anr10q06302009.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
     
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2009
OR
     
o
 
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. 1-32423
 
 
ALPHA NATURAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
     
Delaware
 
02-0733940
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification Number)
     
One Alpha Place, P.O. Box 2345, Abingdon, VA
 
24212
(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. þ 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). þ 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.

þ Large accelerated filer      o Accelerated filer      ¨ Non-accelerated filer   ¨ 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  þ   No

     Number of shares of the registrant’s Common Stock, $0.01 par value, outstanding as of July 30, 2009 – 71,368,970


 
 

 
TABLE OF CONTENTS
 
         
   
Page
   
PART I
       
         
Item 1. Financial Statements
       
 
2
   
 
3
   
 
4
   
 
5
   
 
25
   
 
40
   
 
42
   
         
PART II
       
         
 
43
   
 
43
   
 
45
   
 
45
   
 
45
   
 
       
 
 
 
- 1 -

 
Item 1. Financial Statements
                         
 
Condensed Consolidated Statements of Income (Unaudited)
 
(In thousands, except per share amounts)
 
                         
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Revenues:
                       
Coal revenues
  $ 333,857     $ 604,666     $ 758,273     $ 1,027,075  
Freight and handling revenues
    35,445       86,015       81,499       145,187  
Other revenues
    16,867       11,086       33,132       22,561  
Total revenues
    386,169       701,767       872,904       1,194,823  
Costs and expenses:
                               
Cost of coal sales (exclusive of items shown separately below)
    267,014       434,244       570,039       772,904  
Increase in fair value of derivative instruments, net
    (14,531 )     (6,516 )     (14,769 )     (23,200 )
Freight and handling costs
    35,445       86,015       81,499       145,187  
Cost of other revenues
    7,235       8,763       19,098       16,900  
Depreciation, depletion and amortization
    36,352       42,848       76,557       85,393  
Selling, general and administrative expenses
                               
(exclusive of depreciation and amortization shown separately above)
    22,907       20,702       39,373       36,026  
Total costs and expenses
    354,422       586,056       771,797       1,033,210  
                                 
Income from operations
    31,747       115,711       101,107       161,613  
Other income (expense):
                               
Interest expense
    (10,166 )     (10,522 )     (20,019 )     (20,501 )
Interest income
    355       2,227       980       2,977  
Loss on early extinguishment of debt
    -       (14,669 )     -       (14,669 )
Miscellaneous income (expense), net
    65       (129 )     181       (4 )
Total other expense, net
    (9,746 )     (23,093 )     (18,858 )     (32,197 )
Income from continuing operations before income taxes
    22,001       92,618       82,249       129,416  
Income tax expense
    (5,323 )     (22,012 )     (18,950 )     (30,820 )
Income from continuing operations
    16,678       70,606       63,299       98,596  
                                 
Discontinued operations
                               
Loss from discontinued operations before income taxes
    (2,059 )     (4,522 )     (9,310 )     (7,822 )
Income tax benefit
    740       1,048       2,334       1,888  
Loss from discontinued operations
    (1,319 )     (3,474 )     (6,976 )     (5,934 )
Net income
  $ 15,359     $ 67,132     $ 56,323     $ 92,662  
                                 
                                 
Basic earnings per share:
                               
Income from continuing operations
  $ 0.24     $ 1.02     $ 0.91     $ 1.47  
Loss from discontinued operations
    (0.02 )     (0.05 )     (0.10 )     (0.09 )
Net income
  $ 0.22     $ 0.97     $ 0.81     $ 1.38  
                                 
Diluted earnings per share:
                               
Income from continuing operations
  $ 0.24     $ 0.99     $ 0.90     $ 1.44  
Loss from discontinued operations
    (0.02 )     (0.05 )     (0.10 )     (0.09 )
Net income
  $ 0.22     $ 0.94     $ 0.80     $ 1.35  
                                 
See accompanying notes to condensed consolidated financial statements.
                         
 
- 2 -

 
             
 
Condensed Consolidated  Balance Sheets
 
(In thousands, except share and per share amounts)
 
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
       
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 667,368     $ 676,190  
Trade accounts receivable, net
    158,062       163,674  
Notes and other receivables
    12,878       15,074  
Deferred income taxes
    1,361       -  
 Inventories
    99,664       86,594  
Prepaid expenses and other current assets
    77,397       50,251  
Total current assets
    1,016,730       991,783  
Property, plant, and equipment, net
    518,641       550,098  
Goodwill
    20,547       20,547  
Other intangibles, net
    2,689       3,835  
Deferred income taxes
    71,217       83,689  
Other assets
    62,682       59,886  
Total assets
  $ 1,692,506     $ 1,709,838  
Liabilities and Stockholders' Equity
               
Current liabilities:
               
Current portion of long-term debt
  $ 204,980     $ 232  
Note payable
    7,396       18,288  
Trade accounts payable
    77,125       102,975  
Accrued expenses and other current liabilities
    96,646       140,459  
Total current liabilities
    386,147       261,954  
Long-term debt
    233,125       432,795  
Workers’ compensation benefit obligations
    10,062       9,604  
Postretirement medical benefit obligations
    55,905       60,211  
Asset retirement obligation
    92,658       90,565  
Other liabilities
    46,800       59,017  
Total liabilities
    824,697       914,146  
                 
Commitments and contingencies (Note 13)
               
Stockholders' equity:
               
Preferred stock - par value $0.01, 10,000,000 shares
               
authorized, none issued
    -       -  
Common stock - par value $0.01, 100,000,000 shares
               
authorized,  71,468,407 issued and 71,361,470 outstanding
               
at June 30, 2009 and 70,513,880 issued and
               
outstanding at December 31, 2008
    715       705  
Additional paid-in capital
    492,162       484,261  
Accumulated other comprehensive loss
    (20,197 )     (30,107 )
Treasury stock, at cost: 106,937 and 0 shares at June 30, 2009
               
and December 31, 2008, respectively
    (2,027 )     -  
Retained earnings
    397,156       340,833  
Total stockholders' equity
    867,809       795,692  
Total liabilities and stockholders' equity
  $ 1,692,506     $ 1,709,838  
                 
See accompanying notes to condensed consolidated financial statements.
               


