Alpha Natural Resources Inc. (ANR) filed Quarterly Report for the period ended 2009-09-30.
Alpha Natural Resources is a leading Central Appalachian coal producer that also has significant operations in Northern Appalachia. Their reserves primarily consist of high Btu, low sulfur steam coal and metallurgical coal. They produce, process and sell steam and metallurgical coal from eight regional business units supported by active underground mines, active surface mines and preparation plants located throughout Virginia, West Virginia, Kentucky, Pennsylvania and Colorado. Alpha Natural Resources Inc. has a market cap of $2.79 billion; its shares were traded at around $39.06 with a P/E ratio of 24.1 and P/S ratio of 1.1.
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On January 1, 2009, we adopted Accounting Standards Codification (“ASC”) 470-20, Debt with Conversion and other Options (“ASC 470-20”). ASC 470-20 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 manner reflective of the issuers nonconvertible debt borrowing rate. ASC 470-20 was effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. Upon adoption of ASC 470-20, we 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 $87.8 million and an increase in paid in capital of $69.9 million, (2) an increase to deferred loan costs of $5.3 million, (3) a net reduction to deferred tax assets of $23.1 million ($36.2 million reduction in deferred tax assets, offset by a $13.1 million change in the valuation allowance), and (4) a net increase in retained earnings of $0.2 million. In addition, the adoption of the standard resulted in the following non-cash income statement impacts for the three month and nine month periods ending September 30, 2008: (1) an increase in interest expense of $2.7 million for the three months ended September 30, 2008 and a reduction in interest expense of $3.4 million for the nine months ended September 30, 2008, which is comprised of the reestablishment of the deferred loan costs of $8.9 million in the second quarter of 2008 that was previously written off, offset by amortization of the deferred loan costs of $0.2 million and $0.4 million for the three and nine months ended September 30, 2008, respectively, (2) an increase in income tax expense of $0.3 million and 13.0 million for the three and nine months ended September 30, 2009, respectively, and (3) a decrease in net income of $2.4 million and $9.6 million for the three and nine months ending September 30, 2009.
For the three and nine month periods ending September 30, 2009, the adoption of ASC 470-20 increased non-cash interest expense by $2.9 million and $8.7 million, 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 (the “Convertible Notes”), and provide for an effective interest rate of 8.64%. As of September 30, 2009, the carrying amounts of the debt and the equity components were $207.7 million and $95.5 million, respectively, and the unamortized discount of the liability was $79.8 million. For the three and nine month periods ending September 30, 2009, we paid $1.7 million and $5.1 million, respectively, on the contractual interest coupon.
Consolidated revenues increased $40.8 million, or 6% for the three months ended September 30, 2009 compared to the three months ended September 30, 2008. The increase in consolidated revenues was a result of increased coal revenues ($60.9 million) and increased other revenues ($8.0 million), partially offset by decreased freight and handling revenues ($28.1 million). Coal revenues increased $60.9 million in the three months ended September 30, 2009 compared to the three months ended September 30, 2008 primarily as a result of higher tons shipped, partially offset by decreased coal sales realization per ton. For the three months ended September 30, 2009, total tons shipped included 8.6 million tons of coal from our Western Coal Operations acquired in the Merger, located in the southern Powder River Basin of Wyoming. Consolidated coal sales realization per ton for the three months ended September 30, 2009 reflected lower sales prices on metallurgical coal shipments and the inclusion of lower priced tons shipped from the Powder River Basin compared to the three months ended September 30, 2008.
Income from continuing operations decreased $86.1 million, or 130% for the three months ended September 30, 2009 compared to the three months ended September 30, 2008. The decrease was primarily due to higher operating costs and expenses ($141.3 million) and increased other non-operating expenses ($40.8 million), partially offset by increased revenues explained above ($40.8 million) and decreased income tax expense ($55.2 million). The increase in operating costs and expenses was primarily due to increased selling, general and administrative expenses ($62.6 million), amortization of acquired coal supply agreements ($58.0 million), increased depreciation, depletion and amortization ($38.1 million) and increased cost of coal sales ($28.4 million), partially offset by decreased other miscellaneous operating expenses ($45.8 million). Consolidated selling, general and administrative expenses included approximately $27.7 million of transaction costs incurred for the Merger and $14.7 million in additional Merger-related expenses.
ANR is in the portfolios of David Williams of Columbia Value and Restructuring Fund, John Keeley of Keeley Fund Management, Jean-Marie Eveillard of Arnhold & S. Bleichroeder Advisers, LLC.
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