10-Q 1 form06301010q.htm FORM 10-Q form06301010q.htm
UNITED STATES
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 June 30, 2010
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. 001-07775

 
MASSEY ENERGY COMPANY
(Exact name of registrant as specified in its charter)

 
Delaware
95-0740960
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
   
4 North 4th Street, Richmond, Virginia
23219
(Address of principal executive offices)
(Zip Code)
 
(804) 788-1800
(Registrant’s telephone number, including area code)

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.
Yes x 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x 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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

 
   Large accelerated filer x  Accelerated filer ¨
   Non-accelerated filer ¨ (Do not check if a smaller reporting company)    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 ¨ No x

As of July 21, 2010, there were 102,102,329 shares of common stock, $0.625 par value (“Common Stock”), outstanding.

 
 

 
 


MASSEY ENERGY COMPANY

FORM 10-Q

For the Quarterly Period Ended June 30, 2010



TABLE OF CONTENTS
PAGE
   
PART I:   FINANCIAL INFORMATION
 
   
Item 1. Financial Statements
3
   
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
24
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
39
   
Item 4. Controls and Procedures
39
   
PART II:  OTHER INFORMATION
 
   
Item 1. Legal Proceedings
40
   
Item 1A. Risk Factors
44
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
45
   
Item 5. Other Information
45
   
Item 6. Exhibits
50
   
SIGNATURES
51


 
2

 
PART I: FINANCIAL INFORMATION

Item 1. Financial Statements
MASSEY ENERGY COMPANY
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
(In Thousands, Except Per Share Amounts)
 
UNAUDITED
 
                         
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenues
                       
Produced coal revenue
  $ 693,060     $ 603,219     $ 1,264,862     $ 1,284,246  
Freight and handling revenue
    61,465       60,948       135,754       118,730  
Purchased coal revenue
    22,116       19,231       41,581       29,171  
Other revenue
    33,507       14,229       56,590       33,568  
Total revenues
    810,148       697,627       1,498,787       1,465,715  
                                 
Costs and expenses
                               
Cost of produced coal revenue
    649,430       484,641       1,119,366       1,030,566  
Freight and handling costs
    61,465       60,948       135,754       118,730  
Cost of purchased coal revenue
    18,463       15,489       39,086       20,695  
Depreciation, depletion and amortization, applicable to:
                               
 Cost of produced coal revenue
    132,916       66,801       197,123       138,419  
 Selling, general and administrative
    15,982       840       16,244       1,861  
Selling, general and administrative
    24,526       20,001       52,635       41,871  
Other expense
    5,722       579       6,593       1,362  
Loss (Gain) on derivative instruments
    12,449       (377 )     (24,004 )     (9,244 )
Total costs and expenses
    920,953       648,922       1,542,797       1,344,260  
                                 
(Loss) Income before interest and taxes
    (110,805 )     48,705       (44,010 )     121,455  
                                 
Interest income
    285       2,807       1,748       11,684  
Interest expense
    (25,230 )     (25,453 )     (50,446 )     (50,689 )
Gain on short-term investment
    -       -       3,780       -  
(Loss) Income before taxes
    (135,750 )     26,059       (88,928 )     82,450  
                                 
Income tax benefit (expense)
    47,036       (5,867 )     33,840       (18,832 )
                                 
Net (loss) income
  $ (88,714 )   $ 20,192     $ (55,088 )   $ 63,618  
                                 
Net (loss) income per share
                               
Basic
  $ (0.88 )   $ 0.24     $ (0.59 )   $ 0.75  
Diluted
  $ (0.88 )   $ 0.24     $ (0.59 )   $ 0.75  
                                 
Shares used to calculate Net (loss) income  per share
                               
Basic
    100,664       84,872       93,400       84,865  
Diluted
    100,664       85,270       93,400       85,226  
                                 