             
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
(In thousands)
 
             
   
Six Months Ended
 
   
June 30,
 
   
2009
   
2008
 
             
Operating activities:
           
Net income
  $ 56,323     $ 92,662  
Adjustments to reconcile net income
               
to net cash provided by operating
               
activities:
               
Depreciation, depletion and amortization
    77,271       89,170  
Amortization of debt issuance costs
    1,296       1,270  
Accretion of asset retirement obligation
    4,143       3,708  
Accretion of convertible debt discount
    5,310       2,594  
Loss on early extinguishment of debt
    -       14,669  
Share-based compensation
    7,471       14,575  
Gain on sale of fixed assets and investments
    (683 )     (1,789 )
Change in fair value of derivative instruments
    (14,769 )     (23,200 )
Deferred income tax expense
    7,838       5,841  
Other
    1,989       (569 )
Changes in operating assets and liabilities:
               
Trade accounts receivable
    5,612       (73,316 )
Notes and other receivables
    909       (1,642 )
Inventories
    (13,070 )     (14,638 )
Prepaid expenses and other current
               
assets
    (31,646 )     21,488  
Other assets
    1,591       3,048  
Trade accounts payable
    (23,586 )     28,830  
Accrued expenses and other current
               
liabilities
    (30,578 )     16,759  
Workers’ compensation benefit obligations
    504       (164 )
Postretirement medical benefit obligations
    2,932       4,497  
Asset retirement obligation
    (2,261 )     (2,650 )
Other liabilities
    980       (1,706 )
 
               
Net cash provided by operating activities
  $ 57,576     $ 179,437  
                 
Investing activities:
               
Capital expenditures
  $ (46,111 )   $ (74,207 )
Proceeds from disposition of property, plant,
               
and equipment
    387       2,775  
Proceeds from sale of investment in coal terminal
    -       1,500  
Investment in Dominion Terminal Facility
    -       (2,824 )
Purchase of acquired companies
    (1,750 )     -  
Other
    (75 )     (1,095 )
                 
Net cash used in investing activities
  $ (47,549 )   $ (73,851 )
                 
Financing activities:
               
Proceeds from issuance of convertible debt
  $ -     $ 287,500  
Repayments of note payable
    (10,892 )     (12,485 )
Repayments on long-term debt
    (232 )     (176,028 )
Debt issuance costs
    (5,277 )     (10,861 )
Premium payment on early extinguishment of debt
    -       (10,703 )
Tax benefit from share-based compensation
    -       1,790  
Proceeds from issuance of common stock, net
    -       164,666  
Common stock repurchases
    (2,027 )     -  
Proceeds from exercise of stock options
    230       3,128  
Other
    (651 )     (464 )
 
               
Net cash provided by (used in) financing activities  
  $ (18,849 )   $ 246,543  
 
               
Net increase (decrease) in cash and cash equivalents   
  $ (8,822 )   $ 352,129  
Cash and cash equivalents at beginning of period
    676,190       54,365  
Cash and cash equivalents at end of period
  $ 667,368     $ 406,494  
                 
See accompanying notes to condensed consolidated financial statements.
 

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2009
 (In thousands, except percentages, share, per share and per gallon data)
 
  (1) Business and Basis of Presentation

Business
 
Alpha Natural Resources, Inc. and its consolidated subsidiaries (the “Company”) are primarily engaged in the business of extracting, processing and marketing coal from deep and surface mines, located in the Central and Northern Appalachian regions of the United States, for sale to utility and steel companies in the United States and in international markets.

Basis of Presentation
 
The accompanying interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Significant items subject to estimates and assumptions include inventories; mineral reserves; allowance for non-recoupable advanced mining royalties; asset retirement obligations; employee benefit liabilities; future cash flows associated with assets; useful lives for depreciation, depletion, and amortization; workers’ compensation and black lung claims; postretirement benefits other than pensions; income taxes; revenue recognized using the percentage of completion method; and fair value of financial instruments.  Due to the subjective nature of these estimates, actual results could differ from those estimates.  Results of operations for the six months ended June 30, 2009 are not necessarily indicative of the results to be expected for the year ending December 31, 2009. These financial statements should be read in conjunction with the audited financial statements and related notes as of and for the year ended December 31, 2008 included in the Company's Annual Report on Form 10-K filed on February 27, 2009 and included in the Form 8-K filed on May 22, 2009 with the Securities and Exchange Commission.

Reclassifications
 
On September 26, 2008, the Company sold its interests in Gallatin Materials, LLC (“Gallatin”), a lime manufacturing business, to an unrelated third party.  Gallatin’s results of operations for the prior periods have been reported as discontinued operations (See Note 15).

On December 3, 2008, the Company announced the permanent closure of the Whitetail Kittanning Mine, an adjacent coal preparation plant and other ancillary facilities (“Kingwood”).  The decision resulted from adverse geologic conditions and regulatory requirements that rendered the coal seam unmineable at this location.  The mine stopped producing coal in early January 2009 and Kingwood ceased equipment recovery operations at the end of April 2009.  Beginning in the first quarter of 2009, Kingwood’s results of operations for the current and prior periods have been reported as discontinued operations (See Note 15).

  (2)  New Accounting Pronouncements

New Accounting Pronouncements Adopted
 
For the period ending June 30, 2009, the Company adopted Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) Financial Accounting Standards (“FAS”) No. 107-1 and Accounting Principle Board (“APB”) 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 amends SFAS 107, Disclosures about Fair Value of Financial Instruments, to require disclosures in interim reporting periods and in financial statements for annual reporting periods the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not on the Company’s balance sheet. FSP FAS 107-1 and APB 28-1 also amends APB Opinion No. 28, Interim Financial Reporting, to require entities to disclose the methods and significant assumptions used to estimate the fair value of financial instruments and describe changes in methods and significant assumptions, in both interim and annual financial statements. FSP FAS 107-1 and APB 28-1 were effective for the Company for the quarter ending June 30, 2009. Since FSP FAS 107-1 and APB 28-1 require only additional disclosures the adoption did not affect the Company’s financial position or results of operations (See Note 10).

For the period ending June 30, 2009, the Company adopted FASB Statement of Financial Accounting Standards (“SFAS”) No. 165, Subsequent Events (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The new standard was effective for the Company for the quarter ending June 30, 2009.

 ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
June 30, 2009
 (In thousands, except percentages, share, per share and per gallon data)
 
The Company has evaluated subsequent events for potential recognition and/or disclosure through August 7, 2009, the date the consolidated financial statements included in this Quarterly Report on Form 10-Q were issued. On July 31, 2009, subsequent to the balance sheet date, the Company completed its previously announced merger with Foundation Coal Holdings, Inc. (“Foundation”) (See Note 16).
 
New Accounting Pronouncements Issued and not yet Adopted

In June 2009, FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets – an amendment of FASB No. 140 (“SFAS 140”), Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 166”).  SFAS 166 amends the criteria for a transfer of a financial asset to be accounted for as a sale, redefines a participating interest for transfers of portions of financial assets, eliminates the qualifying special-purpose entity concept and provides for new disclosures. SFAS 166 is effective for fiscal years beginning after November 15, 2009 and its adoption is not expected to affect the Company’s financial position or results of operations.

In June 2009, the FASB issued SFAS No. 168, the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“SFAS 168”). SFAS 168 defines the new hierarchy for U.S. GAAP and will supersede all accounting standards in U.S. GAAP, aside from those issued by the SEC. The Codification will be effective for financial statements issued for reporting periods ending after September 15, 2009.

  (3) Earnings Per Share
 
The number of shares used to calculate basic earnings (loss) per 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 (loss) per share is based on the number of common shares used to calculate basic earnings (loss) 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 and the 2.375% convertible senior notes due 2015 when they are convertible into the Company’s common stock (See Note 6). When convertible, the convertible senior notes due 2015, which were issued in April 2008, become dilutive for earnings per share calculations when the average share price for the quarter exceeds the conversion price of $54.66.  At June 30, 2009, the convertible senior notes were convertible; however, because the conversion price exceeded the average share price, there was no dilutive earnings per share impact.
 
