction against the consummation of the Massey Acquisition, which was denied on May 31, 2011.
 
On June 24, 2011, the defendants moved to dismiss the West Virginia Plaintiffs’ original complaint on the grounds that plaintiffs, as former Massey stockholders, lacked the legal right to pursue those claims, or, alternatively, to stay this case in favor of In re Massey, described above. Defendants also filed an opposition to the West Virginia Plaintiffs’ motion to amend.  On August 19, 2011, the West Virginia Plaintiffs filed a combined memorandum in opposition to defendants’ motion to dismiss or stay and in further support of their motion to amend. On August 22, 2011, defendants filed a memorandum in further support of their motion to dismiss or stay and in further opposition to plaintiffs’ motion to amend. On August 23, 2011, the court held a hearing on defendants’ motion to dismiss and plaintiffs’ motion to amend. Without deciding the motions, the court requested the parties to submit competing proposed orders containing findings of fact and conclusions of law and proposed scheduling orders for the court’s consideration, which the parties did on September 9, 2011. On November 14, 2013, the court denied the West Virginia Plaintiffs’ motion to amend and granted defendants’ motion to dismiss. The West Virginia Plaintiffs appealed the denial of motion to amend and dismissal to the Supreme Court of Appeals of West Virginia. On August 26, 2014, the Supreme Court of Appeals remanded the action to the Circuit Court. On October 16, 2014, the court issued an order stating that its prior ruling of November 14, 2013 remained unchanged and directed the parties to submit a proposed amended order with findings of fact and conclusions of law by November 7, 2014.
 
West Virginia State Court - Contempt Proceedings
 
On April 16, 2010, Manville Personal Injury Settlement Trust (“Manville”), one of the West Virginia Plaintiffs, filed a petition in the Circuit Court of Kanawha County, West Virginia, requesting that the court initiate civil contempt proceedings against certain of the then-current members of Massey’s board of directors with respect to alleged violations of a settlement

29
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

agreement. In July 2007, Manville filed a complaint, purportedly on behalf of Massey, alleging that certain of Massey’s then directors and officers breached their fiduciary duties. On May 20, 2008, the parties executed a stipulation of settlement, which the court subsequently approved. The settlement provided for a release of all claims that were or could have been asserted on behalf of Massey in exchange for, among other things, certain corporate governance reforms and an agreement that the Massey board of directors would make a Corporate Social Responsibility Report to its stockholders on an annual basis that would include, among other things, a report on Massey’s environmental and worker safety compliance. Manville alleges that Massey’s 2009 Corporate Social Responsibility Report did not contain a sufficient report on worker safety compliance. On April 22, 2010, the court issued an order for a rule to show cause, initiating the contempt proceedings.
 
On May 31, 2011, Manville, now joined by the other two West Virginia Plaintiffs, filed a new petition for civil contempt, requesting that the court initiate civil contempt proceedings against certain of the then-current members of Massey’s board of directors and certain then-current Massey officers in connection with certain additional alleged violations of the settlement.
 
On June 22, 2011, the individual defendants that had been served with the new petition filed a motion to dismiss that petition, as well as the original April 16 petition, and also moved to vacate the 2008 order, in which the court approved the settlement, as against them. On June 28, 2011, nominal defendant Alpha Appalachia joined in the individual defendants’ motions to dismiss and vacate. On July 21, 2011, the court held a hearing on the defendants’ motions to dismiss and vacate.
 
On September 29, 2011, the court granted the individual defendants’ motions to dismiss and vacate and ordered that the contempt proceedings be terminated in their entirety. The plaintiffs appealed the dismissal of the contempt proceedings to the Supreme Court of Appeals of West Virginia. On September 12, 2013, the Supreme Court of Appeals of West Virginia affirmed the September 29, 2011 order granting defendants’ motion to dismiss the contempt petitions.
 
Mine Water Discharge Suits
 
On March 20, 2012, three environmental groups filed a citizen’s suit against two of the Company’s subsidiaries, Alex Energy, Inc. and Elk Run Coal Company, Inc., in federal court in the Southern District of West Virginia. The suit alleges violations of the terms of the subsidiaries’ water discharge permits concerning conductivity levels, although the subject permits do not contain numerical limits on conductivity. The plaintiffs seek a civil penalty as well as injunctive relief. On June 4, 2014, the Court entered partial summary judgment against the subsidiaries. The subsidiaries filed an interlocutory appeal with the United States Court of Appeals for the Fourth Circuit regarding the novel basis for the district court’s entry of partial summary judgment. On October 23, 2014, the Court of Appeals declined to hear the appeal at this time.

The district court has scheduled its decision regarding any penalties or other relief for December 2, 2014, and submission of initial expert reports to the court was completed on October 17, 2014. The plaintiffs and their experts advocate installation of water treatment facilities at these two sites employing water treatment technology that has proved costly in other applications. If the court were ultimately to direct the subsidiaries to install water treatment facilities at the two affected sites, the costs could be substantial. Various effective water treatment technologies and techniques exist, however, with varying implementation and operating costs, and the subsidiaries and their experts advocate that the use of water management strategies or other treatment technologies would be more appropriate.
 
On May 9, 2012, three environmental groups filed a citizen’s suit in federal court in the Southern District of West Virginia against two of the Company’s subsidiaries alleging violations of the terms of the subsidiaries’ water discharge permits. The plaintiffs seek a civil penalty as well as injunctive relief. In 2014, the Court entered partial summary judgment against one of the subsidiaries.

On May 15, 2012, the West Virginia Department of Environmental Protection filed a civil enforcement action against the Company’s subsidiary Riverside Energy Company, LLC, in McDowell County Circuit Court in West Virginia seeking civil penalties and injunctive relief based on alleged discharge of selenium in excess of permitted levels. This case is likely to be mooted by the Consent Decree, which is discussed below.

On July 16, 2012, three environmental groups filed a citizen’s suit in federal court in the Southern District of West Virginia against seven of the Company’s subsidiaries alleging violations of the terms of the subsidiaries’ water discharge permits. The plaintiffs seek a civil penalty as well as injunctive relief. In 2014, the Court entered partial summary judgment against one of the subsidiaries.


30
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

On December 31, 2012 and January 2, 2013, two separate environmental groups filed citizen’s suits in federal court in the Western District of Pennsylvania against Emerald Coal Resources, L.P., and other of the Company’s subsidiaries, alleging violations of the terms of the subsidiaries’ water discharge permits. The first of these cases has since been voluntarily dismissed by the plaintiffs. The plaintiffs in the remaining case seek a civil penalty as well as injunctive relief. This case is likely to be mooted by the Consent Decree.
On March 27, 2013, the Company’s subsidiary Alex Energy, Inc. (“Alex”) was served with a complaint from the Sierra Club, and others, alleging improper discharges by Alex into Spruce Run and Road Fork of Robinson Creek in Nicholas County, West Virginia. Alex has appropriate permits for discharges into those tributaries, and the discharges discussed in the plaintiffs’ complaint are undertaken by Alex in compliance with its permits.
On April 10, 2013, the Company’s subsidiary Bandmill Coal Co. (“Bandmill”) was served with a complaint from the Sierra Club, and others, alleging discharges of selenium from the site of Bandmill’s former Tower Mountain surface mine into waters of the United States without a proper permit. The Tower Mountain site is closed, the property has been reclaimed and West Virginia regulators previously determined that Bandmill no longer needs a National Pollutant Discharge Elimination System (“NPDES”) permit for the Tower Mountain site at issue. Bandmill was also released from its obligations to monitor and treat water discharging from the site. Bandmill believes it has operated in compliance with all laws and regulations regarding discharges from the Tower Mountain site.
On July 23, 2013, the Company’s subsidiary, Alex Energy, Inc., was served with a complaint alleging that discharges from the PGM No. 1 surface mine into Hardway Branch of Twentymile Creek violated state water quality standards for selenium. In July 2014, the Court entered partial summary judgment against Alex.
On July 29, 2013, the Company’s subsidiary, Pigeon Creek Processing Co. (“Pigeon Creek”), was notified by environmental groups that they intend to sue Pigeon Creek for discharging selenium from the Stonega impoundment area without the proper authorization in the NPDES permit. To date, no suit has been filed in this matter.
On October 3, 2013, Bandmill was notified by environmental groups that they intend to sue Bandmill for alleged discharges from the Right Hand Fork Surface Mine in connection with state water quality standards for selenium. To date, no suit has been filed in this matter.
On May 21, 2014, the Company’s subsidiary, Dickenson-Russell Coal Company (“DRCC”), was notified by environmental groups that they intend to sue DRCC for alleged discharges from the Moss #3 Preparation Plant in connection with wasteload allocations for total dissolved solids (TDS). To date, no suit has been filed.
On March 5, 2014, Alpha entered into a consent decree (the “Consent Decree”) with the EPA, the U.S. Department of Justice and three states regarding claims under the Clean Water Act. The Consent Decree resolves a complaint by the EPA and state agencies in Kentucky, Pennsylvania and West Virginia alleging that the Alpha’s mining affiliates in those states and in Tennessee and Virginia exceeded certain water discharge permit limits during the period 2006 to 2013. As part of the Consent Decree, Alpha agreed to implement an integrated environmental management system and an expanded auditing/reporting protocol, install selenium and osmotic pressure treatment facilities at specific locations, and certain other measures. The Consent Decree also stipulates that Alpha will pay $27,500 in civil penalties, to be divided among the federal government and state agencies. The Consent Decree is not effective until it is entered by the Court after expiration of a public comment period.
Nicewonder Litigation
 
Affiliated Construction Trades Foundation Litigation

In December 2004, prior to the Company’s acquisition of Nicewonder in October 2005, the Affiliated Construction Trades Foundation (“ACTF”), a division of the West Virginia State Building and Construction Trades Council, brought an action against the West Virginia Department of Transportation, Division of Highways (“WVDOH”) and Nicewonder Contracting, Inc. (“NCI”), which became the Company’s wholly-owned indirect subsidiary as a result of the Nicewonder acquisition, in the Circuit Court of Kanawha County, West Virginia, which was removed to the United States District Court for the Southern District of West Virginia (the “ACTF Litigation”). The plaintiff sought a declaration that the contract between NCI and the State of West Virginia related to NCI’s road construction project for the Red Jacket section of the King Coal Highway (the “Red

31
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

Jacket Contract”) was illegal as a violation of applicable West Virginia and federal competitive bidding and prevailing wage laws.
 
On September 30, 2009, the District Court issued an order that dismissed for lack of standing all of ACTF’s claims under federal law and remanded the remaining state claims to the Circuit Court of Kanawha County, West Virginia for resolution. On May 7, 2010, the Circuit Court of Kanawha County entered summary judgment in favor of NCI. On June 22, 2011, the West Virginia Supreme Court of Appeals reversed the Circuit Court order granting summary judgment in favor of NCI, and remanded the case back to the Circuit Court for further proceedings. Following remand, ACTF filed a motion for summary judgment, which the Circuit Court denied on November 9, 2011. ACTF challenged the order denying its summary judgment motion to the West Virginia Supreme Court of Appeals.

On June 21, 2012, the West Virginia Supreme Court of Appeals issued an opinion finding that ACTF had standing to pursue its claims and remanded the case back to the Circuit Court of Kanawha County, West Virginia for further proceedings.

A settlement between NCI and ACTF was agreed upon in early January 2013, prior to the January 14, 2013 trial date, and the Circuit Court subsequently dismissed the case as to NCI, with prejudice. The Company did not incur any out-of-pocket expenditures in connection with that settlement.

A bench trial proceeded among the remaining parties to the ACTF Litigation and, on February 26, 2013, the Circuit Court of Kanawha County entered an order that ruled against WVDOH in finding that the Red Jacket Contract, as well as the awarding and implementation of that contract, were in violation of West Virginia law because the Red Jacket Contract did not contain a provision whereby WVDOH required payment by NCI of statutory prevailing wages to employees; and WVDOH did not conduct a public bidding process before awarding the Red Jacket Contract to NCI. The time to appeal the order has passed without an appeal having been filed, and the order has become final.

NCI Employee Litigation

On February 7, 2013, the Company received notice of a putative class action lawsuit against NCI filed in the Circuit Court of Mingo County, West Virginia by a former NCI employee (the “NCI Employee Litigation”). The plaintiff in the NCI Employee Litigation is represented by the same attorney who represented the plaintiff in the ACTF Litigation, and the complaint’s allegations raise issues similar to those in the ACTF Litigation and arise from the same Red Jacket Contract that was at issue in the ACTF Litigation. The Company believes that NCI has meritorious defenses to the claims asserted in the NCI Employee Litigation.

NCI filed its answer to the complaint in the NCI Employee Litigation on March 4, 2013. On April 23, 2013, the Circuit Court of Kanawha County, West Virginia, granted NCI’s motion to transfer and entered an agreed order transferring the NCI Employee Litigation from the Circuit Court of Mingo County to the Circuit Court of Kanawha County.

On November 14, 2013, the Circuit Court of Kanawha County granted NCI’s Motion to Certify Questions of Law to the Supreme Court of Appeals of West Virginia, but on June 17, 2014, the Supreme Court declined to review the submitted questions in the absence of a more developed factual record in the lower court. Proceedings in the Circuit Court of Kanawha County, West Virginia therefore resumed. The Circuit Court has scheduled the trial for April 25-29 and May 2-6, 2016.

On October 14, 2014, NCI filed and served a third party complaint against WVDOH seeking a declaration of rights and obligations of the parties. Specifically, the complaint seeks a determination as to whether NCI is entitled to indemnification for any liability it may incur in the NCI Employee Litigation. The complaint also seeks a declaration that the Red Jacket Contract obligates WVDOH to enter into a supplemental agreement with NCI to reimburse NCI for any additional costs incurred, or to be incurred, as a result of the changes to the Red Jacket Contract arising from the February 26, 2013 order entered against WVDOH in the ACTF Litigation, including without limitation any costs and expenses incurred, or to be incurred, by NCI related to the wage and benefit rates for work on the project, including to the extent any such additional costs, damages, statutory penalties, and/or attorney fees are awarded against NCI in the NCI Employee Litigation.



32
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

Fluor Litigation
 
Alpha Appalachia and certain of its subsidiaries are also parties to a number of lawsuits and other legal proceedings related to certain non-coal businesses (the “Prior Business”) previously conducted by its former affiliate Fluor Corporation. These lawsuits include the Alexander-Pederson-Helig cases in which two of Alpha Appalachia’s subsidiaries, Appalachia Holding Company (“Appalachia Holding”) and DRIH Corporation (“DRIH”), were named defendants along with Fluor. In July 2011, those cases resulted in a jury award in the City of St. Louis Circuit Court in favor of the plaintiffs for $38,500 in compensatory and economic damages and $320,000 in punitive damages. The total aggregate judgment against Alpha Appalachia’s subsidiaries is $118,500.

Under the terms of the Distribution Agreement entered into by Alpha Appalachia and Fluor as of November 30, 2000 in connection with the spin-off of Fluor by Massey, Fluor agreed to indemnify Massey with respect to all such legal proceedings and assumed defense of the proceedings. Consistent with that agreement, in September 2011, Fluor submitted to the court a number of surety bonds covering the full amount of the judgments against Fluor and Alpha Appalachia’s subsidiaries in the Alexander-Pederson-Helig cases. On January 24, 2012, Fluor moved for a reduction in the surety bond amount pending appeal. The Missouri Court of Appeals granted Fluor’s motion on March 1, 2012 and reduced the amount of the surety bonds required to be submitted by the defendants collectively to $150,000, which Fluor has submitted on behalf of itself and Alpha Appalachia’s subsidiaries. On June 17, 2014, the Missouri Court of Appeals (i) affirmed the jury award of $38,500 in compensatory damages against Fluor, Appalachia Holding and DRIH, jointly and severally, as well as the award of $48,000 in punitive damages against Appalachia Holding and $32,000 against DRIH, and (ii) vacated the award of $240,000 in punitive damages against Fluor and remanded the case for a new trial solely on the amount of punitive damages as to Fluor. On July 2, 2014, the defendants filed with the Missouri Court of Appeals a petition for rehearing by the panel or rehearing en banc and an application to transfer the appeal to the Missouri Supreme Court in the event rehearing by the Court of Appeals is denied, all of which remain pending. The Company has recorded an indemnity receivable of $118,500 and has accrued a liability of $118,500, included in prepaid expenses and other current assets and accrued expenses and other current liabilities, respectively, in the Condensed Consolidated Balance Sheet at September 30, 2014.

In connection with Fluor’s sale of the Prior Business to a group of purchasers (the “Rennert Entities”) in 1994, the Rennert Entities had agreed to indemnify Fluor and its affiliates for losses and liabilities arising from the Prior Business. In late 2010, the Rennert Entities settled with the plaintiffs in the Alexander-Pederson-Helig cases without indemnifying or obtaining a release for the benefit of Fluor and Alpha Appalachia’s subsidiaries.

In January 2012, the Rennert Entities filed suit against Fluor and two of Alpha Appalachia’s subsidiaries in the United States District Court for the Eastern District of Missouri seeking return of funds previously paid by the Rennert Entities to settle personal injury and property damage claims against Fluor and Alpha Appalachia’s subsidiaries allegedly arising out of the Prior Business and a declaration of non-liability for indemnification with respect to the Alexander-Pederson-Helig cases and any future claims or judgments against Fluor and Alpha Appalachia’s subsidiaries arising out of the Prior Business. Also in January 2012, Fluor filed suit against the Rennert Entities in Missouri state court alleging various breach of contract and tort claims and seeking a declaratory judgment regarding the Rennert Entities’ indemnification obligations to Fluor and Alpha Appalachia’s subsidiaries against claims arising out of the Prior Business. On February 21, 2012, Appalachia Holding and DRIH joined Fluor as plaintiffs in this suit. At the same time, Fluor, Appalachia Holding and DRIH moved to dismiss, or in the alternative, to stay the suit pending in federal court in Missouri in favor of the Missouri state court action. On June 21, 2012, Missouri federal court stayed the case before it in favor of the suit pending in the Missouri state court.