Dividends per share
  $ 0.06     $ 0.06     $ 0.12     $ 0.12  

See Notes to Condensed Consolidated Financial Statements

 
3

 
MASSEY ENERGY COMPANY
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(In Thousands, Except Per Share Amounts)
 
UNAUDITED
 
             
   
June 30,
   
December 31,
 
   
2010
   
2009
 
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 496,158     $ 665,762  
Short-term investment
    -       10,864  
Trade and other accounts receivable, less allowance of $486 and
               
$1,303, respectively
    292,585       121,577  
Inventories
    299,997       269,826  
Income taxes receivable
    -       10,546  
Other current assets
    177,892       235,990  
 Total current assets
    1,266,632       1,314,565  
                 
Property, plant and equipment, net
    3,158,282       2,344,770  
Intangible assets, net
    151,312       -  
Goodwill
    35,205       -  
Other noncurrent assets
    130,281       140,336  
 Total assets
  $ 4,741,712     $ 3,799,671  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities
               
Accounts payable, principally trade and bank overdrafts
  $ 198,377     $ 164,979  
Short-term debt
    3,469       23,531  
Payroll and employee benefits
    65,853       63,590  
Income taxes payable
    280       -  
Other current liabilities
    321,265       192,835  
Total current liabilities
    589,244       444,935  
Noncurrent liabilities
               
Long-term debt
    1,303,020       1,295,555  
Deferred income taxes
    259,366       209,230  
Pension obligation
    49,935       55,610  
Other noncurrent liabilities
    606,243       538,058  
 Total noncurrent liabilities
    2,218,564       2,098,453  
 Total liabilities
    2,807,808       2,543,388  
Shareholders’ equity
               
Capital stock
               
Preferred – authorized 20,000,000 shares without par value; none issued
    -       -  
Common – authorized 150,000,000 shares of $0.625 par value; issued
               
102,966,816 and 86,213,582 shares, respectively
    64,343       53,868  
Treasury stock, 861,439 shares at cost
    (31,822 )     -  
Additional capital
    1,331,844       568,995  
Retained earnings
    649,740       716,089  
Accumulated other comprehensive loss
    (80,201 )     (82,669 )
 Total shareholders’ equity
    1,933,904       1,256,283  
 Total liabilities and shareholders’ equity
  $ 4,741,712     $ 3,799,671  

See Notes to Condensed Consolidated Financial Statements
 
 
4

 
MASSEY ENERGY COMPANY
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(In Thousands)
 
UNAUDITED
 
   
Six Months Ended June 30,
 
   
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net (loss) income
  $ (55,088 )   $ 63,618  
Adjustments to reconcile Net (loss) income to Cash provided by
               
operating activities:
               
Depreciation, depletion and amortization
    151,159       140,280  
Impairment of Upper Big Branch assets
    62,208       -  
Share-based compensation expense
    4,777       6,474  
Amortization of bond discount
    10,120       9,515  
Deferred income taxes
    (44,306 )     5,870  
Gain on disposal of assets
    (2,622 )     (11,046 )
Gain on reserve exchange
    (5,879 )     -  
Net gains in fair value of derivative instruments
    (5,622 )     (25,034 )
Gain on insurance recovery
    (5,810 )     -  
Reserve on note receivable
    4,953       -  
Asset retirement obligations accretion
    8,806       7,016  
Gain on short-term investment
    (3,780 )     -  
Changes in operating assets and liabilities:
               