The computations of basic and diluted net income per share are set forth below:

 
                         
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2009
   
2008
   
2009
   
2008
 
Numerator:
                       
Income from continuing operations
  $ 16,678     $ 70,606     $ 63,299     $ 98,596  
Loss from discontinued operations
    (1,319 )     (3,474 )     (6,976 )     (5,934 )
Net income
  $ 15,359     $ 67,132     $ 56,323     $ 92,662  
                                 
Denominator:
                               
Weighted average shares — basic
    69,920,621       69,455,450       69,902,874       67,273,460  
Dilutive effect of stock equivalents
    973,396       1,965,803       892,460       1,352,406  
Weighted average shares — diluted
    70,894,017       71,421,253       70,795,334       68,625,866  
                                 
Net income per basic share:
                               
Income from continuing operations
  $ 0.24     $ 1.02     $ 0.91     $ 1.47  
Loss from discontinued operations
    (0.02 )     (0.05 )     (0.10 )     (0.09 )
Net income per basic share
  $ 0.22     $ 0.97     $ 0.81     $ 1.38  
                                 
Net income per diluted share:
                               
Income from continuing operations
  $ 0.24     $ 0.99     $ 0.90     $ 1.44  
Loss from discontinued operations
    (0.02 )     (0.05 )     (0.10 )     (0.09 )
Net income per diluted share
  $ 0.22     $ 0.94     $ 0.80     $ 1.35  
                                 

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
June 30, 2009
 (In thousands, except percentages, share, per share and per gallon data)
 
(4) Inventories
         
Inventories consisted of the following:
             
 
June 30,
 
December 31,
 
   
2009
   
2008
 
Raw coal
  $ 9,506     $ 9,018  
Saleable coal
    75,580       61,297  
Equipment for resale
    2,887       2,282  
Materials and supplies
    11,691       13,997  
        Total inventories
  $ 99,664     $ 86,594  
                 
 
(5) Income Taxes
 
The income tax provision on continuing operations and discontinued operations for the three months and six months ended June 30, 2009 is as follows:

                         
   
Three Months Ended
   
Three Months Ended
   
Six Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
Continuing operations
  $ 5,323     $ 22,012     $ 18,950     $ 30,820  
Discontinued operations
    (740 )     (1,048 )     (2,334 )     (1,888 )
    $ 4,583     $ 20,964     $ 16,616     $ 28,932  
                                 
 
A reconciliation of the statutory federal income tax expense at 35% to actual income tax expense related to continuing operations is as follows:

                         
   
Three Months Ended
      Six Months Ended  
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
Federal statutory income tax expense
  $ 7,701     $ 32,416     $ 28,787     $ 45,295  
Increases (reductions) in taxes due to:
                               
Percentage depletion allowance
    (6,398 )     (5,126 )     (14,065 )     (8,240 )
Deduction for domestic production activities
    -       (1,284 )     (569 )     (1,506 )
State taxes, net of federal tax impact
    688       2,829       2,178       3,955  
Change in valuation allowance
    3,194       (6,972 )     2,355       (9,052 )
Change in state rates
    -       -       -       247  
Other, net
    138       149       264       121  
Income tax expense from continuing operations
  $ 5,323     $ 22,012     $ 18,950     $ 30,820  
                                 

The Company has concluded that it is more likely than not that deferred tax assets, net of valuation allowances, currently recorded will be realized. The amount of the valuation allowance takes into consideration the Alternative Minimum Tax system as required by SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). The Company monitors the valuation allowance each quarter and makes adjustments to the allowance as appropriate.
  

 ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
June 30, 2009
 (In thousands, except percentages, share, per share and per gallon data)
 
(6) Long-Term Debt
 
Long-term debt consisted of the following:
             
   
June 30,
2009
   
December 31, 2008
 
             
Term loan due 2012
  $ 233,125     $ 233,125  
2.375% convertible senior note due 2015
    287,500       287,500  
Convertible senior notes discount
    (82,520 )     (87,830 )
Capital lease obligation
    -       232  
        Total long-term debt
    438,105       433,027  
Less current portion
    204,980       232  
        Long-term debt, net of current portion
  $ 233,125     $ 432,795  
                 
 
Term Loan and Revolving Credit Facility

The Company has a senior secured credit facility (“Credit Agreement”) with a group of lending institutions led by Citicorp North America, Inc. as the administrative agent, which consists of a $250,000 term loan facility and a $375,000 revolving credit facility.  As of June 30, 2009, the Company had $361,926 available under the revolving credit facility.

The Credit Agreement places restrictions on the ability of Alpha Natural Resources LLC (“ANR LLC”) and its subsidiaries to make distributions or loans to the Company. The net assets of ANR LLC are restricted, except for allowable distributions for the payment of income taxes, administrative expenses, payments on qualified debt, and, in certain circumstances, dividends or repurchases of common stock of the Company.

All of the Company borrowings under the Credit Agreement are at a variable rate, so the Company is exposed to the effect of rising interest rates. As of June 30, 2009, the Company had a $233,125 term loan outstanding with a variable interest rate based upon the 3-month London Interbank Offered Rate (“LIBOR”) (0.63% at June 30, 2009) plus the applicable margin (1.50% at June 30, 2009). To reduce the Company's exposure to rising interest rates, effective May 22, 2006, the Company entered into a pay-fixed, receive variable interest rate swap on the notional amount of $233,125 for a period of approximately six and one-half years. In effect, this swap converted the variable interest rates based on LIBOR to a fixed interest rate of 5.59% plus the applicable margin defined in the debt agreement for the remainder of the term loan. The Company accounts for the interest rate swap as a cash flow hedge and changes in fair value of the swap are recorded in other comprehensive income (loss). The critical terms of the swap and the underlying debt instrument that it hedges coincide, resulting in no hedge ineffectiveness being recognized in the income statement during the periods ended June 30, 2009 and 2008.  The fair value of the swap at June 30, 2009 was $23,264 which was recorded in other liabilities in the condensed consolidated balance sheet and the offsetting unrealized loss of $17,454, net of tax benefit, was recorded in accumulated other comprehensive loss. As interest expense is accrued on the debt obligation, amounts in accumulated other comprehensive loss related to the derivative hedging instrument are reclassified into earnings to obtain a net cost on the debt obligation of 5.59% plus the applicable margin.

On July 31, 2009, in conjunction with the merger with Foundation (see Note 16), the Company terminated its Credit Agreement and repaid the outstanding balance under the term loan.  In the third quarter of 2009, the Company will record a charge to earnings to write off previously deferred loan costs, and the interest rate swap will be de-designated as a cash flow hedge for accounting purposes which will result in prior amounts recorded in accumulated other comprehensive loss being reclassified into earnings.

2.375% Convertible Senior Notes Due June 2015

As of June 30, 2009, the Company had $287,500 aggregate principal amount of 2.375% convertible senior notes due 2015.  The notes bear interest at a rate of 2.375% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, which began on October 15, 2008. The notes will mature on April 15, 2015, unless previously repurchased by the Company or converted.  The notes are convertible in certain circumstances and in specified periods (as described in the Supplemental Indenture) at an initial conversion rate of 18.2962 shares of common stock per $1,000 principal amount of notes, subject to adjustment upon the occurrence of certain events set forth in the Indenture. Upon conversion of notes, holders will receive cash up to the principal amount of the notes to be converted, and any excess conversion value will be delivered in cash, shares of common stock or a combination thereof, at the Company's election.