On April 4, 2012, the Rennert entities moved to dismiss the Missouri state court action. On July 13, 2012, the Missouri state court scheduled an expedited hearing on the Rennert entities’ pending motions to dismiss for August 15, 2012. On October 5, 2012, the court denied the Rennert entities’ motions to dismiss each of Fluor’s and Alpha Appalachia’s subsidiaries’ claims except for one claim for contribution, which the court dismissed. All defendants answered on October 25, 2012. Discovery has commenced and is ongoing.

Harman Litigation

In December 1997, Wellmore Coal Corporation (“Wellmore”), then a subsidiary of A. T. Massey Coal Company (“A. T. Massey”), which is now a subsidiary of the Company, declared force majeure under its coal supply agreement with Harman Mining Corporation (“Harman”) and reduced the amount of coal to be purchased from Harman. In October 1998, Harman and several entities affiliated with it, as well as their ultimate sole shareholder (together “Harman plaintiffs”), sued A.T. Massey and

33
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

five of its subsidiaries (the “Massey Defendants”) in the Circuit Court of Boone County, West Virginia, alleging that the Massey Defendants tortiously interfered with Wellmore’s agreement with Harman, causing Harman to go out of business. In August 2002, the jury awarded the plaintiffs $50,000 in compensatory and punitive damages.

In October 2006, the Massey Defendants appealed the case to the Supreme Court of Appeals of West Virginia (“WV Supreme Court”). In November 2007, the WV Supreme Court issued a 3-2 majority opinion reversing the judgment against the Massey Defendants and remanding the case to the Circuit Court of Boone County with directions to enter an order dismissing the case, with prejudice, in its entirety. On motion by the Harman plaintiffs, the WV Supreme Court agreed to rehear the case but, in April 2008, it again reversed the judgment against the Massey Defendants and remanded the case with direction to enter an order dismissing the case, with prejudice, in its entirety.

In July 2008, the Harman plaintiffs petitioned the United States Supreme Court (the “U.S. Supreme Court”) to review the WV Supreme Court’s dismissal of their claims. In December 2008, the U.S. Supreme Court agreed to review the case based on the question of whether a justice of the WV Supreme Court should have recused himself from the appeal. The U.S. Supreme Court found that the justice should have recused himself and ruled in June 2009 that the matter should be reheard by the WV Supreme Court.  

The WV Supreme Court heard oral arguments on the matter in September 2009, and in November 2009 reversed the lower court’s decision, ruling that all claims brought in connection with the parties dealings must be brought in Virginia. The Harman plaintiffs subsequently requested that the WV Supreme Court reconsider its decision; the WV Supreme Court denied that request.

In November 2010, Harman plaintiffs re-filed their claims in the Circuit Court of Buchanan County, Virginia, this time solely against A.T. Massey, seeking compensatory damages of approximately $44,000, plus pre- and post-judgment interest and punitive damages. A. T. Massey filed a plea of res judicata, and in December 2011 the Buchanan County Circuit Court granted the plea and dismissed the Harman plaintiffs’ claims. The Harman plaintiffs appealed that decision to the Virginia Supreme Court, and on April 18, 2013, the Virginia Supreme Court reversed the decision of the Buchanan County Circuit Court, finding that res judicata did not bar the Harman plaintiffs’ claims. The matter was remanded to the Buchanan County Circuit Court for further proceedings.

On May 23, 2014, a jury in Buchanan County Circuit Court found for the Harman plaintiffs and awarded them $5,000 in damages, plus prejudgment interest of approximately $1,120. On June 13, 2014, the Harman plaintiffs filed motions seeking a new trial on damages and attorneys’ fees, and A.T. Massey filed a motion to set aside the damages verdict. The Circuit Court has not yet ruled on these motions.
 
Other Legal Proceedings
 
In addition to the matters disclosed above, the Company and its subsidiaries are involved in a number of legal proceedings and governmental examinations incident to its normal business activities. While the Company cannot predict the outcome of these proceedings, the Company does not believe that any liability arising from these matters individually or in the aggregate should have a material impact upon its consolidated cash flows, results of operations or financial condition.

(19)    Segment Information

The Company extracts, processes and markets steam and metallurgical coal from surface and deep mines for sale to electric utilities, steel and coke producers, and industrial customers. The Company operates only in the United States with mines in Northern and Central Appalachia and the Powder River Basin. The Company has two reportable segments: Western Coal Operations, which consists of two Powder River Basin surface mines as of September 30, 2014, and Eastern Coal Operations, which consists of 54 underground mines and 19 surface mines in Northern and Central Appalachia as of September 30, 2014, as well as coal brokerage activities.

In addition to the two reportable segments, the All Other category includes an idled underground mine in Illinois; expenses associated with certain closed mines; Dry Systems Technologies; revenues and royalties from the sale of natural gas; equipment sales and repair operations; terminal services; the leasing of mineral rights; general corporate overhead and corporate assets and liabilities. The Company evaluates the performance of its segments based on EBITDA, which the Company defines as net

34
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

income (loss) plus interest expense, income tax expense, amortization of acquired intangibles, net, and depreciation, depletion and amortization, less interest income and income tax benefit.

Segment operating results and capital expenditures for the three months ended September 30, 2014 were as follows:
 
Eastern
Coal
Operations
 
Western
Coal
Operations
 
All
Other
 
Consolidated
Total revenues
$
932,431

 
$
111,418

 
$
6,743

 
$
1,050,592

Depreciation, depletion, and amortization
$
151,153

 
$
14,898

 
$
4,844

 
$
170,895

Amortization of acquired intangibles, net
$
9,708

 
$
(586
)
 
$
44

 
$
9,166

EBITDA
$
45,940

 
$
1,014

 
$
(20,692
)
 
$
26,262

Capital expenditures
$
43,118

 
$
2,171

 
$
52

 
$
45,341


Segment operating results and capital expenditures for the three months ended September 30, 2013 were as follows:
 
Eastern
Coal
Operations
 
Western
Coal
Operations
 
All
Other
 
Consolidated
Total revenues
$
1,050,495

 
$
128,151

 
$
12,448

 
$
1,191,094

Depreciation, depletion, and amortization
$
175,767

 
$
13,686

 
$
6,839

 
$
196,292

Amortization of acquired intangibles, net
$
3,434

 
$
(690
)
 
$
4

 
$
2,748

EBITDA
$
(244,689
)
 
$
30,478

 
$
(126,902
)
 
$
(341,113
)
Capital expenditures
$
54,725

 
$
1,047

 
$
351

 
$
56,123


Segment operating results and capital expenditures for the nine months ended September 30, 2014 were as follows:
 
Eastern
Coal
Operations
 
Western
Coal
Operations
 
All
Other
 
Consolidated
Total revenues
$
2,862,231

 
$
323,861

 
$
30,371

 
$
3,216,463

Depreciation, depletion, and amortization
$
504,264

 
$
41,189

 
$
16,809

 
$
562,262

Amortization of acquired intangibles, net
$
29,838

 
$
(2,061
)
 
$
132

 
$
27,909

EBITDA
$
80,859

 
$
12,213

 
$
(53,167
)
 
$
39,905

Capital expenditures
$
116,498

 
$
9,191

 
$
2,485

 
$
128,174


Segment operating results and capital expenditures for the nine months ended September 30, 2013 were as follows:
 
Eastern
Coal
Operations
 
Western
Coal
Operations
 
All
Other
 
Consolidated
Total revenues
$
3,451,903

 
$
369,377

 
$
38,528

 
$
3,859,808

Depreciation, depletion, and amortization
$
586,486

 
$
40,863

 
$
22,672

 
$
650,021

Amortization of acquired intangibles, net
$
2,561

 
$
(1,666
)
 
$
13

 
$
908

EBITDA
$
(73,936
)
 
$
74,276

 
$
(233,689
)
 
$
(233,349
)
Capital expenditures
$
156,934

 
$
4,149

 
$
2,046

 
$
163,129



The following table presents a reconciliation of EBITDA to net loss:

35
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
EBITDA
$
26,262

 
$
(341,113
)
 
$
39,905

 
$
(233,349
)
Interest expense
(75,688
)
 
(62,233
)
 
(211,662
)
 
(182,587
)
Interest income
574

 
1,008

 
1,730

 
3,133

Income tax (expense) benefit
43,938

 
143,137

 
6,898

 
309,022

Depreciation, depletion and amortization
(170,895
)
 
(196,292
)
 
(562,262
)
 
(650,021
)
Amortization of acquired intangibles, net
(9,166
)
 
(2,748
)
 
(27,909
)
 
(908
)
Net loss
$
(184,975
)
 
$
(458,241
)
 
$
(753,300
)
 
$
(754,710
)

The following table presents total assets and goodwill as of September 30, 2014 and December 31, 2013:
 
Total Assets
 
Goodwill
 
September 30,
2014
 
December 31,
2013
 
September 30,
2014
 
December 31,
2013
Eastern Coal Operations
$
9,015,970

 
$
9,566,687

 
$
—

 
$
308,651

Western Coal Operations
619,640

 
645,175

 
—

 
—

All Other
1,557,215

 
1,587,396

 
—

 
—

Total
$
11,192,825

 
$
11,799,258

 
$
—

 
$
308,651


The Company markets produced, processed, and purchased coal to customers in the United States and in international markets. Export revenues totaled $381,972 and $1,255,717, or approximately 36% and 39%, respectively, of total revenues for the three and nine months ended September 30, 2014, respectively. Export revenues totaled $517,872 and $1,716,565, or approximately 43% and 44%, respectively, of total revenues for the three and nine months ended September 30, 2013, respectively.

(20)    Guarantor and Non-Guarantor Information

The Company has issued senior notes and convertible senior notes and may issue new registered debt securities (the “New Notes”) in the future that are and will be, respectively, fully and unconditionally guaranteed, jointly and severally, on a senior or subordinated, secured or unsecured basis by certain of the Company’s 100% owned subsidiaries (the “New Notes Guarantor Subsidiaries”).

Presented below are Condensed Consolidating Financial Statements as of September 30, 2014 and December 31, 2013 and for the three and nine months ended September 30, 2014 and 2013, respectively, based on the guarantor structure that was put in place in connection with the issuance of its senior notes and convertible senior notes, and would be put in place in the event the Company issues New Notes in the future. The tables below refer to the Company as issuer of the Senior Notes and of any New Notes that may be issued in the future. “Non-Guarantor Subsidiaries” refers, for the tables below, to ANR Receivables Funding, LLC, Gray Hawk Insurance Company, Shannon-Pocahontas Mining Company, Alpha Coal Sales International Limited, Alpha Natural Resources Singapore Private Limited, Rockridge Coal Company, ANR Second Receivables Funding, LLC, and Alpha Coal India Private Limited, which were not guarantors of the Senior Notes or the Convertible Notes and would not be guarantors of the New Notes. Separate consolidated financial statements and other disclosures concerning the New Notes Guarantor Subsidiaries are not presented because management believes that such information would not be material to holders of any New Notes or related guarantees that may be issued by the Company.


36
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Balance Sheet
September 30, 2014
 
Parent
(Issuer)
 

Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
467

 
$
807,229

 
$
1,715

 
$
—

 
$
809,411

Trade accounts receivable, net
—

 
26,665

 
291,019

 
—

 
317,684

Inventories, net
—

 
305,285

 
—

 
—

 
305,285

Short-term marketable securities
—

 
374,528

 
—

 
—

 
374,528

Prepaid expenses and other current assets
—

 
261,462

 
2,963

 
—

 
264,425

Total current assets
467

 
1,775,169

 
295,697

 
—

 
2,071,333

Property, equipment and mine development costs, net
—

 
1,528,163

 
—

 
—

 
1,528,163

Owned and leased mineral rights and land, net
—

 
6,984,875

 
—

 
—

 
6,984,875

Other acquired intangibles, net
—

 
112,696

 
—

 
—

 
112,696

Other non-current assets
8,449,986

 
8,742,491

 
6,085

 
(16,702,804
)
 
495,758

Total assets
$
8,450,453

 
$
19,143,394

 
$
301,782

 
$
(16,702,804
)
 
$
11,192,825

Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
49,086

 
$
127,859

 
$
—

 
$
—

 
$
176,945

Trade accounts payable
742

 
244,466

 
103

 
—

 
245,311

Accrued expenses and other current liabilities
3,130

 
699,999

 
180

 
—

 
703,309

Total current liabilities
52,958

 
1,072,324

 
283

 
—

 
1,125,565

Long-term debt
3,674,245

 
40,731

 
—

 
—

 
3,714,976

Pension and postretirement medical benefit obligations
—

 
1,024,896

 
—

 
—

 
1,024,896

Asset retirement obligations
—

 
723,479

 
—

 
—

 
723,479

Deferred income taxes
—

 
828,070

 
—

 
—

 
828,070

Other non-current liabilities
1,402,707

 
1,577,703

 
280,298

 
(2,805,412
)
 
455,296

Total liabilities
5,129,910

 
5,267,203

 
280,581

 
(2,805,412
)
 
7,872,282

 Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Total stockholders’ equity
3,320,543

 
13,876,191

 
21,201

 
(13,897,392
)
 
3,320,543

Total liabilities and stockholders’ equity
$
8,450,453

 
$
19,143,394

 
$
301,782

 
$
(16,702,804
)
 
$
11,192,825



37
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Balance Sheet
December 31, 2013
 
Parent
(Issuer)
 

Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiary
 
Eliminations
 
Total
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
467

 
$
617,952

 
$
1,225

 
$
—

 
$
619,644

Trade accounts receivable, net
—

 
287,655

 
—

 
—

 
287,655

Inventories, net
—

 
304,863

 
—

 
—

 
304,863

Short-term marketable securities
—

 
337,069

 
—

 
—

 
337,069

Prepaid expenses and other current assets
—

 
436,352

 
2,841

 
—

 
439,193

Total current assets
467

 
1,983,891

 
4,066

 
—

 
1,988,424

Property, equipment and mine development costs, net
—

 
1,798,648

 
—

 
—

 
1,798,648

Owned and leased mineral rights and land, net
—

 
7,157,506

 
—

 
—

 
7,157,506

Goodwill, net
—

 
308,651

 
—

 
—

 
308,651

Other acquired intangibles, net
—

 
158,465

 
—

 
—

 
158,465

Other non-current assets
8,602,537

 
8,786,932

 
13,826

 
(17,015,731
)
 
387,564

Total assets
$
8,603,004

 
$
20,194,093

 
$
17,892

 
$
(17,015,731
)
 
$
11,799,258

Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
6,250

 
$
22,919

 
$
—

 
$
—

 
$
29,169

Trade accounts payable
—

 
234,951

 
—

 
—

 
234,951

Accrued expenses and other current liabilities
3,130

 
975,365

 
200

 
—

 
978,695

Total current liabilities
9,380

 
1,233,235

 
200

 
—

 
1,242,815

Long-term debt
3,222,906

 
175,528

 
—

 
—

 
3,398,434

Pension and postretirement medical benefit obligations
—

 
990,124

 
—

 
—

 
990,124

Asset retirement obligations
—

 
728,575

 
—

 
—

 
728,575

Deferred income taxes
—

 
901,552

 
—

 
—

 
901,552

Other non-current liabilities
1,298,852

 
1,764,744

 
—

 
(2,597,704
)
 
465,892

Total liabilities
4,531,138

 
5,793,758

 
200

 
(2,597,704
)
 
7,727,392

Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Total stockholders’ equity
4,071,866

 
14,400,335

 
17,692

 
(14,418,027
)
 
4,071,866

Total liabilities and stockholders’ equity
$
8,603,004

 
$
20,194,093

 
$
17,892

 
$
(17,015,731
)
 
$
11,799,258


38
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Statement of Operations
Three Months Ended September 30, 2014
 
Parent
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiary
 
Eliminations
 
Total
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
Coal revenues
$
—

 
$
920,833

 
$
—

 
$
—

 
$
920,833

Freight and handling revenues
—

 
111,816

 
—

 
—

 
111,816

Other revenues
—

 
16,383

 
1,560

 
—

 
17,943

Total revenues
—

 
1,049,032

 
1,560

 
—

 
1,050,592

Cost and expenses:
 
 
 
 
 
 
 
 
 
Cost of coal sales (exclusive of items shown separately below)
—

 
864,998

 
—

 
—

 
864,998

Freight and handling costs
—

 
111,816

 
—

 
—

 
111,816

Other expenses
—

 
17,988

 
—

 
—

 
17,988

Depreciation, depletion, and amortization
—

 
170,895

 
—

 
—

 
170,895

Amortization of acquired intangibles, net
—

 
9,166

 
—

 
—

 
9,166

Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)
—

 
34,310

 
488

 
—

 
34,798

Asset impairment and restructuring
—

 
11,544

 
—

 
—

 
11,544

Total costs and expenses
—

 
1,220,717

 
488

 
—

 
1,221,205

Loss from operations
—

 
(171,685
)
 
1,072

 
—

 
(170,613
)
Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(76,356
)
 
712

 
(44
)
 
—

 
(75,688
)
Interest income
—

 
573

 
1

 
—

 
574

Gain on sale of marketable equity securities
—

 
16,435

 
—

 
—

 
16,435

Miscellaneous income (expense), net
—

 
409

 
(30
)
 
—

 
379

Total other income (expense), net
(76,356
)
 
18,129

 
(73
)
 
—

 
(58,300
)
Income (loss) before income taxes and equity in earnings of investments in Issuer and Guarantor Subsidiaries
(76,356
)
 
(153,556
)
 
999

 
—

 
(228,913
)
Income tax (expense) benefit
29,779

 
14,549

 
(390
)
 