Increase in accounts receivable
    (122,001 )     (6,276 )
(Increase) decrease in inventories
    (18,229 )     7,906  
Decrease in other current assets
    49,490       16,928  
(Increase) decrease in other assets
    (8,359 )     7,787  
Increase (decrease)  in accounts payable and bank overdrafts
    8,614       (80,479 )
Increase in accrued income taxes
    12,565       7,961  
Increase (decrease) in other accrued liabilities
    98,098       (13,538 )
Increase in other noncurrent liabilities
    46,914       12,074  
Increase in pension obligation
    1,478       7,865  
Asset retirement obligations payments
    (2,395 )     (2,538 )
Cash provided by operating activities
    185,091       154,383  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Capital expenditures
    (164,876 )     (179,131 )
Purchase of acquired company, net of cash acquired
    (629,977 )     -  
Proceeds from redemption of Short-term investment
    14,644       24,262  
Proceeds from sale of assets
    2,672       15,113  
Proceeds from insurance recovery
    9,605       -  
Cash utilized by investing activities
    (767,932 )     (139,756 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Issuance of common stock
    466,707       -  
Repurchases of common stock
    (31,822 )     -  
Repayments of capital lease obligations
    (768 )     (1,812 )
Repayments of 6.625% senior notes
    (21,949 )     -  
Redemption of 4.75% convertible senior notes
    -       (70 )
Cash dividends paid
    (11,261 )     (10,185 )
Proceeds from stock options exercised
    11,705       -  
Income tax benefit from stock option exercises
    625       -  
Cash provided (utilized) by financing activities
    413,237       (12,067 )
                 
(Decrease) increase in cash and cash equivalents
    (169,604 )     2,560  
Cash and cash equivalents at beginning of period
    665,762       606,997  
                 
Cash and cash equivalents at end of period
  $ 496,158     $ 609,557  
See Notes to Condensed Consolidated Financial Statements
 
5

 
Notes to Condensed Consolidated Financial Statements

(1)   Significant Accounting Policies

Basis of Presentation

The Condensed Consolidated Financial Statements do not include footnotes and certain financial information normally presented annually under accounting principles generally accepted in the United States (“GAAP”) and, therefore, should be read in conjunction with the Annual Report on Form 10-K of Massey Energy Company (“we,” “our,” “us” or the “Company”) for the year ended December 31, 2009.  Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end.  The results of operations for the quarterly period ended June 30, 2010 are not necessarily indicative of results that can be expected for the fiscal year ending December 31, 2010.

The Condensed Consolidated Financial Statements included herein are unaudited; however, the financial statements contain all adjustments (consisting of normal recurring accruals), which, in our opinion, are necessary to present fairly our consolidated financial position at June 30, 2010, our consolidated results of operations for the three and six months ended June 30, 2010 and 2009, and cash flows for the six months ended June 30, 2010 and 2009, in conformity with GAAP.

The Condensed Consolidated Financial Statements include our accounts and the accounts of our wholly-owned and majority-owned direct and indirect subsidiaries.  Significant intercompany transactions and accounts are eliminated in consolidation.  We have no independent assets or operations.  We do not have a controlling interest in any separate independent operations.  Investments in business entities in which we do not have control, but have the ability to exercise significant influence over the operating and financial policies, are accounted for under the equity method.

All of our direct and substantially all of our indirect operating subsidiaries, each such subsidiary being indirectly 100% owned by us, fully and unconditionally, jointly and severally, guarantee our obligations under the 6.875% senior notes due 2013 (“6.875% Notes”), the 3.25% convertible senior notes due 2015 (“3.25% Notes”) and the 2.25% convertible senior notes due 2024 (“2.25% Notes”).  The subsidiaries not providing a guarantee of the 6.875% Notes, the 3.25% Notes and the 2.25% Notes are minor (as defined under Securities and Exchange Commission (“SEC”) Rule 3-10(h)(6) of Regulation S-X).  See Note 7 to the Notes to Condensed Consolidated Financial Statements for a more complete discussion of debt.

We have evaluated subsequent events through the date the Condensed Consolidated Financial Statements were issued.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net identifiable tangible and intangible assets of acquired companies.  Goodwill is not amortized; instead, it is tested for impairment annually or more frequently if indicators of impairment exist.  As a result of the acquisition of Cumberland Resources Corporation and certain affiliated companies (“Cumberland”) during the second quarter of 2010, we recorded Goodwill of $35.2 million in our Condensed Consolidated Balance Sheet as of June 30, 2010.  As purchase accounting is considered preliminary as of the date the Condensed Consolidated Financial Statements were issued the goodwill amount recorded may be adjusted.  We have not allocated goodwill to the appropriate reporting unit(s) for the purpose of impairment testing as of the date the Condensed Consolidated Financial Statements were issued. See Note 2 to the Notes to Condensed Consolidated Financial Statements for more information.