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
June 30, 2009
 (In thousands, except percentages, share, per share and per gallon data)
 
On January 1, 2009, the Company adopted FASB FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”).  FSP APB 14-1 applies to all convertible debt instruments that have a “net settlement feature,” which means that such convertible debt instruments, by their terms, may be settled either wholly or partially in cash upon conversion, and requires issuers of convertible debt instruments to separately account for the liability and equity components in a manner reflective of the issuers’ nonconvertible debt borrowing rate.  FSP APB 14-1 was effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years.  Upon adoption of FSP APB 14-1, the Company retrospectively applied the change in accounting principle to prior accounting periods.  Adoption of the standard resulted in the following balance sheet impacts at December 31, 2008: (1) a reduction of debt by $87,830 and an increase in paid in capital of $69,851, (2) an increase to deferred loan costs of $5,309, (3) a net reduction to deferred tax assets of $23,124 ($36,262 reduction in deferred tax assets, offset by a $13,138 change in the valuation allowance), and (4) a net increase in retained earnings of $164.  In addition, the adoption of the standard resulted in the following non-cash income statement impacts for the three month and six month periods ending June 30, 2008: (1) a reduction in interest expense of $6,097, comprised of the reestablishment of the deferred loan costs of $8,903 previously written off, offset by amortization of the deferred loan costs of $212 and the accretion of the convertible debt discount of $2,594, (2) an increase in income tax expense of $13,302, and (3) a reduction in net income of $7,205.

For the three and six month periods ending June 30, 2009, the adoption of APB 14-1 increased non-cash interest expense by $2,896 and $5,734, respectively, related to the accretion of the convertible debt discount and the amortization of the deferred loan costs.  The deferred loan costs and discount are being amortized and accreted, respectively, over the seven-year term of the convertible notes, which are due in 2015, and provide for an effective interest rate of 8.64%.  As of June 30, 2009, the carrying amounts of the debt and the equity components were $204,980 and $95,511, respectively, and the unamortized discount of the liability was $82,520.  For the three and six month periods ending June 30, 2009, the Company paid $1,707 and $3,414, respectively, on the contractual interest coupon.

On June 18, 2009, the Company announced that under the terms of the notes, as a result of the merger with Foundation, the 2.375% convertible senior notes due 2015 became convertible at the option of the holders beginning on June 18, 2009, and would remain convertible through the 30th day after the effective date of the merger, which was July 31, 2009. As a result, at June 30, 2009, the carrying amounts of the notes were classified as current portion of long-term debt in the condensed consolidated balance sheet.  In addition, due to the merger of the Company and Foundation, the surviving corporation assumed the obligations of the $287,500 aggregate principal amount of 2.375% convertible senior notes due 2015 (see Note 16).

 Accounts Receivable Securitization

On March 25, 2009, the Company and certain subsidiaries became a party to an $85,000 accounts receivable securitization facility with a third party financial institution (the “A/R Facility”) by forming ANR Receivables Funding, LLC (the “SPE”), a special-purpose, bankruptcy-remote subsidiary, wholly-owned indirectly by the Company. The sole purpose of the SPE is to purchase trade receivables generated by certain of the Company’s operating subsidiaries, without recourse (other than customary indemnification obligations for breaches of specific representations and warranties), and then transfer senior undivided interests in up to $85,000 of those accounts receivable to a financial institution for the issuance of letters of credit or for cash borrowings for the ultimate benefit of the Company.

The SPE is consolidated into the Company’s financial statements, and therefore has no impact on the Company’s consolidated financial statements. The assets of the SPE, however, are not available to the creditors of the Company or any other subsidiary. The SPE pays facility fees, program fees and letter of credit fees (based on amounts of outstanding letters of credit), as defined in the definitive agreements for the A/R Facility.  Available borrowing capacity is based on the amount of eligible accounts receivable as defined under the terms of the definitive agreements for the A/R Facility and varies over time. The receivables purchase agreement supporting the borrowings under the A/R Facility is subject to renewal annually and, unless terminated earlier, expires March 24, 2010.

As of June 30, 2009, letters of credit in the amount $67,000 were outstanding under the A/R Facility and no cash borrowing transactions had taken place.  As outstanding letters of credit exceeded borrowing capacity as of June 30, 2009, the Company was required to provide additional collateral in the form of $22,600 of restricted cash, which is included in prepaid expenses and other current assets, to secure outstanding letters of credit. Under the A/R Facility, the SPE is subject to certain 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 agreements underlying the receivables pool. Alpha Natural Resources, Inc. has agreed to guarantee the performance by its subsidiaries, other than the SPE, of their obligations under the A/R Facility. The Company does not guarantee repayment of the SPE’s debt under the A/R Facility. The financial institution, which is the administrator, may terminate the A/R Facility upon the occurrence of certain events that are customary for facilities of this type (with customary grace periods, if applicable), including, among other things, breaches of covenants, inaccuracies of representations and warranties, bankruptcy and insolvency events, changes in the rate of default or delinquency of the receivables above specified levels, a change of control and material judgments. A termination event would permit the administrator to terminate the program and enforce any and all rights and remedies, subject to cure provisions, where applicable.


ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
June 30, 2009
 (In thousands, except percentages, share, per share and per gallon data)
 
(7) Asset Retirement Obligation
 
At June 30, 2009, the Company had recorded asset retirement obligation accruals for mine reclamation and closure costs (including perpetual water treatment) totaling $101,662. The portion of the costs expected to be incurred within a year in the amounts of $9,004 and $8,375 at June 30, 2009 and December 31, 2008, respectively, are included in accrued expenses and other current liabilities. There were no assets that were legally restricted for purposes of settling asset retirement obligations at June 30, 2009.  These regulatory obligations are secured by surety bonds in the amount of $152,638 at June 30, 2009 and $148,952 at December 31, 2008.

Changes in the reclamation obligation related to continuing operations were as follows:

       
Asset retirement obligation at December 31, 2008
  $ 94,032  
         
Accretion for the period
    3,887  
Expenditures for the period
    (2,186 )
Acquisitions during the period
    336  
Sites added during the period
    684  
Revisions in estimated cash flows
    (361 )
Asset retirement obligation at June 30, 2009
  $ 96,392  
         
 
Changes in the reclamation obligation related to discontinued operations were as follows:

         
Asset retirement obligation at December 31, 2008
 
$
         4,908
 
         
Accretion for the period
   
            256
 
Expenditures for the period
   
             (75)
 
Revisions in estimated cash flows
   
            181
 
Asset retirement obligation at June 30, 2009
 
$
         5,270
 
         
 
(8) Share-Based Compensation Awards
 
As of June 30, 2009, the total number of shares of Alpha Natural Resources, Inc. common stock available for issuance or delivery under the Company’s current Long-Term Incentive Plan (“LTIP”) was 4,421,473 shares.  During the six months ended June 30, 2009 and 2008, all shared-based compensation awards granted by the Company consisted of non-vested restricted shares, non-vested performance shares, and restricted stock units.

Share-based compensation expense totaled $4,246 and $11,586 for the three months ended June 30, 2009 and 2008, respectively. Share-based compensation expense totaled $7,471 and $14,575 for the six months ended June 30, 2009 and 2008, respectively.