—

 
43,938

Equity in earnings of investments in Issuer and Guarantor Subsidiaries
(138,398
)
 
—

 
—

 
138,398

 
—

Net income (loss)
$
(184,975
)
 
$
(139,007
)
 
$
609

 
$
138,398

 
$
(184,975
)

39
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Statement of Operations
Three Months Ended September 30, 2013
 
Parent
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiary
 
Eliminations
 
Total
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
Coal revenues
$
—

 
$
1,028,847

 
$
—

 
$
—

 
$
1,028,847

Freight and handling revenues
—

 
135,931

 
—

 
—

 
135,931

Other revenues
—

 
26,316

 
—

 
—

 
26,316

Total revenues
—

 
1,191,094

 
—

 
—

 
1,191,094

Cost and expenses:
 
 
 
 
 
 
 
 
 
Cost of coal sales (exclusive of items shown separately below)
—

 
988,995

 
—

 
—

 
988,995

Freight and handling costs
—

 
135,931

 
—

 
—

 
135,931

Other expenses
—

 
120,698

 
—

 
—

 
120,698

Depreciation, depletion, and amortization
—

 
196,292

 
—

 
—

 
196,292

Amortization of acquired intangibles, net
—

 
2,748

 
—

 
—

 
2,748

Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)
—

 
38,234

 
665

 
—

 
38,899

Asset impairment and restructuring
—

 
2,017

 
—

 
—

 
2,017

Goodwill impairment
—

 
253,102

 
—

 
—

 
253,102

Total costs and expenses
—

 
1,738,017

 
665

 
—

 
1,738,682

Income (loss) from operations
—

 
(546,923
)
 
(665
)
 
—

 
(547,588
)
Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(60,267
)
 
(1,966
)
 
—

 
—

 
(62,233
)
Interest income
—

 
985

 
23

 
—

 
1,008

Loss on early extinguishment of debt
(39
)
 
197

 
—

 
—

 
158

Miscellaneous income (expense), net
—

 
7,321

 
(44
)
 
—

 
7,277

Total other income (expense), net
(60,306
)
 
6,537

 
(21
)
 
—

 
(53,790
)
Income (loss) before income taxes and equity in earnings of investments in Issuer and Guarantor Subsidiaries
(60,306
)
 
(540,386
)
 
(686
)
 
—

 
(601,378
)
Income tax benefit (expense)
23,519

 
119,755

 
(137
)
 
—

 
143,137

Equity in earnings of investments in Issuer and Guarantor Subsidiaries
(421,454
)
 
—

 
—

 
421,454

 
—

Net income (loss)
$
(458,241
)
 
$
(420,631
)
 
$
(823
)
 
$
421,454

 
$
(458,241
)

40
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Statement of Operations
Nine Months Ended September 30, 2014
 
Parent
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiary
 
Eliminations
 
Total
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
Coal revenues
$
—

 
$
2,792,906

 
$
—

 
$
—

 
$
2,792,906

Freight and handling revenues
—

 
362,356

 
—

 
—

 
362,356

Other revenues
—

 
58,058

 
3,143

 
—

 
61,201

Total revenues
—

 
3,213,320

 
3,143

 
—

 
3,216,463

Cost and expenses:
 
 
 
 
 
 
 
 
 
Cost of coal sales (exclusive of items shown separately below)
—

 
2,589,530

 
—

 
—

 
2,589,530

Freight and handling costs
—

 
362,356

 
—

 
—

 
362,356

Other expenses
—

 
39,873

 
—

 
—

 
39,873

Depreciation, depletion, and amortization
—

 
562,262

 
—

 
—

 
562,262

Amortization of acquired intangibles, net
—

 
27,909

 
—

 
—

 
27,909

Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)
—

 
118,885

 
867

 
—

 
119,752

Asset impairment and restructuring
—

 
23,633

 
—

 
—

 
23,633

Goodwill impairment
—

 
308,651

 
—

 
—

 
308,651

Total costs and expenses
—

 
4,033,099

 
867

 
—

 
4,033,966

Income (loss) from operations
—

 
(819,779
)
 
2,276

 
—

 
(817,503
)
Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(209,529
)
 
(2,091
)
 
(42
)
 
—

 
(211,662
)
Interest income
—

 
1,724

 
6

 
—

 
1,730

Gain on sale of marketable equity securities
—

 
16,435

 
—

 
—

 
16,435

Loss on early extinguishment of debt
(1,630
)
 
(392
)
 
—

 
—

 
(2,022
)
Gain on exchange of equity method investment
—

 
250,331

 
—

 
—

 
250,331

Miscellaneous income (expense), net
—

 
2,617

 
(124
)
 
—

 
2,493

Total other income (expense), net
(211,159
)
 
268,624

 
(160
)
 
—

 
57,305

Income (loss) before income taxes and equity in earnings of investments in Issuer and Guarantor Subsidiaries
(211,159
)
 
(551,155
)
 
2,116

 
—

 
(760,198
)
Income tax (expense) benefit
82,352

 
(74,629
)
 
(825
)
 
—

 
6,898

Equity in earnings of investments in Issuer and Guarantor Subsidiaries
(624,493
)
 
—

 
—

 
624,493

 
—

Net income (loss)
$
(753,300
)
 
$
(625,784
)
 
$
1,291

 
$
624,493

 
$
(753,300
)

41
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Statement of Operations
Nine Months Ended September 30, 2013
 
Parent
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiary
 
Eliminations
 
Total
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
Coal revenues
$
—

 
$
3,292,412

 
$
—

 
$
—

 
$
3,292,412

Freight and handling revenues
—

 
448,316

 
—

 
—

 
448,316

Other revenues
—

 
115,346

 
3,734

 
—

 
119,080

Total revenues
—

 
3,856,074

 
3,734

 
—

 
3,859,808

Cost and expenses:
 
 
 
 
 
 
 
 
 
Cost of coal sales (exclusive of items shown separately below)
—

 
3,082,330

 
—

 
—

 
3,082,330

Freight and handling costs
—

 
448,316

 
—

 
—

 
448,316

Other expenses
—

 
155,479

 
—

 
—

 
155,479

Depreciation, depletion, and amortization
—

 
650,021

 
—

 
—

 
650,021

Amortization of acquired intangibles, net
—

 
908

 
—

 
—

 
908

Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)
—

 
118,141

 
2,523

 
—

 
120,664

Asset impairment and restructuring
—

 
24,358

 
—

 
—

 
24,358

Goodwill impairment
—

 
253,102

 
—

 
—

 
253,102

Total costs and expenses
—

 
4,732,655

 
2,523

 
—

 
4,735,178

Income (loss) from operations
—

 
(876,581
)
 
1,211

 
—

 
(875,370
)
Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(170,584
)
 
(10,822
)
 
(1,181
)
 
—

 
(182,587
)
Interest income
—

 
3,087

 
46

 
—

 
3,133

Loss on early extinguishment of debt
(27,009
)
 
(4,672
)
 
(1,358
)
 
—

 
(33,039
)
Miscellaneous income (expense), net
—

 
24,214

 
(83
)
 
—

 
24,131

Total other benefit (expense), net
(197,593
)
 
11,807

 
(2,576
)
 
—

 
(188,362
)
Loss before income taxes and equity in earnings of investments in Issuer and Guarantor Subsidiaries
(197,593
)
 
(864,774
)
 
(1,365
)
 
—

 
(1,063,732
)
Income tax benefit
77,062

 
231,428

 
532

 
—

 
309,022

Equity in earnings of investments in Issuer and Guarantor Subsidiaries
(634,179
)
 
—

 
—

 
634,179

 
—

Net income (loss)
$
(754,710
)
 
$
(633,346
)
 
$
(833
)
 
$
634,179

 
$
(754,710
)




42
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Statements of Comprehensive Income (Loss)
Three Months Ended September 30, 2014
 
Parent
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Consolidated
Net income (loss)
$
(184,975
)
 
$
(139,007
)
 
$
609

 
$
138,398

 
$
(184,975
)
Total comprehensive income (loss)
$
(249,164
)
 
$
(203,196
)
 
$
609

 
$
202,587

 
$
(249,164
)

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Statements of Comprehensive Income (Loss)
Three Months Ended September 30, 2013
 
Parent
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Consolidated
Net income (loss)
$
(458,241
)
 
$
(420,631
)
 
$
(823
)
 
$
421,454

 
$
(458,241
)
Total comprehensive income (loss)
$
(358,134
)
 
$
(320,524
)
 
$
(823
)
 
$
321,347

 
$
(358,134
)

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Statements of Comprehensive Income (Loss)
Nine Months Ended September 30, 2014
 
Parent
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Consolidated
Net income (loss)
$
(753,300
)
 
$
(625,784
)
 
$
1,291

 
$
624,493

 
$
(753,300
)
Total comprehensive income (loss)
$
(769,547
)
 
$
(642,031
)
 
$
1,291

 
$
640,740

 
$
(769,547
)

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Statements of Comprehensive Income (Loss)
Nine Months Ended September 30, 2013
 
Parent
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Consolidated
Net income (loss)
$
(754,710
)
 
$
(633,346
)
 
$
(833
)
 
$
634,179

 
$
(754,710
)
Total comprehensive income (loss)
$
(648,818
)
 
$
(527,454
)
 
$
(833
)
 
$
528,287

 
$
(648,818
)

43
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2014
 
Parent
(Issuer)
 

Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiary
 
Total
Consolidated
Net cash (used in) provided by operating activities
$
—

 
$
(253,232
)
 
$
84

 
$
(253,148
)
 
 
 
 
 
 
 
 
Investing activities:
 
 
 
 
 
 
 
Capital expenditures
—

 
(128,174
)
 
—

 
(128,174
)
Purchases of marketable securities
—

 
(507,804
)
 
—

 
(507,804
)
Sales of marketable securities
—

 
548,758

 
—

 
548,758

Proceeds from the exchange of equity-method investment, net
—

 
96,732

 
—

 
96,732

Other, net
—

 
13,516

 
—

 
13,516

Net cash provided by investing activities
—

 
23,028

 
—

 
23,028

 
 
 
 
 
 
 
 
Financing activities:
 
 
 
 
 
 
 
Principal repayments of long-term debt
(26,072
)
 
(9,921
)
 
—

 
(35,993
)
Principal repayments of capital lease obligations
—

 
(13,028
)
 
—

 
(13,028
)
Proceeds from borrowings on long-term debt
500,000

 
—

 
—

 
500,000

Debt issuance costs
(23,881
)
 
—

 
(4,304
)
 
(28,185
)
Common stock repurchases
(1,392
)
 
—

 
—

 
(1,392
)
Other
—

 
(1,515
)
 
—

 
(1,515
)
Transactions with affiliates
(448,655
)
 
443,945

 
4,710

 
—

Net cash (used in) provided by financing activities
—

 
419,481

 
406

 
419,887

 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
—

 
189,277

 
490

 
189,767

Cash and cash equivalents at beginning of period
467

 
617,952

 
1,225

 
619,644

Cash and cash equivalents at end of period
$
467

 
$
807,229

 
$
1,715

 
$
809,411


44
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2013
 
Parent
(Issuer)
 

Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiary
 
Total
Consolidated
Net cash (used in) provided by operating activities
$
—

 
$
178,630

 
$
(51
)
 
$
178,579

 
 
 
 
 
 
 
 
Investing activities:
 
 
 
 
 
 
 
Capital expenditures
—

 
(163,129
)
 
—

 
(163,129
)
Purchases of marketable securities
—

 
(738,800
)
 
—

 
(738,800
)
Sales of marketable securities
—

 
680,452

 
—

 
680,452

Other, net
—

 
7,075

 
—

 
7,075

Net cash used in investing activities
—

 
(214,402
)
 
—

 
(214,402
)
 
 
 
 
 
 
 
 
Financing activities:
 
 
 
 
 
 
 
Principal repayments of long-term debt
(723,869
)
 
(228,025
)
 
—

 
(951,894
)
Principal repayments of capital lease obligations
—

 
(12,151
)
 
—

 
(12,151
)
Proceeds from borrowings on long-term debt
964,369

 
—

 
—

 
964,369

Debt issuance costs
(24,317
)
 
—

 
—

 
(24,317
)
Common stock repurchases
(1,352
)
 
—

 
—

 
(1,352
)
Other
—

 
(1,453
)
 
—

 
(1,453
)
Transactions with affiliates
(214,375
)
 
214,015

 
360

 
—

Net cash (used in) provided by financing activities
456

 
(27,614
)
 
360

 
(26,798
)
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
456

 
(63,386
)
 
309

 
(62,621
)
Cash and cash equivalents at beginning of period
277

 
729,662

 
784

 
730,723

Cash and cash equivalents at end of period
$
733

 
$
666,276

 
$
1,093

 
$
668,102



45

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our Condensed Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our Consolidated Financial Statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2013.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This report includes statements of our expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to come within the safe harbor protection provided by those sections. These statements, which involve risks and uncertainties, relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable and may also relate to our future prospects, developments and business strategies. We have used the words “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “project”, “should” and similar terms and phrases, including references to assumptions, in this report to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements.
The following factors are among those that may cause actual results to differ materially from our forward-looking statements:
•
our liquidity, results of operations and financial condition;
•
sustained depressed levels or further declines in coal prices;
•
worldwide market demand for coal, electricity and steel, including demand for U.S. coal exports;
•
utilities switching to alternative energy sources such as natural gas, renewables and coal from basins where we do not operate;
•
reductions or increases in customer coal inventories and the timing of those changes;
•
our production capabilities and costs;
•
inherent risks of coal mining beyond our control, and our ability to utilize our coal assets fully and replace reserves as they are depleted;
•
changes in environmental laws and regulations, including those directly affecting our coal mining and production, and those affecting our customers’ coal usage, including potential climate change initiatives;
•
changes in safety and health laws and regulations and their implementation, and the ability to comply with those changes;
•
competition in coal markets;
•
future legislation, regulatory and court decisions and changes in regulations, governmental policies or taxes or changes in interpretation thereof;
•
global economic, capital market or political conditions, including a prolonged economic downturn in the markets in which we operate and disruptions in worldwide financial markets;
•
the outcome of pending or potential litigation or governmental investigations;
•
our relationships with, and other conditions affecting, our customers, including the inability to collect payments from our customers if their creditworthiness declines;
•
changes in, renewal or acquisition of, terms of and performance of customers under coal supply arrangements and the refusal by our customers to receive coal under agreed contract terms;
•
our ability to obtain, maintain or renew any necessary permits or rights, and our ability to mine properties due to defects in title on leasehold interests;
•
attracting and retaining key personnel and other employee workforce factors, such as labor relations;
•
the geological characteristics of the Powder River Basin, Central and Northern Appalachian coal reserves;
•
funding for and changes in postretirement benefit obligations, pension obligations, including multi-employer pension plans, and federal and state black lung obligations;
•
cybersecurity attacks or failures, threats to physical security, extreme weather conditions or other natural disasters;
•
increased costs and obligations potentially arising from the Patient Protection and Affordable Care Act;
•
reclamation and mine closure obligations;
•
our assumptions concerning economically recoverable coal reserve estimates;
•
our ability to negotiate new United Mine Workers of America (“UMWA”) wage agreements on terms acceptable to us, increased unionization of our workforce in the future, and any strikes by our workforce;

46

•
disruptions in delivery or changes in pricing from third party vendors of key equipment and materials that are necessary for our operations, such as diesel fuel, steel products, explosives and tires;
•
inflationary pressures on supplies and labor and significant or rapid increases in commodity prices;
•
railroad, barge, truck and other transportation availability, performance and costs;
•
disruption in third party coal supplies;
•
our ability to integrate successfully operations that we may acquire or develop in the future, or the risk that any such integration could be more difficult, time-consuming or costly than expected;
•
the consummation of financing transactions, acquisitions or dispositions and the related effects on our business and financial position;
•
indemnification of certain obligations not being met;
•
long-lived asset impairment charges;
•
fair value of derivative instruments not accounted for as hedges that are being marked to market;
•
our substantial indebtedness and potential future indebtedness;
•
restrictive covenants and other terms in our secured credit facility and the indentures governing our outstanding debt securities;
•
our ability to obtain or renew surety bonds on acceptable terms or maintain self-bonding status;
•
certain terms of our outstanding debt securities, including conversions of some of our convertible senior debt securities, that may adversely impact our liquidity; and
•
other factors, including the other factors discussed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and “Risk Factors” sections of this Quarterly Report on Form 10-Q for the three months ended September 30, 2014, the Quarterly Report on Form 10-Q for the three months ended June 30, 2014, the Quarterly Report on Form 10-Q for the three months ended March 31, 2014, and our Annual Report on Form 10-K for the year ended December 31, 2013.

When considering these forward-looking statements, you should keep in mind the cautionary statements in this report and the documents incorporated by reference. We do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events, which may cause actual results to differ from those expressed or implied by the forward-looking statements contained in this report.

Overview

We are one of America’s premier coal suppliers, operating 75 mines and 23 coal preparation and load-out facilities as of September 30, 2014 in Northern and Central Appalachia and the Powder River Basin (“PRB”), with approximately 9,700 employees. Our affiliated companies produce, process, and sell steam and metallurgical coal from operations located in Virginia, West Virginia, Kentucky, Pennsylvania, and Wyoming. We also sell coal produced by others, the majority of which is processed and/or blended with coal produced from our affiliates' mines prior to resale, providing us with a higher overall margin for the blended product than if we had sold the coal separately.