Asset Impairment and Disposal of Long-Lived Assets

Long-lived assets, such as property, equipment, mine development costs, owned and leased mineral rights longwall panel costs and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
 
6

 
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset.  If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset.  For the three months ended June 30, 2010, we recorded an impairment charge of $62.2 million, included in Depreciation, depletion and amortization applicable to Cost of produced coal revenue, in our Condensed Consolidated Statements of Income.  The impairment charge relates to long-lived assets deemed not to be recoverable at our Upper Big Branch mine (“UBB”).  See Note 5 to the Notes to Condensed Consolidated Financial Statements for more information.  No impairment charges were recorded for the three or six months ended June 30, 2009.

Insurance Recoveries

Insurance recoveries that are deemed to be probable and reasonably estimable are recognized to the extent of the related loss.  Insurance recoveries which result in gains, including recoveries under business interruption coverage, are recognized only when realized by settlement with the insurers.  The evaluation of insurance recoveries requires estimates and judgments about future results that affect reported amounts and certain disclosures. Actual results could differ from those estimates.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (the “FASB”) issued an accounting standard update, amending disclosure requirements related to Fair Value Measurements and Disclosures, as follows:

1.  
Significant transfers between Level 1 and 2 shall be disclosed separately, including the reasons for the transfers; and
2.  
Information about purchases, sales, issuances and settlements shall be disclosed separately in the reconciliation of activity in Level 3 fair value measurements.

This accounting standard update is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the reconciliation of activity in Level 3 fair value measurements, which are effective for interim and annual reporting periods beginning after December 15, 2010. The adoption of this accounting standard update did not have a material impact on our financial position or results of operations.  See Note 14 to the Notes to Condensed Consolidated Financial Statements for more information on our Fair Value Measurements and Disclosures.

In April 2010, the FASB issued an accounting standard update, amending disclosure requirements related to income taxes, as a result of the Patient Protection and Affordable Care Act (“PPACA”), which became law on March 23, 2010, and was subsequently amended on March 30, 2010.  Beginning in fiscal year 2014, the tax deduction available to us will be reduced to the extent our drug expenses are reimbursed under the Medicare Part D retiree drug subsidy program.  Because retiree health care liabilities and the related tax impacts are already reflected in our Condensed Consolidated Financial Statements, we are required to recognize the full accounting impact of this accounting standard update in the period in which the PPACA was signed into law.  The total non-cash charge to Income tax expense related to the reduction in the tax benefit is $2.6 million, recorded in the first quarter of 2010.

(2)           Acquisition of Cumberland Resources Corporation

On April 19, 2010, we completed the acquisition of Cumberland for a purchase price of $644.7 million in cash and 6,519,034 shares of our Common Stock.  Prior to the acquisition, Cumberland was one of the largest privately held coal producers in the United States.  The Cumberland operations include primarily underground coal mines in Southwestern Virginia and Eastern Kentucky.  We obtained an estimated 416 million tons of contiguous coal reserves, a preparation plant in Kentucky served by the CSX railroad and a preparation plant in Virginia served by the Norfolk Southern railroad.  We did not incur or assume any third-party debt as a result of the acquisition of Cumberland.  The acquisition of Cumberland increases our metallurgical coal reserves, strengthens our ability to globally market steam and metallurgical quality coal, and optimizes both operational best practices and working capital generation.
 
7

 
    The acquisition of Cumberland will be accounted for as a business combination.  The fair value of the total consideration transferred was $934.2 million.  The acquisition date fair value of each class of consideration transferred was as follows:
   
(In Thousands)
 
Fair value of Common Shares
  $ 289,511  
Cash
    644,730  
Total purchase price
  $ 934,241  


The fair value of Common Shares transferred was determined by using the closing price of our Common Stock on the day of the acquisition.