For the three and six months ended June 30, 2009 and 2008, approximately 75% and 46% respectively, and 74% and 51%, respectively, of share-based compensation expense is reported as selling, general and administrative expenses, included in the Corporate and Eliminations category for segment reporting purposes (Note 14). In addition, approximately 24% and 54%, respectively and 26% and 49%, respectively, is reported as a component of cost of sales, included in the Coal Operations and All Other segments for reporting purposes (Note 14).  As of June 30, 2009 and December 31, 2008, approximately $279 and $170, respectively, of share-based compensation costs were capitalized as a component of inventories. The Company reports the benefits of income tax deductions that exceed recognized compensation as cash flow from financing activities. The excess tax benefits were $0 and $1,790 for the six months ended June 30, 2009 and 2008, respectively.

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 six months ended June 30, 2009, the Company repurchased 106,937 common shares from employees at an average price paid per share of $18.96.

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
June 30, 2009
 (In thousands, except percentages, share, per share and per gallon data)
 
Stock Options

Stock option activity for the six months ended June 30, 2009 is summarized in the following table:

             
           
Weighted-
     
Weighted-
 
Average
     
Average
 
Remaining
 
Number of
 
Exercise
 
Contractual
 
Shares
 
Price
 
Term (Years)
Outstanding at December 31, 2008
     519,984
 
$
         17.87
   
Exercised
      (13,142)
   
         17.50
   
Forfeited/Expired
      (12,142)
   
         17.37
   
Outstanding at June 30, 2009
     494,700
   
         17.88
 
             5.60
Exercisable at June 30, 2009
     306,921
   
         18.55
 
             5.60
             
 
The aggregate intrinsic value of options outstanding at June 30, 2009 was $1,904 and the aggregate intrinsic value of exercisable options was $872. The total intrinsic value of options exercised during the six months ended June 30, 2009 and 2008 was $127 and $5,573, respectively.  As of June 30, 2009, $817 of unrecognized compensation cost related to stock options is expected to be recognized as expense over a weighted-average period of 0.56 years. The weighted average grant date fair value of options outstanding at June 30, 2009 was $7.34.

Restricted Share Awards

Restricted share award activity for the six months ended June 30, 2009 is summarized in the following table:

           
     
Weighted-
 
     
Average
 
 
Number of
 
Grant Date
 
 
Shares
 
Fair Value
 
Non-vested shares outstanding at December 31, 2008
     952,789
 
$
         19.33
 
Granted
     921,901
   
         18.92
 
Vested
    (383,744)
   
         19.86
 
Forfeited/Expired
      (15,735)
   
         17.74
 
Non-vested shares outstanding at June 30, 2009
  1,475,211
 
$
         18.93
 
           

The Company granted 921,901 restricted share awards during the six month period ending June 30, 2009. The restricted shares vest ratably over three years or cliff vest after three years (with accelerated vesting upon a change of control), depending on the recipients’ position with the Company.  

The fair value of restricted share awards is based on the closing stock price on the date of grant, and, for purposes of expense recognition, the total number of awards expected to vest is adjusted for estimated forfeitures. As of June 30, 2009, there was $17,801 of unamortized compensation cost related to non-vested shares, which is expected to be recognized as expense over a weighted-average period of 2.14 years.

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
June 30, 2009
 (In thousands, except percentages, share, per share and per gallon data)
 
Performance Share Awards
 
Performance share award activity for the six months ended June 30, 2009 is summarized in the following table:

           
     
Weighted-
 
     
Average
 
 
Number of
 
Grant Date
 
 
Shares
 
Fair Value
 
Non-vested shares outstanding at December 31, 2008
     527,183
 
$
         16.59
 
Granted
     412,444
   
         24.23
 
Earned
      (35,219)
   
         21.15
 
Forfeited or expired
      (12,936)
   
         18.05
 
Non-vested shares outstanding at June 30, 2009
     891,472
   
         19.93
 
           

The Company issued 35,219 performance shares to employees on February 10, 2009, related to the 2006 performance grant, which ended on December 31, 2008.  Based upon the Company’s performance against the pre-established operating income and return on invested capital targets, an award of 30% of target was issued to employees.

The Company granted 412,444 performance share awards during the six month period ending June 30, 2009.  Recipients of these awards can receive shares of the Company's common stock at the end of a performance period which ends on December 31, 2011, based on the Company's actual performance against pre-established operating income goals, strategic goals, and total shareholder return goals. In order to receive the shares, the recipient must also be employed by the Company on the vesting date. The performance share awards represent the number of shares of common stock to be awarded based on the achievement of targeted performance and may range from 0% to 200% of the targeted amount. The grant date fair value of the awards related to operating income targets is based on the closing price of the Company's common stock on the New York Stock Exchange on the grant date of the award and is being amortized over the performance period. The awards related to strategic goals do not meet the criteria for grant date pursuant to SFAS No. 123(R), Share-based Payments (as amended) (“SFAS 123(R)”). The fair value of the awards related to total shareholder return targets is based upon a Monte Carlo simulation and is being amortized over the performance period. For certain employees and officers of the Company to receive these performance share awards, the Company must achieve a pre-determined EBITDA level during the performance period in addition to the criteria set for those employees participating in the plan.  The Company reassesses at each reporting date whether achievement of each of the performance conditions is probable, as well as estimated forfeitures, and adjusts the accruals of compensation expense as appropriate.

As of June 30, 2009, there was $6,094 of unamortized compensation cost related to the outstanding performance share awards.  This unamortized compensation cost is expected to be recognized over the remaining periods up to December 31, 2011.

  (9) Derivative Financial Instruments
  
Derivative financial instruments are accounted for in accordance with SFAS 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), which requires all derivative financial instruments to be reported on the balance sheet at fair value. Changes in fair value are recognized either in earnings or equity, depending on whether the transaction qualifies for hedge accounting and if so, the nature of the underlying exposure being hedged and how effective the derivatives are at offsetting price movements in the underlying exposure.

On January 1, 2009, the Company adopted SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”), which amends SFAS 133.  SFAS 161 requires enhanced disclosures about derivative instruments and hedging activities to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. The new standard also increases required disclosures regarding the location and amounts of derivative instruments in an entity’s financial statements, how derivative instruments and related hedged items are accounted for under SFAS 133 and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. Since SFAS 161 requires only additional disclosures concerning derivatives and hedging activities, the adoption of SFAS 161 did not affect the Company’s financial position and results of operations. 

The Company accounts for certain forward purchase and forward sale coal contracts that do not qualify under the “normal purchase and normal sale” exception of SFAS 133 as derivatives and records these contracts as assets or liabilities at fair value. Changes in fair value of these coal derivative contracts have been recorded as an (increase) decrease in fair value of certain derivative instruments, net, and included as a component of costs and expenses in the consolidated statements of income.  At June 30, 2009, the Company had unrealized gains (losses) on open sales and open purchase contracts of $3,249 and ($3,538), respectively. The unrealized gains of $3,249 on open sales contracts are recorded in prepaid expenses and other current assets. The unrealized losses on open purchase contracts are recorded in accrued expenses and other current liabilities and other liabilities in the amount of ($3,293) and ($245), respectively.