For the three and nine months ended September 30, 2014, sales of steam coal were 16.5 million tons and 48.9 million tons, respectively, and in each case accounted for approximately 78% of our coal sales volume. Comparatively, for the three and nine months ended September 30, 2013, sales of steam coal were 16.8 million tons and 50.6 million tons, respectively, and accounted for approximately 77% and 76% of our coal sales volume. For the three and nine months ended September 30, 2014, sales of metallurgical coal, which generally sells at a premium over steam coal, were 4.8 million tons and 13.7 million tons, respectively, and in each case accounted for approximately 22% of our coal sales volume. Comparatively, for the three and nine months ended September 30, 2013, sales of metallurgical coal were 5.0 million tons and 15.7 million tons, respectively, and accounted for approximately 23% and 24% of our coal sales volume.

Our sales of steam coal for the three and nine months ended September 30, 2014 and 2013 were made primarily to large utilities and industrial customers throughout the United States, and our sales of metallurgical coal were made primarily to steel companies in the Northeastern and Midwestern regions of the United States and in several countries in Europe, Asia and South America. For the three and nine months ended September 30, 2014, approximately 36% and 39%, respectively, of our total revenues were derived from coal sales made to customers outside the United States, compared to 43% and 44%, respectively, for the three and nine months ended September 30, 2013.

We have two reportable segments, Eastern Coal Operations and Western Coal Operations. Eastern Coal Operations consists of our operations in Northern and Central Appalachia and our coal brokerage activities. Western Coal Operations consists of two PRB mines in Wyoming. Our All Other category includes an idled underground mine in Illinois; expenses associated with certain closed mines; Dry Systems Technologies; revenues and royalties from the sale of natural gas; equipment sales and

47

repair operations; terminal services; the leasing of mineral rights; general corporate overhead and corporate assets and liabilities.

In 2010, we entered into a 50/50 joint venture (the “Alpha Shale JV”) with Rice Drilling C LLC, a wholly owned subsidiary of Rice Drilling B LLC, in order to develop a portion of our Marcellus Shale natural gas holdings in southwest Pennsylvania. On December 6, 2013, we, Rice Drilling C LLC and Rice Energy Inc. (“Rice Energy”) entered into a transaction agreement (the “Transaction Agreement”). Pursuant to the Transaction Agreement, we agreed to transfer our 50% interest in the Alpha Shale JV to Rice Energy in exchange for total consideration of $300.0 million, consisting of $100.0 million of cash and $200.0 million of shares of Rice Energy common stock, based upon Rice Energy’s initial public offering (the “Offering”). On January 29, 2014, Rice Energy completed its Offering, and on the same date, issued approximately 9.5 million shares of common stock, and paid $100.0 million in cash, to us. We recognized a gain of $250.3 million. On August 19, 2014, we sold approximately 3.1 million shares of Rice Energy common stock for $81.8 million of cash and recorded a gain of $16.4 million. The remaining approximately 6.4 million shares of Rice Energy are subject to customary lockup provisions that will expire on November 11, 2014. As of September 30, 2014, the fair value of these shares was $170.5 million, which is included in other long-term assets in the Condensed Consolidated Balance Sheet.

In October and December 2013, the parties to the securities class action brought by Massey stockholders in the wake of the explosion at Massey’s Upper Big Branch mine participated in mediation. In December 2013, the parties reached agreement on all material terms of settlement, including a cash payment of $265.0 million. In February 2014, the parties reached agreement on definitive settlement documentation, subject to court approval, and on February 19, 2014, the Court entered an order preliminarily approving the settlement subject to a final determination following a settlement hearing on June 4, 2014. On February 25, 2014, pursuant to the terms of the settlement, we made an initial payment of $30.0 million into an escrow account and on June 3, 2014, we deposited the remaining $235.0 million of the settlement into the escrow account. On June 4, 2014, the Court entered an order approving the settlement and dismissed the class action with prejudice. In May 2014, we received approximately $70.0 million of insurance proceeds in connection with the settlement.
On March 5, 2014, we entered into a consent decree (the “Consent Decree”) with the EPA, the U.S. Department of Justice and three states regarding claims under the Clean Water Act. The Consent Decree resolves a complaint by the EPA and state agencies in Kentucky, Pennsylvania and West Virginia alleging that our mining affiliates in those states and in Tennessee and Virginia exceeded certain water discharge permit limits during the period 2006 to 2013. As part of the Consent Decree, we agreed to implement an integrated environmental management system and an expanded auditing/reporting protocol, install selenium and osmotic pressure treatment facilities at specific locations, and certain other measures. The Consent Decree also stipulates that we will pay $27.5 million in civil penalties, to be divided among the federal government and state agencies. The Consent Decree is not effective until it is entered by the Court. We expect to make capital expenditures of approximately $160.0 million over the course of the three year period from 2014 through 2016 to achieve water quality compliance under certain water discharge permits issued by the state agencies represented in the Consent Decree.
On April 23, 2014, the U.S. Mine Safety and Health Administration (“MSHA”) issued an extensive final rule revising and expanding its regulation of respirable dust in coal mines. The final rule differs in certain respects from MSHA’s October 2010 proposed rule. We are reviewing the final rule and evaluating its potential effects. Although certain provisions of the rule required compliance by August 2014, many provisions will not be effective until 2016.
On July 31, 2014, we announced that 11 surface mining operations in West Virginia are expected to be idled, along with, preparation plants and other support operations. The decision to idle these operations was made in response to persistent weakness in U.S. and overseas coal demand, depressed price levels and government regulations that are causing electric utilities to close and forego new construction of coal-fired power plants. In connection with the announcement, Worker Adjustment and Retraining Notification (WARN) Act notices were delivered by our affiliate companies, on the same date, to approximately 1,100 employees. Following an evaluation of cost structures, including wages and benefits, as well as an assessment of forecasts for customer commitments and anticipated pricing, on September 26, 2014, we announced the closing of two mines included in the July 31, 2014 WARN notices. These mines shipped approximately 1.5 million tons of steam and metallurgical coal during the first three quarters of 2014. Additionally, we announced that one of the 11 mines will continue to operate as usual. The WARN notices for the remaining 8 mines were extended to the end of November 2014 or within the following two week period. The remaining mines that are subject to idling produced 3.3 million tons of thermal and metallurgical coal during the first three quarters of 2014. Both domestic shipments and shipments to Europe from Central Appalachia are expected to be reduced in connection with the idling of these operations.
As previously disclosed, the Emerald longwall mine will operate only through the second panel in district D. Emerald, will be conducting development work with minimal production during the first quarter of 2015, likely resulting in higher overall eastern cost of coal sales per ton during that period. We now expect Emerald to cease production near the end of 2015.

48

During the second quarter of 2014, we performed an interim impairment test for our goodwill due primarily to continued weakness in the global metallurgical coal markets which indicated that the fair value of a reporting unit within our Eastern Coal Operations may have been below its carrying value. As a result, we recorded goodwill impairment expense of $308.7 million to write down the carrying value of goodwill to its estimated implied value for a reporting unit in our Eastern Coal Operations. See Note 3 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
During the three months ended September 30, 2014, we entered into an amendment and extension of our fourth amended and restated credit agreement (as amended and restated, the “Fifth Amended and Restated Credit Agreement”). Additionally, we entered into a credit and security agreement (the “A/R Facility”) in which we may borrow cash or cause letters of credit to be issued, on a revolving basis, in an amount up to $200.0 million, subject to certain limitations. For a more complete description of these transactions, see Note 11 in the Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q and see - Liquidity and Capital Resources.
Coal Pricing Trends, Uncertainties and Outlook
 
Metallurgical Coal
The global seaborne metallurgical coal market has shown no meaningful improvement over the last several months and continues to exhibit dynamics of an oversupplied market. The Asian hard coking coal benchmark remained at approximately $120 per metric tonne for the third consecutive quarter.
Decelerating growth in steel demand in China, coupled with increases in Australian metallurgical coal production continue to cause an oversupplied seaborne metallurgical coal market. The World Steel Association (“WSA”) recently lowered its global apparent steel usage (“ASU”) growth forecast for 2015 to 2.0 percent from 3.3 percent, with Chinese ASU growth forecasts dropping from 2.7 percent to 0.8 percent. Furthermore, Chinese metallurgical coal imports continued to decline significantly in 2014 compared to 2013. Australian year-to-date exports are up through August 2014 compared to the prior year period.
Announced cuts to global metallurgical coal production through production curtailments and mine idlings have continued with additional production cuts likely as current prices do not allow a return for many of the global producers. North American production cuts account for a significant percentage of announced global cuts to date. We believe many of these announced reductions have not yet taken full effect as certain mines have yet to idle or are selling their remaining inventory.
Thermal Coal
Recent price trends suggest that the thermal coal market will remain weak into early 2015. Although domestic utility inventory levels remain at historically low levels, softer natural gas prices, increased imports of thermal coal and declining usage of thermal coal by power plants in response to EPA regulations have contributed to a continued weak pricing and demand environment.
Rail underperformance continues to hinder shipping volumes across all regions, particularly in the Powder River Basin. Utility inventory levels at the end of September 2014 were significantly lower in terms of coal burn compared to the five-year average and unchanged as of the end of August 2014.
While pricing in Northern Appalachia (“NAPP”) has held up better than in other regions, it is still down over the past few months. Increased competition from the Illinois basin, the threat of increased production from competing mines, and natural gas price declines with large basis differentials have all contributed to continued soft market conditions in NAPP. Utility inventories in NAPP were slightly higher in terms of coal burn at the end of September 2014 compared to August 2014 and compared to the five-year average.
Utility stockpiles in Central Appalachia (“CAPP”) at the end of September 2014 are well below normal five-year average burn levels. Although CAPP utility stockpiles are up from levels seen as of the end of August 2014, they are down significantly compared to a year ago. Despite this, we continue to see no demonstrated sense of urgency from the utilities, due in part to mild summer weather, lackluster demand and strong natural gas injections over the past several months.
The seaborne market is equally uninspiring, with API2 spot pricing weakening further from prices in the second quarter of 2014 and in line with 2015 calendar year pricing, well below the break-even point for the majority of U.S. producers.
Results of Operations

EBITDA is defined as net income (loss) plus interest expense, income tax expense, depreciation, depletion, and amortization, and amortization of acquired intangibles, net, less interest income and income tax benefit. EBITDA is not a

49

financial measure recognized under accounting principles generally accepted in the United States (“GAAP”). It is used by management to measure operating performance, and management also believes it is a useful indicator of our ability to meet debt service and capital expenditure requirements. Because EBITDA is not calculated identically by all companies, our calculation may not be comparable to similarly titled measures of other companies.

The following table reconciles EBITDA to net loss, the most directly comparable GAAP measure:

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
 
(in thousands)
Net loss
$
(184,975
)
 
$
(458,241
)
 
$
(753,300
)
 
$
(754,710
)
Interest expense
75,688

 
62,233

 
211,662

 
182,587

Interest income
(574
)
 
(1,008
)
 
(1,730
)
 
(3,133
)
Income tax expense (benefit)
(43,938
)
 
(143,137
)
 
(6,898
)
 
(309,022
)
Depreciation, depletion and amortization
170,895

 
196,292

 
562,262

 
650,021

Amortization of acquired intangibles, net
9,166

 
2,748

 
27,909

 
908

EBITDA
$
26,262

 
$
(341,113
)
 
$
39,905

 
$
(233,349
)


Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013

Summary

Total revenues decreased $140.5 million, or 12%, for the three months ended September 30, 2014 compared to the prior year period. The decrease in total revenues was due to decreased coal revenues of $108.0 million, decreased freight and handling revenues of $24.1 million, and decreased other revenues of $8.4 million. The decrease in coal revenues was due to lower average coal sales realization per ton and lower sales volumes for metallurgical and western steam coal and lower average coal sales realization per ton for eastern steam coal. The decrease in coal revenues consisted of decreased metallurgical coal revenues of $83.4 million, or 17%, and decreased steam coal revenues of $24.6 million, or 4%. The decrease in freight and handling revenues was due primarily to a decline in export shipments and freight rates. The decrease in other revenues was due primarily to decreased revenues related to contractual settlements.

Net loss decreased $273.3 million for the three months ended September 30, 2014 compared to the prior year period. The decrease was largely due to a non-cash goodwill impairment charge of $253.1 million recorded in the prior year period and decreases in certain operating costs and expenses of $249.8 million, which are described below, partially offset by decreased coal and other revenues discussed above, decreased income tax benefits of $99.2 million, increased asset impairment and restructuring expenses of $9.5 million, and increased other expense, net of $4.5 million, which includes a gain of $16.4 million for the three months ended September 30, 2014 on the sale of marketable equity securities.

The decrease in certain operating costs and expenses of $249.8 million consisted of decreased cost of coal sales of $124.0 million, or 13%, decreased other expenses of $102.7 million, or 85%, decreased depreciation, depletion and amortization expenses of $25.4 million, or 13%, and decreased selling, general and administrative expenses of $4.1 million, or 11%, partially offset by increased expenses for amortization of acquired intangibles, net of $6.4 million, or 234%.

Coal sales volumes decreased 0.6 million tons, or 3%, compared to the prior year period. The decrease in coal sales volumes was primarily due to decreases of 0.8 million tons, or 8%, and 0.3 million tons, or 5%, for western steam and metallurgical coal, respectively, partially offset by an increase of 0.5 million tons, or 7%, in eastern steam coal. The decrease in western steam coal volumes was due primarily to rail transportation difficulties. The decrease in metallurgical coal volumes was due primarily to lower export shipments due to weak market conditions and the impacts of production curtailments. The increase in eastern steam coal was primarily due to improved performance at our Cumberland longwall mine, which experienced a temporary shut down in the prior year period due to difficult mining conditions and geological factors, partially offset by production curtailments at other mines in our eastern operations.

The consolidated average coal sales realization per ton for the three months ended September 30, 2014 was $43.36 compared to $47.09 in the prior year period, a decrease of $3.73 per ton, or 8%. The decrease was largely attributable to

50

decreases of $12.28 per ton, or 13%, $5.05 per ton, or 8%, and $0.77 per ton, or 6%, in metallurgical, eastern steam and western steam average coal sales realization per ton, respectively. The average coal sales realization per ton for metallurgical coal and eastern steam coal was $82.45 and $58.16, respectively, for the three months ended September 30, 2014 compared to $94.73 and $63.21 in the prior year period. The average coal sales realization per ton for western steam coal was $11.81 for the three months ended September 30, 2014 compared to $12.58 in the prior year period.

Consolidated coal margin percentage, calculated as consolidated coal revenues less consolidated cost of coal sales (excluding cost of coal sales in our All Other category), divided by consolidated coal revenues, was 8% for the three months ended September 30, 2014 compared to 5% in the prior year period. Coal margin percentage for our Eastern and Western Coal Operations was 8% and 4%, respectively, for the three months ended September 30, 2014 compared to 2% and 26% in the prior year period. Consolidated coal margin per ton, calculated as consolidated coal sales realization per ton less consolidated cost of coal sales per ton (excluding cost of coal sales per ton in our All Other category), was $3.33 for the three months ended September 30, 2014 compared to $2.47 in the prior year period. Coal margin per ton for our Eastern and Western Coal Operations was $5.53 and $0.49, respectively, for the three months ended September 30, 2014 compared to $1.77 and $3.29 in the prior year period. The increase in coal margin percentage and coal margin per ton in Eastern Coal Operations was primarily due to the impact of production curtailments at higher cost mines, our cost reduction efforts and improved performance at our Cumberland longwall mine, which experienced a temporary shut down in the prior year period due to difficult mining conditions and geological factors. The decrease in coal margin percentage and coal margin per ton in Western Coal Operations was primarily due to decreased sales as a result of rail transportation difficulties.

 
Three Months Ended
September 30,
 
Increase (Decrease)
 
2014
 
2013
 
$ or Tons
 
%
 
(in thousands, except per ton data)
 
 
Revenues:
 
 
 
 
 
 
 
Coal revenues:
 
 
 
 
 
 
 
Eastern steam
$
417,759

 
$
425,097

 
$
(7,338
)
 
(2
)%
Western steam
109,602

 
126,865

 
(17,263
)
 
(14
)%
Metallurgical
393,472

 
476,885

 
(83,413
)
 
(17
)%
Freight and handling revenues
111,816

 
135,931

 
(24,115
)
 
(18
)%
Other revenues
17,943

 
26,316

 
(8,373
)
 
(32
)%
Total revenues
$
1,050,592

 
$
1,191,094

 
$
(140,502
)
 
(12
)%
Tons sold:
 
 
 
 
 
 
 
Eastern steam
7,183

 
6,726

 
457

 
7
 %
Western steam
9,280

 
10,087

 
(807
)
 
(8
)%
Metallurgical
4,773

 
5,034

 
(261
)
 
(5
)%
Total
21,236

 
21,847

 
(611
)
 
(3
)%
Coal sales realization per ton:
 
 
 
 
 
 
 
Eastern steam
$
58.16

 
$
63.21

 
$
(5.05
)
 
(8
)%
Western steam
$
11.81

 
$
12.58

 
$
(0.77
)
 
(6
)%
Metallurgical
$
82.45

 
$
94.73

 
$
(12.28
)
 
(13
)%
Average
$
43.36

 
$
47.09

 
$
(3.73
)
 
(8
)%

Coal revenues. Coal revenues decreased $108.0 million, or 10%, for the three months ended September 30, 2014 compared to the prior year period. The decrease in coal revenues consisted of decreases in eastern steam, western steam and metallurgical coal revenues.

Total eastern steam coal revenues decreased $7.3 million, or 2%, which consisted of decreased export coal revenues of $14.7 million, or 23%, partially offset by increased domestic coal revenues of $7.4 million, or 2%, compared to the prior year period. The decrease in eastern steam coal revenues was largely due to lower coal sales realization per ton for both domestic and export shipments. Eastern steam coal shipments increased 0.5 million tons, or 7%, which consisted primarily of increased domestic shipments compared to the prior year period due in part to increased performance at our Cumberland longwall mine, which experienced a temporary shut down in the prior year period due to difficult mining conditions and geological factors.