The purchase price was allocated to the assets acquired and liabilities assumed based on appraisals of estimated fair values.  Such estimates are preliminary as we have not yet received the final appraisal reports.  We expect to resolve the majority of these items in 2010.  The preliminary purchase price allocation was as follows:

(In Thousands)
 
Purchase Price Allocation
 
       
Cash and cash equivalents
  $ 14,753  
Trade and other accounts receivable
    52,802  
Inventories
    11,942  
Other current assets
    4,140  
Net Property, Plant and Equipment
    807,779  
Intangible assets, net
    168,461  
Goodwill
    35,205  
Other Noncurrent Assets
    529  
    Total assets     1,095,611  
         
Accounts payable, principally trade and bank overdrafts
    24,784  
Payroll and employee benefits
    8,648  
Other current liabilities
    24,731  
Deferred income taxes
    91,126  
Other noncurrent liabilities
    12,081  
    Total liabilities     161,370  
         
    Net assets acquired   $ 934,241  


As purchase accounting is considered preliminary as of the date the Condensed Consolidated Financial Statements were issued, the goodwill amount recorded may be adjusted.  We have not allocated goodwill to the appropriate reporting unit(s) for the purpose of impairment testing as of the date the Condensed Consolidated Financial Statements were issued.
 
8

 

The following unaudited pro forma information has been prepared for illustrative purposes only and assumes the acquisition occurred at the beginning of each of the periods being presented.  The unaudited pro forma results have been prepared based on estimates and assumptions that we believe are reasonable; however, they are not necessarily indicative of the consolidated results of operations had the acquisition occurred at the beginning of each of the periods presented, or of future results of operations.

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In Thousands, Except Per Share Amounts)
 
Total revenue
                       
As reported
  $ 810,148     $ 697,627     $ 1,498,787     $ 1,465,715  
Pro forma
  $ 843,676     $ 838,245     $ 1,702,166     $ 1,739,164  
                                 
Net (loss) income
                               
As reported
  $ (88,714 )   $ 20,192     $ (55,088 )   $ 63,618  
Pro forma
  $ (87,958 )   $ 21,782     $ (44,137 )   $ 65,169  
                                 
Net (loss) income per share - Basic
                               
As reported
  $ (0.88 )   $ 0.24     $ (0.59 )   $ 0.75  
Pro forma
  $ (0.86 )   $ 0.22     $ (0.43 )   $ 0.64  
                                 
Net (loss) income per share - Dilutive
                               
As reported
  $ (0.88 )   $ 0.24     $ (0.59 )   $ 0.75  
Pro forma
  $ (0.86 )   $ 0.21     $ (0.43 )   $ 0.64  
 
 
Total revenue and Income before taxes reported in the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2010 included Total revenue of $138.8 million and  Income before taxes of $15.9 million related to the former Cumberland entity.

(3)           Inventories

Inventories consisted of the following:

   
June 30, 2010
   
December 31, 2009
 
   
(In Thousands)
 
Saleable coal
  $ 210,309     $ 179,081  
Raw coal
    30,328       36,254  
     Coal inventory
    240,637       215,335  
Supplies inventory
    59,360       54,491  
     Total inventory
  $ 299,997     $ 269,826  

Saleable coal represents coal ready for sale, including inventories designated for customer facilities under consignment arrangements of $25.3 million and $43.7 million at June 30, 2010 and December 31, 2009, respectively.  Raw coal represents coal that generally requires further processing prior to shipment to the customer.

 
9

 
(4)           Other Current Assets

Other current assets are comprised of the following:
   
June 30, 2010
   
December 31, 2009
 
   
(In Thousands)
 
Longwall panel costs
  $ 7,381     $ 12,041  
Deposits
    89,532       133,794  
Other
    80,979       90,155  
     Total other current assets
  $ 177,892     $ 235,990  

During the second quarter of 2010 we impaired $5.1 million of current longwall panels costs deemed not to be recoverable at UBB due to an explosion which occurred in April 2010.  See Note 5 to the Notes to Condensed Consolidated Financial Statements for more information.