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
June 30, 2009
 (In thousands, except percentages, share, per share and per gallon data)
 
The Company has utilized interest rate swap agreements to modify the interest characteristics of a portion of the Company's outstanding debt. The swap agreements essentially convert variable-rate debt to fixed-rate debt and have been designated as cash flow hedges.  Changes in the fair value of interest rate swaps designated as hedging instruments of the variability of cash flows associated with floating rate and long-term debt obligations are reported in accumulated other comprehensive loss.  These amounts are subsequently reclassified into interest expense in the same period in which the related floating rate debt obligation affects earnings. At June 30, 2009, the fair value of the interest rate swap agreements is a liability of $23,264, which is recorded in other liabilities.

The Company is also exposed to the risk of fluctuations in cash flows related to its purchase of diesel fuel. The Company has entered into diesel fuel swap agreements to reduce the volatility in the price of diesel fuel for its operations. These diesel fuel swaps use the NYMEX New York Harbor No. 2 Heating Oil (“No. 2 heating oil”) futures contracts as the underlying commodity reference price. Any unrealized loss is recorded in accrued expenses and other current liabilities and other liabilities and any unrealized gain is recorded in prepaid expenses and other current assets and other assets.  Changes in fair value are recognized in earnings if they are not eligible for hedge accounting or other comprehensive income if they qualify for hedge accounting.  Most of the diesel fuel swap agreements are not designated as hedges for accounting purposes and therefore the changes in fair value of these diesel fuel derivative instrument contracts have been recorded as an (increase) decrease in fair value of certain derivative instruments, net, and included as a component of costs and expenses in the consolidated statements of income.  For any hedges that qualify for hedge accounting, the effective portion of any unrealized gain or loss is recorded in accumulated other comprehensive income (loss) and any ineffective portion of any unrealized gain (loss) is recorded as an (increase) decrease in fair value of certain derivative instruments, net.

As of June 30, 2009, approximately 7,780 gallons or 51% of the Company's budgeted 2009 remaining diesel fuel usage has been capped with the swap agreements in which the Company has agreed to pay a fixed price and receive a floating price per gallon of No. 2 heating oil. The fixed prices for the notional quantity of 7,780 gallons range from $1.61 to $4.10 per gallon for the last six months of 2009. In addition, as of June 30, 2009, the Company has in place swap agreements with respect to 20,750 gallons, at fixed prices ranging from $1.79 to $3.86 per gallon, which mature in 2010 to 2012.  At June 30, 2009, the fair value of these diesel fuel swap agreements is a net liability of $21,072, which is recorded in prepaid expenses and other current assets in the amount of $291, other assets in the amount of $1,037, accrued expenses and other current liabilities in the amount of $14,072, and in other liabilities in the amount of $8,328. 

The following are the derivatives in cash flow hedging relationships and derivatives not designated as hedging instruments, and their related effect in assets as of June 30, 2009 and December 31, 2008:

                   
 
Asset Derivatives
 
 
6/30/2009
 
12/31/2008
 
 
 Balance Sheet
Location
 
 Fair
Value
 
 Balance Sheet
Location
   
Fair
Value
 Derivatives Designated as
 Hedging Instruments
               
 Diesel fuel derivatives
 Other assets
 $
                         771
 
 Other assets
 
 $
                        -
 
 Total Derivatives Designated as
Hedging Instruments
 $
                         771
     
 $
                        -
 
                   
                   
 Derivatives Not Designated as
Hedging Instruments
             
 Forward coal sales
 Prepaid expenses and other current assets
 $
                      3,249
 
Prepaid expenses and other current assets
 $
                        -
 
 Forward coal purchases
 Prepaid expenses and other current assets
                            -
 
Prepaid expenses and other current assets
                  2,854
 
 Diesel fuel derivatives
 Prepaid expenses and other current assets
                         291
 
Prepaid expenses and other current assets
                  5,186
 
 Diesel fuel derivatives
 Other assets
 
                         266
 
 Other assets
   
                        -
 
 Total Derivatives Designated as
Hedging Instruments
 $
                      3,806
     
 $
                  8,040
 
                   
 Total Derivatives
 
 $
                      4,577
     
 $
                  8,040
 
                   

 ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
June 30, 2009
 (In thousands, except percentages, share, per share and per gallon data)
 
The following are the derivatives in cash flow hedging relationships and derivatives not designated as hedging instruments, and their related effect in liabilities as of June 30, 2009 and December 31, 2008:

                   
 
Liability Derivatives
 
 
6/30/2009
 
12/31/2008
 
 
 Balance Sheet
Location
 
 Fair
Value
 
 Balance Sheet
Location
   
Fair
Value
 Derivatives Designated as
Hedging Instruments
               
 Diesel fuel derivatives
 Other liabilities
 $
                             4
 
 Other liabilities
 
 $
                        -
 
 Interest rate swaps
 Other liabilities
 
                    23,264
 
 Other liabilities
   
                27,929
 
 Total Derivatives Designated as
Hedging Instruments
 $
                    23,268
     
 $
                27,929
 
                   
                   
 Derivatives Not Designated as
Hedging Instruments
             
 Forward coal sales
 Accrued expenses and other current liabilities
                            -
 
Accrued expenses and other current liabilities
                  3,042
 
 Forward coal purchases
 Accrued expenses and other current liabilities
 $
                      3,293
 
Accrued expenses and other current liabilities
 $
                        -
 
 Forward coal purchases
 Other liabilities
 
                         245
 
 Other liabilities
   
                        -
 
 Diesel fuel derivatives
 Accrued expenses and other current liabilities
                    14,072
 
Accrued expenses and other current liabilities
                25,081
 
 Diesel fuel derivatives
 Other liabilities
 
                      8,324
 
 Other liabilities
   
                16,812
 
 Total Derivatives Designated as
Hedging Instruments
 $
                    25,934
     
 $
                44,935
 
                   
 Total Derivatives
 
 $
                    49,202
     
 $
                72,864
 
                   

The following are the derivatives in cash flow hedging relationships and their related effect in the condensed consolidated statements of income and Other Comprehensive Income for the three and six months ending June 30, 2009 and 2008:

                             
Derivatives in Cash Flow Hedging Relationships
 
Location of (Gain) or Loss Recognized in Income on Hedged Item
 
Amount of (Gain) or Loss Recognized in Income on Hedged Item
       
Three Months Ended
 June 30,
 
Six Months Ended
 June 30,
       
2009
   
2008
   
2009
   
2008
 
Interest rate swaps
 
Interest expense
  $ 2,575     $ 1,705     $ 4,983     $ 2,153  
   
Total
  $ 2,575     $ 1,705     $ 4,983     $ 2,153  
                                     
 
                         
Derivatives in Cash Flow Hedging Relationships
 
Amount of (Gain) or Loss Recognized in OCI on Derivative (Effective Portion)
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2009
   
2008
   
2009
   
2008
 
Diesel fuel derivatives
  $ 570     $ -     $ 576     $ -  
Interest rate swaps
    4,633       8,547       4,665       2,138  
Total
  $ 5,203     $ 8,547     $ 5,241     $ 2,138  
                                 

 ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
June 30, 2009
 (In thousands, except percentages, share, per share and per gallon data)
 
The following are the derivatives not designated as hedging instruments and their related effect in the condensed consolidated statements of income for the three and six months ending June 30, 2009 and 2008:

                             
Derivatives Not Designated as Hedging Instruments
 
Location of (Gain) or Loss Recognized in Income on Derivative
 
Amount of (Gain) or Loss Recognized in Income on Derivative
 
       
Three Months Ended June 30,
   
Six Months Ended June 30,
 
       
2009
   
2008
   
2009
   
2008
 
Forward coal sales
 
(Increase) decrease in fair value of derivative instruments, net
  $ 1,318     $ 38,294     $ (396 )   $ 56,331  
Forward coal purchases
 
(Increase) decrease in fair value of derivative instruments, net
    (2,079 )     (25,730 )     495       (58,084 )
Diesel fuel derivatives
 
(Increase) decrease in fair value of derivative instruments, net
    (13,770 )     (19,080 )     (14,868 )     (21,447 )
Total
      $ (14,531 )   $ (6,516 )   $ (14,769 )   $ (23,200 )
                                     

  (10) 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. The following methods and assumptions are used to estimate the fair value of each class of financial instrument.