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Coal sales realization per ton for eastern steam domestic sales was $59.56 per ton compared to $63.66 per ton in the prior year period and coal sales realization per ton for eastern steam export sales was $49.56 per ton compared to $60.78 per ton in the prior year period. Coal sales realization per ton has been negatively impacted by competition from coal sourced from other basins, primarily the Illinois basin, and competition from other energy sources, primarily natural gas.

Total metallurgical coal revenues decreased $83.4 million, or 17%, which consisted of decreased export coal revenues of $94.9 million, or 29%, partially offset by increased domestic coal revenues of $11.5 million, or 8%, compared to the prior year period. The decrease in export metallurgical coal revenues was largely due to decreases in export shipments and lower average coal sales realization per ton, which was impacted by weak market conditions as increases in supply have outpaced demand growth in the seaborne markets. The increase in domestic metallurgical coal revenues was largely due to increases in domestic shipments. Metallurgical coal shipments decreased 0.3 million tons, or 5%, which consisted of decreased export shipments of 0.6 million tons, or 16%, partially offset by increased domestic shipments of 0.3 million tons, or 25%, compared to the prior year period. Coal sales realization per ton for metallurgical export sales was $75.25 per ton compared to $88.75 per ton in the prior year period and coal sales realization per ton for metallurgical domestic sales was $96.46 per ton compared to $112.06 per ton in the prior year period.

The decrease in western steam coal revenues of $17.3 million, or 14%, was primarily due to decreased coal shipments primarily as a result of the impacts of rail transportation difficulties and a decrease of $0.77, or 6%, in average coal sales realization per ton due to customer mix and roll off of higher priced contracts year over year. Western coal sales volumes decreased 0.8 million tons, or 8%, compared to the prior year period.

Our sales mix of metallurgical coal and steam coal based on volume was 22% and 78%, respectively, for the three months ended September 30, 2014 compared with 23% and 77% in the prior year period. Our sales mix of metallurgical coal and steam coal based on coal revenues was 43% and 57%, respectively, for the three months ended September 30, 2014 compared with 46% and 54%, respectively, in the prior year period.

Freight and handling. Freight and handling revenues and costs were $111.8 million for the three months ended September 30, 2014, a decrease of $24.1 million, or 18%, compared to the prior year period. The decrease was primarily due to decreased export shipments and decreased freight rates compared to the prior year period.

Other. Other revenues decreased $8.4 million, or 32%, and other expenses decreased $102.7 million, or 85%, for the three months ended September 30, 2014 compared to the prior year period, resulting in a net increase to income from operations of $94.3 million. The net increase was due primarily to loss contingency accruals for litigation recorded in the prior year period.


52

 
Three Months Ended
September 30,
 
Increase (Decrease)
 
2014
 
2013
 
$
 
%
 
(in thousands, except per ton data)
 
 
Cost of coal sales (exclusive of items shown separately below)
$
864,998

 
$
988,995

 
$
(123,997
)
 
(13
)%
Freight and handling costs
111,816

 
135,931

 
(24,115
)
 
(18
)%
Other expenses
17,988

 
120,698

 
(102,710
)
 
(85
)%
Depreciation, depletion and amortization
170,895

 
196,292

 
(25,397
)
 
(13
)%
Amortization of acquired intangibles, net
9,166

 
2,748

 
6,418

 
234
 %
Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)
34,798

 
38,899

 
(4,101
)
 
(11
)%
Asset impairment and restructuring
11,544

 
2,017

 
9,527

 
472
 %
Goodwill impairment
—

 
253,102

 
(253,102
)
 
(100
)%
Total costs and expenses
$
1,221,205

 
$
1,738,682

 
$
(517,477
)
 
(30
)%
Cost of coal sales per ton:1
 
 
 
 
 
 
 
Eastern Coal Operations
$
62.32

 
$
74.93

 
$
(12.61
)
 
(17
)%
Western Coal Operations
$
11.32

 
$
9.29

 
$
2.03

 
22
 %
Average
$
40.03

 
$
44.62

 
$
(4.59
)
 
(10
)%
EBITDA:
 
 
 
 
 
 
 
Eastern Coal Operations
$
45,940

 
$
(244,689
)
 
$
290,629

 
119
 %
Western Coal Operations
$
1,014

 
$
30,478

 
$
(29,464
)
 
(97
)%
1 Cost of coal sales per ton includes only costs associated with our Eastern and Western Coal Operations.

Cost of coal sales. Cost of coal sales decreased $124.0 million, or 13%, for the three months ended September 30, 2014 compared to the prior year period. The decrease in cost of coal sales was due primarily to decreased labor and benefit expenses and decreased supplies and maintenance expenses primarily related to our cost reduction measures, decreased sales-related variable costs associated with decreased metallurgical and steam coal revenues, and decreased expenses related to production curtailments at certain higher cost mines.

Depreciation, depletion and amortization. Depreciation, depletion, and amortization decreased $25.4 million, or 13%, for the three months ended September 30, 2014 compared to the prior year period. The decrease was primarily due to decreased spending related to continued constrained capital spending and the impact of production curtailments.

Amortization of acquired intangibles, net. Amortization expense of acquired intangibles, net increased $6.4 million for the three months ended September 30, 2014 compared to the prior year period. The increase in expense for amortization of acquired intangibles, net, was primarily due to lower amortization of below-market contracts assumed in prior acquisitions due to the completion of shipments under many of the contracts assumed.

Selling, general and administrative. Selling, general and administrative expenses decreased $4.1 million, or 11%, for the three months ended September 30, 2014 compared to the prior year period. The decrease in selling, general and administrative expenses was due primarily to decreased professional fees as a result of our cost reduction measures.

Asset impairment and restructuring. Asset impairment and restructuring expenses were $11.5 million for the three months ended September 30, 2014 and consisted primarily of severance-related expenses.

Interest expense. Interest expense increased $13.5 million, or 22%, during the three months ended September 30, 2014 compared to the prior year period due primarily to the issuance of 4.875% convertible notes in December 2013 and 7.50% senior secured second lien notes in May 2014, partially offset by repurchases of a portion of outstanding 2.375% and 3.25% convertible notes during the first half of 2014.

Income taxes. Income tax benefit of $43.9 million was recorded for the three months ended September 30, 2014 on a loss before income taxes of $228.9 million. The benefit rate is lower than the federal statutory rate of 35% primarily due to the

53

impact of a change in the valuation allowance of $43.7 million, partially offset by the percentage depletion allowance and state income taxes, net of federal benefit. The change in valuation allowance results from an increase in net operating losses and other deferred tax assets for which we are unable to support realization. See Note 15 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Income tax benefit of $143.1 million was recorded for the three months ended September 30, 2013 on a loss before income taxes of $601.4 million. The benefit rate is lower than the federal statutory rate of 35% primarily due to the impact of the non-deductible goodwill impairment of $88.6 million, partially offset by the impact of the percentage depletion allowance, state income taxes, net of federal tax impact and a change in the valuation allowance.

Segment EBITDA

Eastern Coal Operations - EBITDA increased $290.6 million for the three months ended September 30, 2014 compared to the prior year period. The increase in EBITDA was largely due to a goodwill impairment charge of $253.1 million recorded in the prior year period, increased coal margin per ton of $3.76, or 212%, increased other miscellaneous income, net of $9.7 million which includes a gain of approximately $16.4 million on the sale of marketable equity securities, and decreased other expenses of $2.0 million, or 143%, partially offset by increased asset impairment and restructuring expenses of $12.0 million, decreased other revenues of $5.1 million, or 35%, and increased selling, general and administrative expenses of $2.4 million, or 8%. The increase in coal margin per ton was due to decreased cost of coal sales primarily resulting from our cost reduction measures and improved performance at our Cumberland longwall mine, which experienced a temporary shut down in the prior year period due to difficult mining conditions and geological factors. The increase in coal margin per ton consisted of decreased cost of coal sales per ton of $12.61, or 17%, partially offset by decreased average coal sales realization per ton of $8.85, or 12%.

Western Coal Operations - EBITDA decreased $29.5 million, or 97%, for the three months ended September 30, 2014 compared to the prior year period. The decrease in EBITDA was primarily due to decreased coal margin per ton of $2.80, or 85%. The decrease in coal margin per ton consisted of decreased average coal sales realization per ton of $0.77, or 6%, primarily due to customer mix and roll off of higher priced contracts year over year, and increased cost of coal sales per ton of $2.03, or 22%, which was due primarily to lower volumes related to poor rail service.

Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013

Summary

Total revenues decreased $643.3 million, or 17%, for the nine months ended September 30, 2014 compared to the prior year period. The decrease in total revenues was due to decreased coal revenues of $499.5 million, decreased freight and handling revenues of $85.9 million, and decreased other revenues of $57.9 million. The decrease in coal revenues was due primarily to lower western steam and metallurgical coal sales volumes and lower average coal sales realization per ton for eastern and western steam coal and metallurgical coal. The decrease in coal revenues consisted of decreased metallurgical coal revenues of $389.5 million and decreased steam coal revenues of $110.0 million. The decrease in freight and handling revenues was due primarily to decreased freight rates and fewer export shipments. The decrease in other revenues was due primarily to decreased revenues related to contractual related settlements in the prior year period.

Net loss decreased $1.4 million for the nine months ended September 30, 2014 compared to the prior year period. The decrease was largely due to decreased certain operating costs and expenses, which are described below, of $670.1 million, increased other miscellaneous income, net, of $245.7 million, which includes a $250.3 million gain on exchange of our 50% interest in the Alpha Shale J.V. and a $16.4 million gain on sale of marketable equity securities for the nine months ended September 30, 2014, and decreased asset impairment and restructuring expenses of $0.7 million, partially offset by decreased coal and other revenues discussed above, decreased income tax benefits of $302.1 million, and a goodwill impairment expense of $308.7 million for the nine months ended September, 30, 2014, which increased $55.5 million compared to the prior year period.

The decrease in certain operating costs and expenses of $670.1 million consisted of decreased cost of coal sales of $492.8 million, or 16%, decreased other expenses of $115.6 million, or 74%, decreased depreciation, depletion and amortization expenses of $87.8 million, or 14%, and decreased selling, general and administrative expenses of $0.9 million, or 1%, partially offset by increased amortization of acquired intangibles, net of $27.0 million.

Coal sales volumes decreased 3.8 million tons, or 6%, compared to the prior year period. The decrease in coal sales volumes was due to decreases of 2.2 million tons and 2.1 million tons of western steam and metallurgical coal, respectively,

54

partially offset by an increase of 0.5 million tons of eastern stream coal. The decrease in western steam coal was due primarily to rail transportation difficulties; a weather related event at our Eagle Butte mine in the second quarter of 2014 and the impacts of production curtailments. The decrease in metallurgical coal volumes was due primarily to lower export shipments due to weak market conditions and the impacts of production curtailments. The increase in eastern steam coal was primarily due to improved performance at our Cumberland longwall mine, which experienced a temporary shut down in the prior year period due to difficult mining conditions and geological factors, partially offset by production curtailments at other mines in our eastern operations.

The consolidated average coal sales realization per ton for the nine months ended September 30, 2014 was $44.65 compared to $49.65 in the prior year period, a decrease of $5.00 per ton, or 10%. The decrease was largely attributable to decreases of $13.56 per ton, or 14%, $4.19 per ton, or 7%, and $0.70 per ton, or 6%, in metallurgical, eastern steam and western steam average coal sales realization per ton, respectively. The average coal sales realization per ton for metallurgical coal and eastern steam coal was $86.14 and $58.32, respectively, for the nine months ended September 30, 2014 compared to $99.70 and $62.51 in the prior year period. The average coal sales realization per ton for western steam coal was $11.97 for the nine months ended September 30, 2014 compared to $12.67 in the prior year period.

Consolidated coal margin percentage, calculated as consolidated coal revenues less consolidated cost of coal sales (excluding cost of coal sales in our All Other segment), divided by consolidated coal revenues, was 9% for the nine months ended September 30, 2014 compared to 8% in the prior year period. Coal margin percentage for our Eastern and Western Coal Operations was 9% and 7%, respectively, for the nine months ended September 30, 2014 compared to 6% and 23%, respectively, in the prior year period. Consolidated coal margin per ton, calculated as consolidated coal sales realization per ton less consolidated cost of coal sales per ton (excluding cost of coal sales per ton in our All Other segment), was $3.78 for the nine months ended September 30, 2014 compared to $3.79 in the prior year period. Coal margin per ton for our Eastern and Western Coal Operations was $5.99 and $0.82, respectively, for the nine months ended September 30, 2014 compared to $4.49 and $2.88 in the prior year period.

 
Nine Months Ended
September 30,
 
Increase (Decrease)
 
2014
 
2013
 
$ or Tons
 
%
 
(in thousands, except per ton data)
 
 
Revenues:
 
 
 
 
 
 
 
Coal revenues:
 
 
 
 
 
 
 
Eastern steam
$
1,297,764

 
$
1,361,387

 
$
(63,623
)
 
(5
)%
Western steam
318,778

 
365,188

 
(46,410
)
 
(13
)%
Metallurgical
1,176,364

 
1,565,837

 
(389,473
)
 
(25
)%
Freight and handling revenues
362,356

 
448,316

 
(85,960
)
 
(19
)%
Other revenues
61,201

 
119,080

 
(57,879
)
 
(49
)%
Total revenues
$
3,216,463

 
$
3,859,808

 
$
(643,345
)
 
(17
)%
Tons sold:
 
 
 
 
 
 
 
Eastern steam
22,254

 
21,779

 
475

 
2
 %
Western steam
26,635

 
28,825

 
(2,190
)
 
(8
)%
Metallurgical
13,656

 
15,705

 
(2,049
)
 
(13
)%
Total
62,545

 
66,309

 
(3,764
)
 
(6
)%
Coal sales realization per ton:
 
 
 
 
 
 
 
Eastern steam
$
58.32

 
$
62.51

 
$
(4.19
)
 
(7
)%
Western steam
$
11.97

 
$
12.67

 
$
(0.70
)
 
(6
)%
Metallurgical
$
86.14

 
$
99.70

 
$
(13.56
)
 
(14
)%
Average
$
44.65

 
$
49.65

 
$
(5.00
)
 
(10
)%

Coal revenues. Coal revenues decreased $499.5 million, or 15%, for the nine months ended September 30, 2014 compared to the prior year period. The decrease in coal revenues consisted of decreases in eastern steam, western steam and metallurgical coal revenues.


55

Total eastern steam coal revenues decreased $63.6 million, or 5%, which consisted of decreased domestic coal revenues of $47.7 million, or 4%, and decreased export coal revenues of $15.9 million, or 7%, compared to the prior year period. The decrease in eastern steam coal revenues was largely due to lower coal sales realization per ton, which decreased $4.19, or 7%, compared to the prior year period. Coal sales realization per ton for eastern steam domestic sales was $59.70 per ton compared to $63.30 per ton in the prior year period and coal sales realization per ton for eastern steam export sales was $51.89 per ton, compared to $58.78 per ton in the prior year period.

Total metallurgical coal revenues decreased $389.5 million, or 25%, which consisted of decreased export coal revenues of $348.4 million, or 32%, and decreased domestic coal revenues of $41.1 million, or 9%, compared to the prior year period. The decrease in metallurgical coal revenues was largely due to lower average coal sales realization per ton and lower coal sales volumes, which were impacted by weak market conditions as increases to supply have outpaced demand growth, particularly in the seaborne markets. Metallurgical coal shipments decreased 2.1 million tons, or 13%, which consisted of increased domestic shipments of 0.4 million tons, or 11%, and decreased export shipments of 2.5 million tons, or 21% compared to the prior year period. Coal sales realization per ton for metallurgical export sales was $80.04 per ton compared to $92.69 per ton in the prior year period and coal sales realization per ton for metallurgical domestic sales was $98.72 per ton, compared to $120.18 per ton in the prior year period.

The decrease in western steam coal revenues was primarily due to decreased coal shipments as a result of the impacts of rail transportation difficulties, a weather related event at our Eagle Butte mine in the second quarter of 2014, and a decrease of $0.70, or 6%, in average coal sales realization per ton due to customer mix and roll off of higher priced contracts year over year. Western coal sales volumes decreased 2.2 million tons, or 8%, compared to the prior year period.

Our sales mix of metallurgical coal and steam coal based on volume was 22% and 78%, respectively, for the nine months ended September 30, 2014 compared with 24% and 76% in the prior year period. Our sales mix of metallurgical coal and steam coal based on coal revenues was 42% and 58%, respectively, for the nine months ended September 30, 2014 compared with 48% and 52%, respectively, in the prior year period.

Freight and handling. Freight and handling revenues and costs were $362.4 million for the nine months ended September 30, 2014, a decrease of $86.0 million, or 19%, compared to the prior year period. The decrease was primarily due to decreased freight rates and fewer export shipments compared to the prior year period.

Other. Other revenues decreased $57.9 million, or 49%, and other expenses decreased $115.6 million, or 74%, for the nine months ended September 30, 2014 compared to the prior year period, resulting in a net increase to income from operations of $57.7 million. The net increase was due primarily to decreased revenues and credits related to contractual settlements and loss contingency accruals for litigation recorded in the prior year period.