Deposits consist primarily of funds placed in restricted accounts with financial institutions to collateralize letters of credit that support workers’ compensation requirements, insurance and other obligations.  As of June 30, 2010 and December 31, 2009, Deposits includes $59.4 million and $46.0 million, respectively, of funds pledged as collateral to support $58.2 million and $45.1 million, respectively of outstanding letters of credit.  In addition, Deposits at June 30, 2010 and December 31, 2009, includes $10.9 and $12.1 million of United States Treasury securities supporting various regulatory obligations, respectively.  As of December 31, 2009, Deposits included a $72.0 million appeal bond we had been required to post related to litigation against us, which was released by the West Virginia Supreme Court of Appeals during the first quarter of 2010, as the final appeal of the case at the state level was resolved in our favor.  

We have committed to the divestiture of certain mining equipment assets which are not part of our short-term mining plan.  At June 30, 2010 and December 31, 2009, the carrying amount of assets held for sale totaled $18.9 million and $22.3 million, respectively, and are included in Other current assets.

(5)           Property, Plant and Equipment

Property, plant and equipment is comprised of the following:

   
June 30, 2010
   
December 31, 2009
 
   
(In Thousands)
 
Property, plant and equipment, at cost
  $ 5,450,285     $ 4,615,297  
Accumulated depreciation, depletion and amortization
    (2,292,003 )     (2,270,527 )
    Property, plant and equipment, net
  $ 3,158,282     $ 2,344,770  
 
During the second quarter of 2010, we recorded an impairment charge of $62.2 million, which is included in Depreciation, depletion and amortization applicable to Cost of produced coal revenue, in our Condensed Consolidated Statements of Income.  In accordance with relevant accounting requirements, Property, plant and equipment (which included mine development) and longwall panel costs located at UBB with a carrying amount of $34.0 million and $28.2 million (of which $5.1 million was considered current assets and $23.1 million noncurrent assets), respectively, was deemed to be destroyed or probable of abandonment.  Accordingly, the carrying value of the assets was completely written off.  For impairment tests, we compare the carrying value of the asset tested to its estimated fair value. The fair value is determined using the estimated discounted cash flows expected to be generated by the assets along with, where appropriate, market inputs.  The determination of fair value requires the use of significant judgment and estimates about assumptions that management believes are appropriate in the circumstances although it is reasonably possible that actual performance will differ from these assumptions.  There was approximately $14.9 million of assets at or near the UBB mine that was not impaired.  Specifically, related to these assets, our determination of recoverability was based on our assumptions about future operations at the UBB mine and possible alternatives to accessing the related coal reserves.  Given the ongoing investigations into the cause of the accident and the uncertainty around the future operations at the UBB mine, there is a reasonable possibility that additional impairments could be recorded in future periods.
 
 
10

 
Property, plant and equipment includes gross assets under capital leases of $12.9 million at both June 30, 2010 and December 31, 2009, respectively.
 
During the first and second quarters of 2010, we exchanged certain coal reserves to third parties, recognizing pre-tax gains of $2.3 million and $3.6 million, respectively, in Other revenue.

During the first quarter of 2009, we sold our interest in certain coal reserves to a third party, recognizing a pre-tax gain of $7.1 million in Other revenue.
 
(6)           Intangible assets

As part of the acquisition of Cumberland during the second quarter of 2010, we acquired Intangible assets with a fair value of $168.5 million.  Intangible assets are comprised of the following:

(In Thousands)
 
June 30, 2010
 
       
Coal sales contracts
  $ 98,310  
Transportation contracts
    61,700  
Mining permits
    8,451  
     Intangible assets, cost
    168,461  
Accumulated amortization
    (17,149 )
     Intangible assets, net
  $ 151,312  

Our Coal sales and Transportation contracts are amortized based on the actual amount of tons shipped under each contract.  Mining permits are amortized using the units-of-production method over the estimated proven and probable reserve tons.  For the three months ended June 30, 2010, we recorded $17.1 million in amortization expense related to the newly acquired Intangible assets.
 