Cash and Cash Equivalents, Trade Accounts Receivables, Note Payable, Trade Accounts Payable, and Other Current Liabilities:  The carrying amounts approximate fair value due to the short maturity of these instruments.

Notes and other Receivables: The fair value approximates the carrying value as the rates associated with the receivables are comparable to current market rates.

Long-term Debt: The fair value of the 2.375% convertible senior notes was estimated using observable market prices as these securities are traded. As of June 30, 2009 and December 31, 2008, the fair value of the term loan due 2012 is estimated using observable market prices for debt of similar characteristics and maturities. The carrying value of the Company’s capital lease obligation approximates fair value due to the short maturity of these instruments.

                         
 
June 30, 2009
 
December 31, 2008
 
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
                         
2.375% convertible senior notes due 2015, net of discount of $82,520
and $87,830 for June 30, 2009 and December 31, 2008, respectively
  $ 204,980     $ 226,766     $ 199,670     $ 186,013  
Term loan due 2012
    233,125       230,794       233,125       194,659  
Capital lease obligation
    -       -       232       232  
Total long-term debt
  $ 438,105     $ 457,560     $ 433,027     $ 380,904  
                                 
 
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 and non-recurring basis as of June 30, 2009 and December 31, 2008, respectively.  As required by SFAS 157, 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 value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
June 30, 2009
 (In thousands, except percentages, share, per share and per gallon data)
 
                               
 
As of June 30, 2009
 
             
Fair Value Measurements Using:
 
             
Quoted
 
Significant
       
             
Prices in
 
Other
 
Significant
 
             
Active
 
Observable
 
Unobservable
 
 
Carrying
 
Total Fair
 
Markets
 
Inputs
 
Inputs
 
 
Amount
 
Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
 
                         
Financial Assets (Liabilities):
                             
Forward coal sales
  $ 3,249     $ 3,249     $ -     $ 3,249     $ -  
Forward coal purchases
  $ (3,538 )   $ (3,538 )   $ -     $ (3,538 )   $ -  
Diesel fuel derivatives
  $ (21,072 )   $ (21,072 )   $ -     $ (21,072 )   $ -  
Interest rate swaps
  $ (23,264 )   $ (23,264 )   $ -     $ (23,264 )   $ -  
                                         
 
                               
 
As of December 31, 2008
 
             
Fair Value Measurements Using:
 
             
Quoted
 
Significant
       
             
Prices in
 
Other
 
Significant
 
             
Active
 
Observable
 
Unobservable
 
 
Carrying
 
Total Fair
 
Markets
 
Inputs
 
Inputs
 
 
Amount
 
Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
                               
Financial Assets (Liabilities):
                             
Forward coal sales
  $ (3,042 )   $ (3,042 )   $ -     $ (3,042 )   $ -  
Forward coal purchases
  $ 2,854     $ 2,854     $ -     $ 2,854     $ -  
Diesel fuel derivatives
  $ (36,707 )   $ (36,707 )   $ -     $ (36,707 )   $ -  
Interest rate swaps
  $ (27,929 )   $ (27,929 )   $ -     $ (27,929 )   $ -  
                                         
 
The following methods and assumptions were used to estimate the fair values of the assets and liabilities in the tables above. 

Level 2 Fair Value Measurements
 
Forward Coal Purchases and Sales — The fair value of the forward coal purchases and sales contracts were estimated using discounted cash flow calculations based upon forward commodity price curves. The curves were obtained from independent pricing services reflecting broker market quotes.
 
Diesel Fuel Derivatives — Since the Company’s diesel fuel derivative instruments are not traded on a market exchange, the fair values are determined using valuation models which include assumptions about commodity prices based on those observed in the underlying markets.

Interest Rate Swaps — The fair value of the interest rate swaps were estimated using discounted cash flow calculations based upon forward interest-rate yield curves.  The curves were obtained from independent pricing services reflecting broker market quotes.

 ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
June 30, 2009
 (In thousands, except percentages, share, per share and per gallon data)
 
(11) Postretirement Benefits Other Than Pensions
 
The following table details the components of the net periodic benefit cost for the Company’s retiree medical plan (the “Plan”):

                         
 
Three Months Ended
 
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
Service cost
  $ 514     $ 693     $ 1,208     $ 1,386  
Interest cost
    1,149       873       2,004       1,746  
Amortization of net actuarial gain
    (50 )     -       (50 )     -  
Amortization of prior service cost
    537       615       1,129       1,230  
Curtailment gain
    (712 )     -       (712 )     -  
 Net periodic benefit cost
  $ 1,438     $ 2,181     $ 3,579     $ 4,362  
                                 
 
The Company provides current and certain retired employees and their dependents postretirement medical benefits by accruing the costs of such benefits over the service lives of employees. Premiums are paid by the Company based on years of service, with the difference contributed by the employee, if any. Employer contributions for postretirement medical benefits paid for the three months ended June 30, 2009 and 2008 were $89 and $50, respectively, and for the six months ended June 30, 2009 and 2008 were $179 and $82, respectively. Employee contributions are insignificant and the Plan is unfunded.
 
Two of the Company’s subsidiaries are required to make contributions to the 1974 UMWA Pension Plan and Trust and/or the 1993 UMWA Benefit Plan. The contributions made to these plans for the three months ended June 30, 2009 and 2008 were $42 and $53, respectively, and for the six months ended June 30, 2009 and 2008 were $91 and $98, respectively.
  