56

 
Nine Months Ended
September 30,
 
Increase (Decrease)
 
2014
 
2013
 
$ or Tons
 
%
 
(in thousands, except per ton data)
 
 
Cost of coal sales (exclusive of items shown separately below)
$
2,589,530

 
$
3,082,330

 
$
(492,800
)
 
(16
)%
Freight and handling costs
362,356

 
448,316

 
(85,960
)
 
(19
)%
Other expenses
39,873

 
155,479

 
(115,606
)
 
(74
)%
Depreciation, depletion and amortization
562,262

 
650,021

 
(87,759
)
 
(14
)%
Amortization of acquired intangibles, net
27,909

 
908

 
27,001

 
2,974
 %
Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)
119,752

 
120,664

 
(912
)
 
(1
)%
Asset impairment and restructuring
23,633

 
24,358

 
(725
)
 
(3
)%
Goodwill impairment
308,651

 
253,102

 
55,549

 
22
 %
Total costs and expenses
$
4,033,966

 
$
4,735,178

 
$
(701,212
)
 
(15
)%
Cost of coal sales per ton:1
 
 
 
 
 
 
 
Eastern coal operations
$
62.91

 
$
73.60

 
$
(10.69
)
 
(15
)%
Western coal operations
$
11.15

 
$
9.79

 
$
1.36

 
14
 %
Average
$
40.87

 
$
45.86

 
$
(4.99
)
 
(11
)%
EBITDA:
 
 
 
 
 
 
 
Eastern Coal Operations
$
80,859

 
$
(73,936
)
 
$
154,795

 
209
 %
Western Coal Operations
$
12,213

 
$
74,276

 
$
(62,063
)
 
(84
)%
1 Cost of coal sales per ton includes only costs associated with our Eastern and Western Coal Operations.

Cost of coal sales. Cost of coal sales decreased $492.8 million, or 16%, for the nine months ended September 30, 2014 compared to the prior year period. The decrease in cost of coal sales was due primarily to decreased labor and benefit expenses and decreased supplies and maintenance expenses primarily related to our cost reduction measures, decreased sales-related variable costs associated with decreased metallurgical and steam coal revenues, and decreased expenses related to production curtailments at certain higher cost mines.

Depreciation, depletion and amortization. Depreciation, depletion, and amortization decreased $87.8 million, or 14%, for the nine months ended September 30, 2014 compared to the prior year period. The decrease was primarily due to decreased depreciation expense related to continued constrained capital spending and the impact of production curtailments.

Amortization of acquired intangibles, net. Amortization expense of acquired intangibles, net increased $27.0 million for the nine months ended September 30, 2014 compared to the prior year period. The increase in expense for amortization of acquired intangibles, net, was primarily due to decreased amortization of below-market contracts assumed in prior acquisitions due to the completion of shipments under many of the contracts assumed.

Selling, general and administrative. Selling, general and administrative expenses decreased $0.9 million, or 1%, for the nine months ended September 30, 2014 compared to the prior year period. The decrease in selling, general and administrative expenses was due primarily to decreased employee-related expenses as a result of lower headcount and our cost reduction measures, partially offset by increased legal fees primarily related to a case that was tried during the second quarter of 2014.

Asset impairment and restructuring. Asset impairment and restructuring expenses were $23.6 million for the nine months ended September 30, 2014 and consisted of severance related expenses of $13.9 million and impairment expenses of $9.7 million related to certain other non-current assets.

Goodwill impairment. See Overview and Critical Accounting Policies, and Note 3 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Interest expense. Interest expense increased $29.1 million, or 16%, during the nine months ended September 30, 2014 compared to the prior year period due primarily to the issuance of 3.75% convertible notes in May, 2013, 4.875% convertible

57

notes in December 2013 and 7.50% senior secured second lien notes in May 2014, partially offset by repurchases of a portion of outstanding 2.375% and 3.25% convertible notes, respectively, in the first half of 2014.

Income taxes. Income tax benefit of $6.9 million was recorded for the nine months ended September 30, 2014 on a loss before income taxes of $760.2 million. The benefit rate is lower than the federal statutory rate of 35% primarily due to the impact of a change in the valuation allowance of $181.3 million and the impact of the non-deductible goodwill impairment of $108.0 million, partially offset by the impact of the percentage depletion allowance and state income taxes, net of federal benefit. The change in valuation allowance results from an increase in net operating losses and other deferred tax assets for which we are unable to support realization. See Note 15 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Income tax benefit of $309.0 million was recorded for the nine months ended September 30, 2013 on a loss before income taxes of $1,063.7 million. The benefit rate is lower than the federal statutory rate of 35% primarily due to the impact of the non-deductible goodwill impairment of $88.6 million and certain other non-deductible expenses, partially offset by the impact of the percentage depletion allowance and state income taxes, net of federal tax impact.

Segment EBITDA

Eastern Coal Operations - EBITDA increased $154.8 million for the nine months ended September 30, 2014 compared to the prior year period. The increase in EBITDA was largely due to increased other miscellaneous income of $244.5 million, which includes a gain of $250.3 million from the exchange of our 50% interest in the Alpha Shale J.V. and a gain of approximately $16.4 million on the sale of marketable equity securities, decreased selling, general and administrative expenses of $15.9 million, or 13%, and increased coal margin per ton of $1.50, or 33%, partially offset by increased goodwill impairment expenses of $55.5 million, or 22%, increased other expenses of $43.9, or 102%, and increased asset impairment and restructuring expenses of $1.7 million, or 14%. The increase in coal margin per ton was due to decreased cost of coal sales primarily due to cost reduction measures and improved performance at our lower cost longwall mines, particularly at our Cumberland longwall mine, which experienced a temporary shut down in the prior year period due to difficult mining conditions and geological factors. The increase in coal margin per ton consisted of decreased cost of coal sales per ton of $10.69, or 15%, partially offset by decreased average coal sales realization per ton of $9.19, or 12%.

Western Coal Operations - EBITDA decreased $62.1 million, or 84%, for the nine months ended September 30, 2014 compared to the prior year period. The decrease in EBITDA was primarily due to decreased coal margin per ton of $2.06, or 72%. The decrease in coal margin per ton consisted of decreased average coal sales realization per ton of $0.70, or 6%, and increased cost of coal sales per ton of $1.36, or 14%, which was due primarily to lower volumes related to poor rail service and a weather related event at our Eagle Butte mine in the second quarter of 2014.


Liquidity and Capital Resources

Our primary liquidity and capital resource requirements stem from the cost of our coal production and purchases, our capital expenditures, our debt service, our reclamation obligations, our litigation and regulatory costs and settlements and associated costs, and from time to time, our securities repurchases. Our primary sources of liquidity have been from sales of coal, our credit facility and debt arrangements and to a lesser extent, cash from sales of non-core assets and miscellaneous revenues.

In 2010, we entered into a 50/50 joint venture (the “Alpha Shale JV”) with Rice Drilling C LLC, a wholly owned subsidiary of Rice Drilling B LLC, in order to develop a portion of our Marcellus Shale natural gas holdings in southwest Pennsylvania. On December 6, 2013, we, Rice Drilling C LLC and Rice Energy Inc. (“Rice Energy”) entered into a transaction agreement (the “Transaction Agreement”). Pursuant to the Transaction Agreement, we agreed to transfer our 50% interest in the Alpha Shale JV to Rice Energy in exchange for total consideration of $300.0 million, consisting of $100.0 million of cash and $200.0 million of shares of Rice Energy common stock, based upon Rice Energy’s initial public offering (the “Offering”). On January 29, 2014, Rice Energy completed its Offering, and on the same date, issued approximately 9.5 million shares of common stock and paid us $100.0 million in cash. We recognized a gain of $250.3 million. On August 19, 2014, we sold approximately 3.1 million shares of Rice Energy common stock for $81.8 million of cash and recorded a gain of $16.4 million. The remaining approximately 6.4 million shares of Rice Energy are subject to customary lockup provisions that will expire on November 11, 2014. As of September 30, 2014, the fair value of these shares was $170.5 million, which is included in other long-term assets in the Condensed Consolidated Balance Sheet.

58

We believe that cash on hand, short term marketable securities, cash generated from our operations and borrowing capacity available under our revolving credit facility and accounts receivable securitization facility, will be sufficient to meet our working capital requirements, anticipated capital expenditures, debt service requirements including $153.7 million of convertible senior notes due 2015, reclamation obligations, potential securities repurchases, and expected settlements and costs related to outstanding litigation for at least the next twelve months.

At September 30, 2014, we had total liquidity of $2,270.1 million, including cash and cash equivalents of $809.4 million, marketable securities of $545.0 million which include the Rice Energy common stock, which is subject to customary lockup provisions until November 11, 2014, and $915.7 million of unused commitments available under the revolving credit facility portion of our Credit Agreement and our A/R Facility, after giving effect to $178.3 million of letters of credit outstanding as of September 30, 2014, subject to limitations described in our Credit Agreement and A/R Facility.

Weak market conditions and depressed coal prices have resulted in operating losses and decreased cash flows from operations. If market conditions do not improve, we expect our liquidity to be adversely affected. In particular, we expect a decrease in cash and cash equivalents to the extent that capital expenditures and other cash obligations exceed cash generated from our operations.

We have worked and are working to enhance our capital structure and financial flexibility as opportunities arise through repayment or repurchase of outstanding debt, amendment of our credit facility, and other methods. We may decide to pursue or not pursue these opportunities at any time. As part of this strategy, we may from time to time repurchase some of our outstanding notes through open market purchases, privately negotiated transactions, tender offers, exchange offers or otherwise, upon such terms and at such prices as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. To facilitate repurchases, we may make purchases pursuant to one or more trading plans under Rule 10b5-1 of the Exchange Act, which allow us to repurchase securities during periods when we otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. Any such plans may be discontinued at any time.

We sponsor pension plans in the United States for salaried and non-union hourly employees. For these plans, the Pension Protection Act of 2006 (“PPA”) requires a funding target of 100% of the present value of accrued benefits. Generally, any such plan with a funding ratio of less than 80% will be deemed at risk and will be subject to additional funding requirements under the PPA. Annual funding contributions to the plans are made as recommended by consulting actuaries based upon the Employee Retirement Income Security Act (“ERISA”) funding standards. Plan assets consist of cash and cash equivalents, an investment in a group annuity contract, equity and fixed income funds, and private equity funds. We are required to measure plan assets and benefit obligations as of the date of our fiscal year-end balance sheet, or sooner under certain circumstances, and recognize the overfunded or underfunded status of our defined benefit pension and other postretirement plans (other than a multi-employer plan) as an asset or liability in our balance sheet and recognize changes in that funded status in the year in which the changes occur through other comprehensive income (loss). We may be required to increase the amount of cash contributions into the pension trust in order to comply with the funding requirements of the PPA. Our plans are not currently deemed to be at risk and subject to additional funding requirements under the PPA. We made a pension plan contribution of $5.0 million during the three months ended September 30, 2014 and do not expect to make any significant additional contributions in 2014.

With respect to global economic events, there continues to be uncertainty in the financial markets and weakness in the coal industry. We constantly monitor the creditworthiness of our customers. We believe that the creditworthiness of our current group of customers is sound and represents no abnormal business risk. On May 13, 2014, Moody’s Investors Service downgraded our ratings, including our Corporate Family Rating (CFR) to B3 from B2, the probability of default rating to B3-PD from B2-PD, and the ratings on the first lien senior secured credit facility to B1 from Ba2, and senior unsecured debt to Caa1 from B3. The speculative grade liquidity (SGL) rating remains unchanged at SGL-2. The rating outlook is stable. These issues bring potential liquidity risks for us, including the risks of declines in our stock value, declines in our cash and cash equivalents, less availability and higher costs of additional credit, restrictions to or the loss of our self-bonding capability and requests for additional collateral by surety providers, and potential counterparty defaults and failures.

In October and December 2013, the parties to the securities class action brought by Massey stockholders in the wake of the explosion at Massey’s Upper Big Branch mine participated in mediation. In December 2013, the parties reached agreement on all material terms of settlement, including a cash payment of $265.0 million. In February 2014, the parties reached agreement on definitive settlement documentation, subject to court approval, and on February 19, 2014, the Court entered an order preliminarily approving the settlement subject to a final determination following a settlement hearing on June 4, 2014. On February 25, 2014, pursuant to the terms of the settlement, we made an initial payment of $30.0 million into an escrow account and on June 3, 2014, we deposited the remaining $235.0 million of the settlement amount into the escrow account. On June 4,

59

2014, the Court entered an order approving the settlement and dismissed the class action with prejudice. In May 2014, we received approximately $70.0 million of insurance proceeds in connection with the settlement.
On March 5, 2014, we entered into a consent decree (the “Consent Decree”) with the EPA, the U.S. Department of Justice and three states regarding claims under the Clean Water Act. The Consent Decree resolves a complaint by the EPA and state agencies in Kentucky, Pennsylvania and West Virginia alleging that our mining affiliates in those states and in Tennessee and Virginia exceeded certain water discharge permit limits during the period 2006 to 2013. As part of the Consent Decree, we agreed to implement an integrated environmental management system and an expanded auditing/reporting protocol, install selenium and osmotic pressure treatment facilities at specific locations, and certain other measures. The Consent Decree also stipulates that we will pay $27.5 million in civil penalties, to be divided among the federal government and state agencies. The Consent Decree is not effective until it is entered by the Court. We expect to make capital expenditures of approximately $160.0 million over the course of the three year period from 2014 through 2016 to achieve water quality compliance under certain water discharge permits issued by the state agencies represented in the Consent Decree.
In October 2014, the company’s subsidiary AMFIRE Mining Company, LLC entered into an agreement to divest substantially all of its assets, located in Central Pennsylvania, for total consideration of approximately $86.0 million, including $75.0 million in cash and assumption of certain liabilities. The transaction is expected to close by the end of 2014. Total 2014 AMFIRE production through September 2014 was approximately 1.7 million tons, including 1.2 million tons of metallurgical coal.
Cash Flows

Cash and cash equivalents increased by $189.8 million for the nine months ended September 30, 2014. The net change in cash and cash equivalents was attributable to the following:
 
Nine Months Ended
September 30,
 
2014
 
2013
Cash Flows (in thousands):
 
 
 
Net cash provided by (used in) operating activities
$
(253,148
)
 
$
178,579

Net cash provided by (used in) investing activities
23,028

 
(214,402
)
Net cash provided by (used in) financing activities
419,887

 
(26,798
)
Net increase (decrease) in cash and cash equivalents
$
189,767

 
$
(62,621
)

Net cash used in operating activities for the nine months ended September 30, 2014 was $253.1 million compared to net cash provided by operating activities of $178.6 million for the nine months ended September 30, 2013. The decrease in cash provided by operating activities in the first nine months of 2014 as compared to the first nine months of 2013 is primarily due to the previously mentioned $195.0 million in net payments related to the securities class action settlement, increased interest payments and changes in working capital.

Net cash provided by investing activities for the nine months ended September 30, 2014 increased $237.4 million from the $214.4 million of net cash used in investing activities during the nine months ended September 30, 2013. The primary source of cash for investing activities for the nine months ended September 30, 2014 included sales of marketable securities of $548.8 million, which includes proceeds of $81.8 million related to the sale of a portion of our investment in the common stock of Rice Energy, and net proceeds of $96.7 million from the exchange of an equity method investment, partially offset by $128.2 million of capital expenditures and $507.8 million in purchases of marketable securities.

Net cash provided by financing activities for the nine months ended September 30, 2014 was $419.9 million compared to net cash used in financing activities of $26.8 million for the nine months ended September 30, 2013. The primary uses and sources of cash for financing activities for the nine months ended September 30, 2014 included $500.0 million in proceeds from the issuance of our 7.50% senior secured second lien notes due 2020, $36.0 million in payments related to the repurchases of 2.375% and 3.25% convertible notes and principal repayments of long-term debt, $28.2 million in payments for debt issuance and modification costs, and capital lease principal payments of $13.0 million.

Long-Term Debt

Repurchases of 2.375% and 3.25% Convertible Senior Notes due 2015


60

During the nine months ended September 30, 2014, the Company completed the repurchase of approximately $21.4 million of its outstanding 2.375% Convertible Notes and approximately $19.0 million of its outstanding 3.25% Convertible Notes and recorded a loss on early extinguishment of debt of $2.0 million.

Accounts Receivable Securitization Facility
On September 19, 2014, ANR Second Receivables Funding, LLC (“ANR Second Receivables Funding”), our special purpose, indirect subsidiary, entered into a Credit and Security Agreement (the “A/R Facility”) with General Electric Capital Corporation, as a lender, a swing line lender, an LC Lender (as defined therein) and the administrative agent, and Webster Business Credit Corporation, as an LC Lender and as a Lender, and certain financial institutions from time to time parties thereto, as Lenders (as defined therein). Under the A/R Facility, ANR Second Receivables Funding may borrow cash from the Lenders or cause the LC Lenders to issue letters of credit, on a revolving basis, in an amount up to $200.0 million, subject to certain limitations set forth therein. The funding pursuant to the A/R Facility is available through the earlier of September 19, 2018 and 90 days prior to the earliest scheduled maturity date of: (1) our Fourth Amended and Restated Credit Agreement, dated as of May 22, 2013, as amended from time to time (the “Fourth Amended and Restated Credit Agreement”), with Citicorp North America, Inc. and all other parties thereto from time to time, as such maturity date may be amended from time to time in a manner that meets the requirements set forth in the A/R Facility (which requirements were met by the Amendment described below under the caption “Amendment to the Fourth Amended and Restated Credit Agreement”), (2) any successor to, or replacement of, the Fourth Amended and Restated Credit Agreement meeting the requirements set forth in the A/R Facility, or (3) the earliest scheduled maturity date of any obligations for Indebtedness (as defined therein) (a) maturing after December 31, 2015, and (b) having an outstanding principal balance in excess of $100.0 million on such 90th day.

The obligations of the Lenders to make cash advances and of the LC Lenders to issue letters of credit pursuant to the A/R Facility are secured by certain trade receivables owned by ANR Second Receivables Funding. The receivables are originated by Alpha Coal Sales Co., LLC (“Alpha Coal Sales”), our indirect subsidiary and the sole member of ANR Second Receivables Funding, as sales agent on behalf of certain of our operating subsidiaries, and arise from the fulfillment of customer contracts entered into by Alpha Coal Sales. The A/R Facility provides that a specified percentage of billed and unbilled receivables meeting certain criteria are eligible to be counted for purposes of determining the amount of financing available to ANR Second Receivables Funding, subject to customary limits and reserves, including limits and reserves based on a dilution rate (calculated using factors including whether any portion of the receivable was reduced, canceled or written-off or is subject to dispute, offset, counterclaim or other defense), a loss rate and certain obligor and payment characteristics of the receivables. On each transfer date during the term of the A/R Facility, Alpha Coal Sales will sell and/or contribute receivables to ANR Second Receivables Funding. Alpha Coal Sales will service those receivables on behalf of ANR Second Receivables Funding and may be required to repurchase receivables in the event of a breach of certain representations or warranties made pursuant to the A/R Facility.

The Lenders and the LC Lenders will be entitled to receive interest payments with respect to the outstanding amount of each advance (including letter of credit participations) made or maintained under the A/R Facility by each Lender or LC Lender during each applicable settlement period. In addition, ANR Second Receivables Funding will pay General Electric Capital Corporation a fee as administrative agent. Certain other fees and expenses are payable to the participating financial institutions. Collections on the receivables, as well as amounts required to remain on deposit in certain accounts under the A/R Facility, will be available to pay the interest, fees and expenses, as well as to collateralize the letters of credit, if required under the A/R Facility, and repay principal on cash advances.

The A/R Facility and related documents contain affirmative, negative and financial covenants customary for financings of this type, including restrictions related to, among other things, liens, payments, merger or consolidation and amendments to the contracts pursuant to which the receivables were originated. The A/R Facility includes termination events customary for facilities of this type (with typical grace periods, where applicable), including, among other things, breaches of covenants, inaccuracies of representations and warranties, bankruptcy and insolvency events, changes in the rate of default, delinquency or dilution of the receivables above specified levels, failure to comply with a springing fixed charge coverage ratio, occurrence of a change of control and existence of material judgments. A termination event would permit the administrative agent to terminate the program and enforce any and all rights under the A/R Facility and certain agreements related thereto. Additionally, the A/R Facility contains cross-default provisions, which would allow the administrative agent to terminate the program in the event of non-payment of other material indebtedness when due, and any other event which results in the acceleration of the maturity of material indebtedness.

Although the Lenders and the LC Lenders bear the risk of non-payment by any obligor of the receivables, we have agreed to guarantee the performance of its subsidiaries, other than ANR Second Receivables Funding, under the A/R Facility and agreements related to the A/R Facility for the benefit of the Lenders and the LC Lenders.

61


As of September 30, 2014, there were no letters of credit outstanding, no cash borrowing transactions had taken place and $200.0 million was available under the A/R Facility.

Fifth Amended and Restated Credit Agreement

On September 24, 2014, we entered into an amendment and extension of the fourth amended and restated credit agreement (as amended and restated, the “Fifth Amended and Restated Credit Agreement”). The amendment, among other things:

•
extends the maturity of approximately 75% of previous revolving credit facility commitments (the “Extended Maturity Revolver Facility Commitments”) from June 30, 2016 to September 30, 2017, with the remaining approximately 25%, or $276.0 million, of revolving credit facility commitments expiring, as previously, on June 30, 2016;
•
reduces the amount of the Extended Maturity Revolver Facility Commitments by 25% to $618.0 million and provides for an increase in the interest rate payable to holders of the Extended Maturity Revolver Facility Commitments on borrowings under the revolving credit facility, effective as of the date of the Amendment; and
•
makes other changes to the Fourth Amended and Restated Credit Agreement, including eliminating the interest coverage financial covenant previously scheduled to apply starting in the first quarter of 2016, extending the minimum liquidity covenant through September 30, 2017, accelerating the date by which certain real property is added as collateral and adding provisions to facilitate future extensions and refinancing under the Fifth Amended and Restated Credit Agreement.

Amendment No. 2 to the Fourth Amended and Restated Credit Agreement

On May 7, 2014, we entered into an amendment (“Amendment No. 2”) to the Fourth Amended and Restated Credit Agreement dated as of May 22, 2013, which was amended on October 2, 2013 by Amendment No. 1 thereto, (as amended, the “Credit Agreement”) with the lenders party thereto, the issuing banks party thereto, Citicorp North America, Inc., as administrative agent and as collateral agent, and all other parties thereto from time to time. The principal changes to the Credit Agreement effected by the Amendment No. 2 to the Fourth Amended and Restated Credit Agreement include the following: suspending the interest coverage ratio until the first quarter of 2016, replacing the senior secured leverage ratio with a first lien senior secured leverage ratio, reducing the size of the restricted payment basket, extending the minimum liquidity covenant through the end of 2015, increasing by $400 million the amount of additional debt permitted to be incurred either pursuant to the “accordion” feature of the Credit Agreement or a notes offering, and requiring the first $800 million of additional debt incurred pursuant to the accordion or a notes offering (including the debt represented by the 7.50% senior secured second lien notes due 2020 issued in May 2014) to be unsecured debt or second lien secured debt.

The terms of the Credit Agreement (i) restrict our ability to make investments, loans and acquisitions, incur additional indebtedness, and pay dividends on our capital stock or redeem, repurchase or retire our capital stock; and (ii) require us to provide additional collateral consisting of receivables to secure our obligations under the Credit Agreement when not used to secure a permitted receivables facility.

Indenture and New Senior Secured Second Lien Notes

On May 20, 2014, Alpha, certain of Alpha’s wholly owned domestic subsidiaries, as guarantors (collectively, the “Guarantors”), and Wilmington Trust, National Association (“Wilmington Trust”), as trustee, entered into an indenture (the “Indenture”) governing Alpha’s newly issued 7.5% senior secured second lien notes due 2020 (the “New Secured Notes”). The New Secured Notes will pay interest semiannually in arrears on February 1 and August 1 of each year, beginning on February 1, 2015, at a rate of 7.50% per year, and will mature on August 1, 2020.

The New Secured Notes are guaranteed by each of Alpha’s current and future wholly owned domestic subsidiaries that guarantee Alpha’s obligations under the Credit Agreement. The New Secured Notes are Alpha’s senior secured obligations, ranking equal in right of payment with all of Alpha’s existing and future indebtedness that is not subordinated in right of payment to the New Secured Notes; secured by a second priority lien on Alpha’s assets that secure Alpha’s indebtedness under the Credit Agreement, and thus effectively junior to Alpha’s indebtedness that is permitted to be secured by first priority liens on the collateral securing the New Secured Notes, including indebtedness under the Credit Agreement, and to indebtedness secured by assets that are not part of the collateral securing the New Secured Notes, in each case to the extent of the value of the assets securing such indebtedness; senior in right of payment to all of Alpha’s future debt that is subordinated in right of payment to the New Secured Notes; and structurally subordinated to any existing and future indebtedness and other liabilities of any non-guarantor subsidiary.


62

Alpha may redeem the New Secured Notes, in whole or in part, at any time prior to August 1, 2016, at a price equal to 100% of the aggregate principal amount of the New Secured Notes plus a “make-whole” premium, plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date. In addition, Alpha may redeem up to 35% of the aggregate principal amount of the New Secured Notes with the net cash proceeds from certain equity offerings, at any time prior to August 1, 2016 at a redemption price equal to 107.5% of the aggregate principal amount of the New Secured Notes, plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date if at least 65% of the aggregate principal amount of New Secured Notes issued under the Indenture remains outstanding after the redemption. Alpha may also redeem the New Secured Notes, in whole or in part, at any time on or after August 1, 2016, at the redemption prices specified in the Indenture, plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date.

Upon the occurrence of a change of control repurchase event with respect to the New Secured Notes, unless Alpha has exercised its right to redeem the New Secured Notes, Alpha will be required to offer to repurchase each holder’s New Secured Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the date of repurchase.

The Indenture contains covenants that limit, among other things, Alpha’s ability to:

•
incur, or permit its subsidiaries to incur, additional debt;
•
issue, or permit its subsidiaries to issue, certain types of stock;
•
pay dividends on its or its subsidiaries’ capital stock or repurchase its capital stock;
•
make certain investments;
•
enter into certain types of transactions with affiliates;
•
incur liens on certain assets to secure debt;
•
limit dividends or other payments by its restricted subsidiaries to it and its other restricted subsidiaries;
•
consolidate, merge or sell all or substantially all of its assets; and
•
make certain payments on its or its subsidiaries’ subordinated debt.

These covenants are subject to a number of important qualifications and exceptions. These covenants may not apply at any time after the New Secured Notes are assigned a credit grade rating of at least BB+ (stable) from Standard & Poor’s Ratings Services and of at least Ba1 (stable) from Moody’s Investors Service, Inc.

As of September 30, 2014, our total long-term indebtedness consisted of the following (in thousands):
 
September 30, 2014
6.25% senior notes due 2021
$
700,000

7.50% senior secured second lien notes due 2020
500,000

6.00% senior notes due 2019
800,000

9.75% senior notes due 2018
500,000

Term loan due 2020
615,625

4.875% convertible senior notes due 2020
345,000

3.75% convertible senior notes due 2017
345,000

3.25% convertible senior notes due 2015
109,201

2.375% convertible senior notes due 2015
44,458

Other
60,777

Debt discount
(128,140
)
Total long-term debt
$
3,891,921

Less current portion
(176,945
)
Long-term debt, net of current portion
$
3,714,976


Analysis of Material Debt Covenants

We were in compliance with all covenants under the Fifth Amended and Restated Credit Agreement and the indentures governing our notes as of September 30, 2014. Operating results below current levels, or at current levels for an extended period of time, or other adverse factors could result in our being unable to comply with these covenants. A breach of the covenants in the Fifth Amended and Restated Credit Agreement or the indentures governing our notes, including the financial

63

covenants under the Fifth Amended and Restated Credit Agreement that measure ratios based on Adjusted EBITDA, could result in a default under the Fifth Amended and Restated Credit Agreement or the indentures governing our notes and the respective lenders and note holders could elect to declare all amounts borrowed due and payable. Any acceleration under either the Fifth Amended and Restated Credit Agreement or one of the indentures governing our notes would also result in a default under the other indentures governing our notes. Additionally, under the Fifth Amended and Restated Credit Agreement and the indentures governing our notes our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is also tied to ratios based on Adjusted EBITDA.

Actual covenant levels and required levels set forth in our Fifth Amended and Restated Credit Agreement are:
 
Actual
Covenant Levels;
Period Ended
September 30, 2014
 
Required
Covenant Levels
Maximum total senior secured debt less unrestricted cash to Adjusted EBITDA ratio (1)
(.16
)
 
2.5x

Minimum consolidated liquidity (in thousands)
$
2,099,606

 
$
300,000

(1) 
Unrestricted cash is limited to a maximum of $700.0 million of cash, cash equivalents and marketable securities that qualify as permitted investments under the terms of our Fifth Amended and Restated Credit Agreement. The Company's shares of Rice Energy do not qualify as permitted investments.

Adjusted EBITDA is defined as EBITDA further adjusted to exclude certain non-cash items, non-recurring items, and other adjustments permitted in calculating covenant compliance under the Fifth Amended and Restated Credit Agreement. EBITDA, a measure used by management to evaluate its ongoing operations for internal planning and forecasting purposes, is defined as net income (loss) from operations plus interest expense, income tax expense, amortization of acquired intangibles, net and depreciation, depletion and amortization, less interest income and income tax benefit. EBITDA is a non-GAAP financial measure and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. The amounts shown for EBITDA as presented may differ from amounts calculated and may not be comparable to other similarly titled measures used by other companies.

Certain non-cash items that may adjust EBITDA in the compliance calculation are: (a) accretion of asset retirement obligations; (b) amortization of intangibles; (c) any long-term incentive plan accruals or any non-cash compensation expense recorded from grants of stock appreciation or similar rights, stock options or other rights to officers, directors and employees; and (d) gains or losses associated with the change in fair value of derivative instruments. Certain non-recurring items that may adjust EBITDA in the compliance calculation are: (a) business optimization expenses or other restructuring charges; (b) non-cash impairment charges; (c) certain non-cash expenses or charges arising as a result of the application of acquisition accounting; (d) non-cash charges associated with loss on early extinguishment of debt; and (e) charges associated with litigation, arbitration, or contract settlements. Certain other items that may adjust EBITDA in the compliance calculation are: (a) after-tax gains or losses from discontinued operations; (b) losses from certain dispositions; (c) franchise taxes; and (d) other non-cash expenses that do not represent an accrual or reserve for future cash expense.

The calculation of Adjusted EBITDA shown below is based on our results of operations in accordance with the Fifth Amended and Restated Credit Agreement and therefore, is different from EBITDA presented elsewhere in this Quarterly Report on Form 10-Q.

64

 
Three Months Ended
 
Twelve
Months
Ended
 
December 31,
2013
 
March 31,
2014
 
June 30,
2014
 
September 30,
2014
 
September 30,
2014
 
(In thousands)
 
 
Net loss
$
(358,788
)
 
$
(55,698
)
 
$
(512,627
)
 
$
(184,975
)
 
$
(1,112,088
)
Interest expense
64,001

 
64,962

 
71,012

 
75,688

 
275,663

Interest income
(384
)
 
(616
)
 
(540
)
 
(574
)
 
(2,114
)
Income tax expense (benefit)
92,472

 
46,558

 
(9,518
)
 
(43,938
)
 
85,574

Amortization of acquired intangibles, net
4,148

 
9,279

 
9,464

 
9,166

 
32,057

Depreciation, depletion and amortization
215,000

 
200,295

 
191,072

 
170,895

 
777,262

EBITDA
$
16,449

 
$
264,780

 
$
(251,137
)
 
$
26,262

 
$
56,354

Non-cash charges (1) (2) (4)
56,645

 
29,450

 
322,611

 
29,745

 
438,451

Other adjustments (1) (3)
13,898

 
10,070

 
3,477

 
12,057

 
39,502

Adjusted EBITDA
$
86,992

 
$
304,300

 
$
74,951

 
$
68,064

 
$
534,307

(1) 
Calculated in accordance with the Fifth Amended and Restated Credit Agreement.
(2) 
Includes $308.7 million for the three months ended June 30, 2014 characterized under the Fifth Amended and Restated Credit Agreement as goodwill impairment, which corresponds to goodwill impairment described in our Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ending December 31, 2013.
(3) 
Includes $11.5 million for the three months ended September 30, 2014, $1.7 million for the three months ended June 30, 2014, $0.7 million for the three months ended March 31, 2014, and $2.9 million for the three months ended December 31, 2013 characterized under the Fifth Amended and Restated Credit Agreement as business optimization expenses and other restructuring charges, which corresponds to asset impairment and restructuring charges described in our Annual Report on Form 10-K for the year ending December 31, 2013 and elsewhere in this Quarterly Report on Form 10-Q.
(4) 
The three months ended June 30, 2014 have been adjusted from amounts previously reported due to the inadvertent inclusion of certain amounts during those periods. Our covenant compliance was not impacted as a result of these adjustments.

Consolidated liquidity calculated in accordance with our Fifth Amended and Restated Credit Agreement and is equal to the sum of all unrestricted cash and cash equivalents, certain marketable securities and unused revolving credit facility commitments available under our Fifth Amended and Restated Credit Agreement. As of September 30, 2014, we had available liquidity of $2,099.6 million, including cash and cash equivalents of $809.4 million, marketable securities of $374.5 million and $915.7 million of unused revolving credit facility commitments available under our Fifth Amended and Restated Credit Agreement and A/R Facility.

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to certain off-balance sheet arrangements. These arrangements include
guarantees, operating leases, indemnifications and financial instruments with off-balance sheet risk, such as bank letters of
credit and performance or surety bonds. Liabilities related to these arrangements are not reflected in our Condensed
Consolidated Balance Sheets. However, the underlying obligations that they secure, such as asset retirement obligations, self-insured workers’ compensation liabilities, royalty obligations and certain retiree medical obligations, are reflected in our
Condensed Consolidated Balance Sheets.

We are required to provide financial assurance in order to perform the post-mining reclamation required by our mining permits, pay our federal production royalties, pay workers’ compensation claims under self-insured workers’ compensation laws in various states, pay federal black lung benefits, pay retiree health care benefits to certain retired UMWA employees and perform certain other obligations. In order to provide the required financial assurance, we generally use surety bonds and self-bonding for post-mining reclamation and bank letters of credit for self-insured workers’ compensation obligations and UMWA retiree health care obligations. Federal black lung benefits are paid from a dedicated trust fund to which future contributions will be required. Bank letters of credit are also used to collateralize a portion of the surety bonds.


65

As of September 30, 2014, we had outstanding surety bonds with a total face amount of $410.0 million to secure various obligations and commitments and we had self bonding guarantees in the amount of $637.9 million. In addition, as collateral for various obligations and commitments, we had $178.3 million of letters of credit in place under our Fifth Amended and Restated Credit Agreement. These outstanding letters of credit served as collateral for workers’ compensation bonds, reclamation surety bonds, secured UMWA retiree health care obligations, secured workers’ compensation obligations and other miscellaneous obligations. We meet frequently with our surety providers and have discussions with certain providers regarding the extent of and the terms of their participation in the program. These discussions may cause us to shift surety bonds between providers or to alter the terms of their participation in our program. In the event that our self-bonding capacity or additional surety bonds become unavailable or our surety bond providers require additional collateral, we would seek to secure our obligations with letters of credit, cash deposits or other suitable forms of collateral, which would likely require greater use of our Fifth Amended and Restated Credit Agreement and A/R Facility for this purpose. A failure to maintain our self-bonding status, an inability to acquire surety bonds or additional collateral requirements could result from a variety of factors, including a significant decline in our financial position (including as a result of non-cash impairments) or creditworthiness, and restrictions on the availability of collateral under our credit agreements and indentures.