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
June 30, 2009
 (In thousands, except percentages, share, per share and per gallon data)
 
(12) Comprehensive Income
 
Total comprehensive income is as follows for the three months and six months ended June 30, 2009:
 
             
   
Three Months Ended June 30, 2009
   
Six Months Ended June 30, 2009
 
Net Income
  $ 15,359     $ 56,323  
Change in fair value of cash flow hedge related to interest rate swaps, net of tax effect of ($1,150) and ($1,158), for the three months and six months, respectively
    3,482       3,506  
Change in SFAS 158 adjustment related to postretirement medical, net of tax effect of ($1,766) and ($1,913), for the three months and six months, respectively
    5,348       5,793  
Change in SFAS 158 adjustment related to black lung obligations, net of tax effect of ($5) and ($11), for the three months and six months, respectively
    18       35  
Change in fair value of cash flow hedge related to diesel fuel swaps, net of tax effect of ($188) and ($190) for the three months and six months, respectively
    570       576  
Total comprehensive income
  $ 24,777     $ 66,233  
                 
 
Total comprehensive income is as follows for the three months and six months ended June 30, 2008:

             
   
Three Months Ended June 30, 2008
   
Six Months
Ended June 30, 2008
 
Net Income
  $ 67,132     $ 92,662  
Change in fair value of cash flow hedge related to interest rate swaps, net of tax effect of ($2,408) and ($830), for the three months and six months, respectively
    6,140       1,308  
Change in SFAS 158 adjustment related to postretirement medical, net of tax effect of ($325) and ($476), for the three months and six months, respectively
    290       754  
Change in SFAS 158 adjustment related to black lung obligations, net of tax effect of ($12) and ($17), for the three months and six months, respectively
    11       28  
Total comprehensive income
  $ 73,573     $ 94,752  
                 

The following table summarizes the components of accumulated other comprehensive loss at June 30, 2009:
 
         
Fair value of cash flow hedge related to interest rate swaps, net of tax effect of ($5,810)
 
$
       17,454
 
SFAS 158 adjustment related to black lung obligations, net of tax effect of ($881)
   
         2,754
 
SFAS 158 adjustment related to postretirement medical obligations, net of tax effect of ($183)
   
            565
 
Fair value of cash flow hedge related to diesel fuel swaps, net of tax effect of $190
   
           (576)
 
Total accumulated other comprehensive loss
 
$
       20,197
 
         
 
(13) Commitments and Contingencies

(a) 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 and performance or surety bonds.  No liabilities related to these arrangements are reflected in the Company's condensed consolidated balance sheets.  Management does not expect any material losses to result from these guarantees or off-balance sheet financial instruments.  The amount of bank letters of credit, issued under the Company’s accounts receivable securitization program, outstanding as of June 30, 2009 is presented in Note 6 to the condensed consolidated financial statements. The amount of surety bonds outstanding at June 30, 2009 related to the Company's reclamation obligations is presented in Note 7 to the condensed consolidated financial statements.
 

 ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
June 30, 2009
 (In thousands, except percentages, share, per share and per gallon data)
 
(b) Litigation
 
  The Company is a party to a number of legal proceedings 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.
Nicewonder Litigation

In December 2004, prior to the Company’s Nicewonder acquisition in October 2005, the Affiliated Construction Trades Foundation brought an action against the West Virginia Department of Transportation, Division of Highways (“WVDOH”) and Nicewonder Contracting, Inc. ("NCI"), which became our wholly-owned indirect subsidiary as a result of the Nicewonder acquisition, in the United States District Court in the Southern District of West Virginia. The plaintiff sought a declaration that the contract between NCI and the State of West Virginia related to NCI's road construction project was illegal as a violation of applicable West Virginia and federal competitive bidding and prevailing wage laws. The plaintiff also sought an injunction prohibiting performance of the contract but has not sought monetary damages. 

On September 5, 2007, the Court ruled that the WVDOH and the Federal Highway Administration (which is now a party to the suit) could not, under the circumstances of this case, enter into a contract that did not require the contractor to pay the prevailing wages as required by the Davis-Bacon Act. Although the Court has not yet decided what remedy it will impose, the Company expects a ruling before year-end 2010.  We anticipate that the most likely remedy is a directive that the contract be renegotiated for such payment. If that renegotiation occurs, the WVDOH has committed to agree, and NCI has a contractual right to insist, that additional costs resulting from the order will be reimbursed by the WVDOH.  Accordingly, the Company does not believe that it will incur any monetary expense as a result of this ruling. As of June 30, 2009, the Company had a $9,000 long-term receivable for the recovery of these costs from the WVDOH and a $9,000 long-term liability for the potential obligations under the ruling.
  
  (14) 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 the Central Appalachian and Northern Appalachian regions. The Company has one reportable segment: Coal Operations, which as of June 30, 2009, consisted of 31 underground mines and 21 surface mines located in Central Appalachia and Northern Appalachia. Coal Operations also includes the Company's coal sales function, which markets the Company's Appalachian coal to domestic and international customers. The All Other category includes the Company's equipment sales and repair operations, as well as other ancillary business activities, including terminal services, coal and environmental analysis services, and leasing of mineral rights. In addition, the All Other category includes the operations of the Company's road construction businesses. The Corporate and Eliminations category includes general corporate overhead and the elimination of intercompany transactions. The revenue elimination amount represents inter-segment revenues. The Company evaluates the performance of its segment based on EBITDA from continuing operations which the Company defines as income from continuing operations plus interest expense, income tax expense, and depreciation, depletion and amortization, less interest income.
 
Segment operating results from continuing operations and capital expenditures including discontinued operations for the three months ended June 30, 2009 and segment assets as of June 30, 2009 were as follows:
 
                         
             
Corporate
       
 
Coal
 
All
 
and
       
 
Operations
 
Other
 
Eliminations
 
Consolidated
 
Revenues
  $ 371,479     $ 25,057     $ (10,367 )   $ 386,169  
Depreciation, depletion, and amortization
    34,252       1,451       649       36,352  
EBITDA from continuing operations
    67,927       7,633       (7,396 )     68,164  
Capital expenditures
    26,899       222       854       27,975  
Total assets
    1,647,863       132,708       (88,065 )     1,692,506  
                                 

  
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
June 30, 2009
 (In thousands, except percentages, share, per share and per gallon data)
 
Segment operating results from continuing operations and capital expenditures including discontinued operations for the six months ended June 30, 2009 and segment assets as of June 30, 2009 were as follows:
                         
             
Corporate
       
 
Coal
 
All
 
and
       
 
Operations
 
Other
 
Eliminations
 
Consolidated
 
Revenues
  $ 844,179     $ 49,154     $ (20,429 )   $ 872,904  
Depreciation, depletion, and amortization
    72,450       2,882       1,225       76,557  
EBITDA from continuing operations
    185,784       15,316       (23,255 )     177,845  
Capital expenditures
    44,033       400       1,678       46,111  
Total assets
    1,647,863       132,708       (88,065 )     1,692,506  
                                 
 
Segment operating results from continuing operations and capital expenditures including discontinued operations for the three months ended June 30, 2008 and segment assets as of June 30, 2008 were as follows:
                         
             
Corporate
       
 
Coal
 
All
 
and
       
 
Operations
 
Other
 
Eliminations
 
Consolidated
 
Revenues
  $ 693,240     $ 22,275     $ (13,748 )   $ 701,767  
Depreciation, depletion, and amortization
    41,033       1,406       409       42,848  
EBITDA from continuing operations
    175,207       4,305       (35,751 )     143,761  
Capital expenditures
    38,572       1,209       629       40,410  
Total assets
    1,573,222       104,564       (27,916 )     1,649,870  
                                 
 
Segment operating results from continuing operations and capital expenditures including discontinued operations for the six months ended June 30, 2008 and segment assets as of June 30, 2008 were as follows:
                         
             
Corporate
       
 
Coal
 
All
 
and
       
 
Operations
 
Other
 
Eliminations
 
Consolidated
 
Revenues
  $ 1,176,748     $ 45,048     $ (26,973 )   $ 1,194,823  
Depreciation, depletion, and amortization
    81,883       2,693       817       85