Other
     
As a regular part of our business, we review opportunities for, and engage in discussions and negotiations concerning, the acquisition or disposition of coal mining and related infrastructure assets and interests in coal mining companies, and acquisitions or dispositions of, or combinations or other strategic transactions involving companies with coal mining or other energy assets. When we believe that these opportunities are consistent with our strategic plans and our acquisition or disposition criteria, we will make bids or proposals and/or enter into letters of intent and other similar agreements. These bids or proposals, which may be binding or nonbinding, are customarily subject to a variety of conditions and usually permit us to terminate the discussions and any related agreement if, among other things, we are not satisfied with the results of due diligence. Any acquisition opportunities we pursue could materially affect our liquidity and capital resources and may require us to incur indebtedness, seek equity capital or both. There can be no assurance that additional financing will be available on terms acceptable to us, or at all.

Contractual Obligations
 
Our contractual obligations for transportation agreements decreased $23.2 million during the nine months ended September 30, 2014. Other than normal payments and servicing of our obligations, there have been no other significant changes to our contractual obligations previously reported in our Annual Report on Form 10-K for the year ended December 31, 2013.

Critical Accounting Policies and Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts. These estimates and assumptions are based on information available as of the date of the financial statements. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of results that can be expected for the full year. Please refer to the section entitled “Critical Accounting Policies and Estimates” of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2013 for a discussion of our critical accounting policies and estimates.

Asset Impairment. U.S. GAAP requires that a long-lived asset group that is held and used should be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset group might not be recoverable. During the three months ended September 30, 2014, we determined that indicators of impairment were present for our coal related long-lived asset groups. Testing long-lived assets for impairment after indicators of impairment have been identified is a two-step process. Step one compares the net undiscounted cash flows of an asset group to its carrying value. If the carrying value of an asset group exceeds the net undiscounted cash flows of that asset group, step two is performed whereby the fair value of the asset group is estimated and compared to its carrying amount. The amount of impairment, if any, is equal to the excess of the carrying value of an asset group over its estimated fair value. The amount of impairment, if any, is allocated to the long-lived assets on a pro-rata basis, except that the carrying value of the individual long-lived assets are not reduced below their estimated fair value. Long-lived assets located in a close geographic area are grouped together for purposes of impairment testing when, after considering revenue and cost interdependencies, circumstances indicate the assets are used together to produce future cash flows. Our asset groups generally consist of the assets and applicable liabilities of one or more mines and preparation plants and associated coal reserves for which cash flows are largely independent of cash flows of other mines, preparation plants and associated reserves.


66

During the three months ended September 30, 2014, we determined that the undiscounted cash flows exceeded, by a substantial margin, the carrying values of our long-lived asset groups within our Eastern and Western Coal Operations. For the one coal related long-lived asset group contained in our All Other category, the long-lived assets had previously been written down to their estimated fair value of $1.7 million during the third quarter of 2013. Our estimates of undiscounted cash flows are dependent upon a number of significant management estimates about future performance including sales volumes and prices, costs to produce, income taxes, and capital spending, among others. Changes in any of these assumptions could materially impact the estimated undiscounted cash flows of our asset groups.

Goodwill. Goodwill represents the excess of purchase price over the fair value of the identifiable net assets of acquired companies. Goodwill is not amortized; instead, it is tested for impairment annually as of October 31 of each year, or more frequently if indicators of impairment exist.

We test goodwill for impairment using a fair value approach at the reporting unit level. We perform our goodwill impairment test in two steps. Step one compares the fair value of each reporting unit to its carrying value, including goodwill. If the fair value of a reporting unit determined in step one is lower than its carrying value, we proceed to step two, which compares the carrying value of goodwill to its implied fair value. In estimating the implied fair value of goodwill at a reporting unit, we assign the fair value of the reporting unit to all of the assets and liabilities associated with the reporting unit as if the reporting unit had been acquired in a business combination. Any excess of carrying value of goodwill over its implied fair value at a reporting unit is recorded as impairment.

The valuation methodology utilized in step one to estimate the fair value of the reporting units is based on both a market and income approach and is within the range of fair values yielded under each approach. The income approach is based on a discounted cash flow methodology in which expected future net cash flows are discounted to present value, using an appropriate after-tax weighted average cost of capital (discount rate). The market approach is based on a guideline company and similar transaction methodology. Under the guideline company approach, certain operating metrics from a selected group of publicly traded guideline companies that have similar operations to the Company’s reporting units are used to estimate the fair value of the reporting units. Under the similar transaction approach, recent merger and acquisition transactions for companies that have similar operations to the Company’s reporting units are used to estimate the fair value of the Company’s reporting units.

The income approach is dependent upon a number of significant management estimates about future performance including sales volumes and prices, costs to produce, income taxes, capital spending, working capital changes and the after-tax weighted average cost of capital. Changes in any of these assumptions could materially impact the estimated fair value of our reporting units. Our forecasts of coal prices generally reflect a long-term outlook of market prices expected to be received for our coal. However, coal prices are influenced by global market conditions beyond our control. If actual coal prices are less than our expectations, it could have a material impact on the fair value of our reporting units. Our forecasts of costs to produce coal are based on our operating forecasts and an assumed inflation rate for materials and supplies such as steel, diesel fuel and explosives. However, the costs of the materials and supplies used in our production process such as steel, diesel fuel and explosives are influenced by global market conditions beyond our control. If actual costs are higher or if inflation increases above our expectations, it could have a material impact on the fair value of our reporting units. We also are faced with increasingly stringent safety standards and governmental regulation, much of which is beyond our control, which could increase our costs and materially decrease the fair value of our reporting units. For a further discussion of the factors that could result in a change in our assumptions, see “Risk Factors” in our Annual Report on Form 10-K and our other filings with the Securities and Exchange Commission.

We performed an interim goodwill impairment test during the second quarter of 2014 due primarily to continued weakness in the global metallurgical coal markets which indicated that the fair value of a reporting unit within our eastern coal operations may have been below its carrying value. As a result of our step two evaluation of the implied fair value of goodwill, in the second quarter of 2014, we recorded goodwill impairment expense of $308.7 million to write down the carrying value of our remaining goodwill in a reporting unit within our eastern coal operations to $0. See Note 3 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Income Taxes. We recognize deferred tax assets and liabilities using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating our ability to recover our deferred tax assets within the jurisdiction in which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, taxable income available via carryback to prior years, tax planning strategies, and results of recent operations. Due to the significant negative evidence of cumulative losses in recent years, the company is unable to utilize estimates of future earnings to support the

67

realization of its deferred tax assets. Therefore, the company is currently relying primarily on income resulting from expected future deferred tax liability reversals, along with carryback opportunities and prudent tax strategies to support the realization of deferred tax assets. We update our assessment regarding the realizability of our deferred tax assets including scheduling the reversal of our deferred tax assets and liabilities each quarter to determine the amount of valuation allowance needed. Scheduling the reversal of deferred tax asset and liability balances requires judgment and estimation. We believe the deferred tax liabilities relied upon as future taxable income in our assessment will reverse in the same period and jurisdiction and are of the same character as the temporary differences giving rise to the deferred tax assets that will be realized. If our conclusions change in the future regarding the realization of a portion or all of our net deferred tax assets, we may record a change to the valuation allowance through income tax expense in the period the determination is made, which may have a material impact on our results. As of September 30, 2014, we were in a net deferred tax liability position with tax computed at regular tax rates on the gross temporary differences. Federal and state net operating loss carryforwards were partially realized by scheduling the tax effect of the taxable temporary differences. Some deferred tax liabilities did not reverse in the same period as deferred tax assets, and therefore were not used as a future source of taxable income. If deferred tax assets increase relative to our deferred tax liabilities or circumstances change regarding the reversal patterns of existing deferred balances, we may be required to establish additional valuation allowances. We recorded increases of $43.7 million and $181.3 million to our deferred tax asset valuation allowance during the three and nine months ended September 30, 2014, respectively. As of September 30, 2014, a valuation allowance of $487.8 million has been provided on federal and state net operating loss carryforwards and gross deferred tax assets not expected to provide future tax benefits.

Item 3.
Quantitative and Qualitative Disclosures about Market Risk

Commodity Price Risk

We manage our commodity price risk for coal sales through the use of coal supply agreements. As of October 21, 2014, we had sales commitments for approximately 100% of planned shipments of western steam coal for 2014, all of which is priced, 99% of planned shipments of eastern steam coal for 2014, 95% of which is priced and 100% of planned shipments of metallurgical coal for 2014, all of which is priced. Additionally, we have planned shipments of approximately one million tons of CAPP thermal coal for the remainder of 2014 with various European customers at prices tied to the API 2 index. These market-priced contracts expose us to changes in market prices which we may seek to offset, in part or in whole, by entering into derivative instruments. As of September 30, 2014, we did not have any material hedges in place for these CAPP tons. The discussion below presents the sensitivity of the market value of selected financial instruments to selected changes in market rates and prices. The range of changes reflects our view of changes that are reasonably possible over a one-year period. Market values are the present value of projected future cash flows based on the market rates and prices chosen.
We have exposure to price risk for supplies that are used directly or indirectly in the normal course of production such as diesel fuel, steel and other items such as explosives. We manage our risk for these items through strategic sourcing contracts in normal quantities with our suppliers and may use derivative instruments from time to time, primarily swap contracts with financial institutions, for a certain percentage of our monthly requirements. Swap agreements essentially fix the price paid for our diesel fuel by requiring us to pay a fixed price and receive a floating price.

We expect to use approximately 11.3 million gallons of diesel fuel for the last three months of 2014 and 46.7 million gallons of diesel fuel for 2015. Through our derivative swap contracts, we have fixed prices for approximately 34% and 41% of our expected diesel fuel needs for the remaining three months of 2014 and for the year of 2015, respectively. If the price of diesel fuel were to decrease during the remaining three months of 2014, our expense resulting from our diesel fuel derivative swap contracts would increase, which would be offset by a decrease in the cost of our physical diesel fuel purchases.

Credit Risk

Our credit risk is primarily with electric power generators and steel producers. Our policy is to independently evaluate each customer’s creditworthiness prior to entering into transactions and to monitor outstanding accounts receivable against established credit limits. When appropriate (as determined by our credit management function), we have taken steps to reduce our credit exposure to customers that do not meet our credit standards or whose credit has deteriorated. These steps include obtaining letters of credit or cash collateral, obtaining credit insurance, requiring prepayments for shipments or establishing customer trust accounts held for our benefit in the event of a failure to pay.

Interest Rate Risk

We have exposure to changes in interest rates through our Fifth Amended and Restated Credit Agreement, which has a variable interest rate at LIBOR plus a margin of 2.75% (subject to LIBOR floor of 0.75%), subject, in the case of the revolving

68

credit line, to adjustment based on leverage ratios. As of September 30, 2014, our term loan due 2020 under the Fifth Amended and Restated Credit Agreement had an outstanding balance of $615.6 million. A 50 basis point increase or decrease in interest rates would increase or decrease our annual interest expense by $3.1 million.

Item 4.
Controls and Procedures

Our Disclosure Committee has responsibility for ensuring that there is an adequate and effective process for establishing, maintaining and evaluating disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in our SEC reports is timely recorded, processed, summarized and reported. In addition, we have established a Code of Business Ethics designed to provide a statement of the values and ethical standards to which we require our employees and directors to adhere. The Code of Business Ethics provides the framework for maintaining the highest possible standards of professional conduct. We also maintain an ethics hotline for use by employees, vendors and others. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this report, in ensuring that material information relating to Alpha Natural Resources, Inc., required to be disclosed in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the requisite time periods and is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

There have not been any significant changes in our internal control over financial reporting during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.
Legal Proceedings

For a description of the Company’s legal proceedings, see Note 18, part (d), to the unaudited Condensed Consolidated Financial Statements, which is incorporated herein by reference.

Item 1A.
Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in the “Risk Factors” sections in the Annual Report on Form 10-K for the year ended December 31, 2013, together with the cautionary statement under the caption “Cautionary Note Regarding Forward Looking Statements” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report. These described risks are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.



Item 2.Unregistered Sales of Equity Securities and Use of Proceeds


69

 
Total Number of Shares Purchased (1)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program (2)
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (000’s omitted) (3)
July 1, 2014 through July 31, 2014
3,005

 
$
3.38

 
—

 
500,002

August 1, 2014 through August 31, 2014
5,305

 
$
3.37

 
—

 
500,002

September 1, 2014 through September 30, 2014
51,727

 
$
3.91

 
—

 
500,002

 
60,037

 
 
 
—

 
500,002

(1) 
In November 2008, the Board of Directors authorized the Company to repurchase common shares from employees to satisfy the employees’ minimum statutory tax withholdings upon the vesting of restricted stock and performance shares. During the three months ended September 30, 2014, the Company issued 183,877 shares of common stock to employees upon vesting of restricted stock and restricted stock units and repurchased 60,037 shares of common stock to satisfy the employees’ minimum statutory tax withholdings.
(2) 
On August 22, 2011, the Board of Directors authorized the company to repurchase up to $600,000,000 of common shares. Under this program, we may repurchase shares from time to time on the open market or in privately negotiated transactions, including structured or accelerated transactions, at prevailing prices as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. To facilitate repurchases, we may make purchases pursuant to one or more trading plans under Rule 10b5-1 of the Exchange Act, which allow us to repurchase shares during periods when we otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. This program may be discontinued at any time.
(3) 
Management cannot estimate the number of shares that will be repurchased because decisions to purchase are based on company outlook, business conditions and current investment opportunity. The amount of shares we may repurchase is subject to the terms governing our Fifth Amended and Restated Credit Agreement.

Item 4. Mine Safety Disclosures

Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this Quarterly Report on Form 10-Q.

Item 5. Other Information
In the Condensed Consolidated Statements of Cash Flows, which accompanied our earnings press release issued on October 30, 2014 and furnished on form 8-K on that date, “Other non-current assets”(under the heading "Operating activities") and “Sales of marketable securities” (under the heading "Investing activities") should have been $8,255 and $548,758, respectively, for the nine months ended September 30, 2014. Consequently:
•
“Net cash provided by (used in) operating activities” and “Net cash provided by (used in) investing activities” should have been ($253,148) and $23,028, respectively, for the nine months ended September 30, 2014,
•
on the page entitled Supplemental Sales, Operations and Financial Data, “Net cash (used in) provided by operating activities” should have been $17,861 and ($253,148) for the three and nine months ended September 30, 2014, respectively, and
•
in the portion of the release entitled “Liquidity and Capital Resources”, cash provided by operating activities for the quarter ended September 30, 2014 should have been $18 million, and cash used in operating activities for the first nine months of 2014 should have been $253 million.

A corrected version of the earnings press release is available on our website, www.alphanr.com.

Item 6.
Exhibits
See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q.

70

SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
ALPHA NATURAL RESOURCES, INC.
Date: November 6, 2014
By:
/s/ Frank J. Wood
 
Name:
 Frank J. Wood
 
Title:
 Executive Vice President and Chief Financial Officer
        (Principal Financial and Accounting Officer)


71

Exhibit No.
Description of Exhibit
3.1
Amended and Restated Certificate of Incorporation of Alpha Natural Resources, Inc. (Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of Alpha Natural Resources, Inc. (File No. 001-32331) filed on August 5, 2009).
 
 
 
3.2
Certificate of Amendment of the Restated Certificate of Incorporation of Alpha Natural Resources, Inc. (Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K of Alpha Natural Resources, Inc. (File No. 001-32331) filed on June 1, 2011).
 
 
 
3.3
Amended and Restated Bylaws of Alpha Natural Resources, Inc. (Incorporated by reference to Exhibit 3.3 to the Current Report on Form 8-K of Alpha Natural Resources, Inc. (File No. 001-32331) filed on August 26, 2014).
 
 
 
10.1*‡
General Release and Non-Disparagement, dated July 18, 2014, by and between Alpha Natural Resources Services, LLC and Vaughn R. Groves.
 
 
 
10.2*‡
General Release, dated September 1, 2014, by and between Alpha Natural Resources Services, LLC and Vaughn R. Groves.
 
 
 
10.3*‡
Consulting Agreement, dated September 1, 2014, by and between Alpha Natural Resources Services, LLC and Vaughn R. Groves.
 
 
 
10.4
Credit and Security Agreement dated as of September 19, 2014, by and among ANR Second Receivables Funding, LLC, General Electric Capital Corporation, as a lender, a swing line lender, an LC Lender and the administrative agent, and Webster Business Credit Corporation, as an LC Lender and as a Lender, and certain financial institutions from time to time parties thereto, as Lenders (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Alpha Natural Resources, Inc. (File No. 001-32331) filed on September 25, 2014).
 
 
 
10.5
Amendment Agreement dated September 24, 2014, by and among Alpha Natural Resources, Inc., the lenders party thereto and Citicorp North America, Inc., as administrative agent and collateral agent (including as an exhibit the Fifth Amended and Restated Credit Agreement, dated as of September 24, 2014, among Alpha Natural Resources, Inc., the lenders party thereto and Citicorp North America, Inc., as administrative agent and collateral agent) (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Alpha Natural Resources, Inc. (File No. 001-32331) filed on September 25, 2014).
 
 
 
12.1*
Computation of Ratio of Earnings to Fixed Charges
 
 
 
12.2*
Computation of Other Ratios
 
 
 
31(a)*
Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31(b)*
Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32(a)*
Certification Pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32(b)*
Certification Pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
 
 
 
95*
Mine Safety Disclosure Exhibit
 
 
 
101.INS*
XBRL instance document
 
 
 
101.SCH*
XBRL taxonomy extension schema
 
 
 
101.CAL*
XBRL taxonomy extension calculation linkbase
 
 
 
101.DEF*
XBRL taxonomy extension definition linkbase
 
 
 
101.LAB*
XBRL taxonomy extension label linkbase
 
 
 
101.PRE*
XBRL taxonomy extension presentation linkbase
* Filed herewith
‡ Management contract of compensatory plan or arrangement



72

Alpha Natural Resources, Inc. Reports