    Estimated amortization expense for Intangible assets for the next five calendar years is as follows:
 
       Estimated  
       amortization  
 (In Thousands)      expense  
 2011    $  59,466  
 2012    $  8,374  
 2013    $  8,157  
 2014    $  7,926  
 2015    $  7,571  
 
 
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(7)           Debt

Debt is comprised of the following:

   
June 30, 2010
   
December 31, 2009
 
   
(In Thousands)
 
6.875% senior notes due 2013, net of discount
           
     of $2,912 and $3,273, respectively
  $ 757,088     $ 756,727  
3.25% convertible senior notes due 2015, net of discount
               
     of $122,869 and $132,628, respectively
    536,194       526,435  
6.625% senior notes due 2010
    -       21,949  
2.25% convertible senior notes due 2024
    9,647       9,647  
Capital lease obligations
    3,560       4,328  
          Total debt
    1,306,489       1,319,086  
Amounts due within one year
    (3,469 )     (23,531 )
          Total long-term debt
  $ 1,303,020     $ 1,295,555  
 
The weighted average effective interest rate of the outstanding borrowings was 7.3% at both June 30, 2010 and December 31, 2009, respectively.

Convertible Debt Securities

The discount associated with the 3.25% Notes is being amortized via the effective-interest method increasing the reported liability until the notes are carried at par value on their maturity date.  We recognized $4.8 million and $9.8 million of pre-tax non-cash interest expense for the amortization of the discount for the three and six months ended June 30, 2010, respectively.  We recognized $4.6 million and $9.1 million of pre-tax non-cash interest expense for the amortization of the discount for the three and six months ended June 30, 2009, respectively.

6.625% Notes

During January 2010, we redeemed at par the remaining $21.9 million of our 6.625% senior notes due 2010.

(8)
Pension Expense

Net periodic pension expense for both our qualified defined benefit pension plan and nonqualified supplemental benefit pension plan is comprised of the following components:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In Thousands)
 
Service cost
  $ 2,432     $ 2,972     $ 5,074     $ 5,354  
Interest cost
    4,527       4,293       8,971       8,465  
Expected return on plan assets
    (4,998 )     (4,154 )     (9,603 )     (8,180 )
Recognized loss
    3,660       4,428       7,151       8,666  
Amortization of prior service cost
    1       130       3       140  
Net periodic pension expense
  $ 5,622     $ 7,669     $ 11,596     $ 14,445  

During the three and six months ended June 30, 2010, we voluntarily contributed $5.0 million and $9.6 million, respectively, to the qualified defined benefit pension plan.  During the three and six months ended June 30, 2009, we contributed zero and $5.0 million, respectively, to the qualified defined benefit pension plan.  We expect to make voluntary contributions of approximately $20 million to the qualified defined benefit pension plan in 2010.

 
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We paid benefits to participants of the nonqualified supplemental benefit pension plan of $0.03 million and $0.01 million for the three months ended June 30, 2010 and 2009, respectively, and $0.05 million and $0.03 million for the six months ended June 30, 2010 and 2009, respectively.  
 
(9)           Other Noncurrent Liabilities

Other noncurrent liabilities is comprised of the following:
   
June 30, 2010
   
December 31, 2009
 
   
(In Thousands)
 
Reclamation
  $ 219,412     $ 193,361  
Workers' compensation and black lung
    125,462       98,227  
Other postretirement benefits
    161,483       155,024  
Other
    99,886       91,446  
     Total other noncurrent liabilities
  $ 606,243     $ 538,058  
 
Included in workers’ compensation is an accrual for supplemental compensation benefits of $12.1 million related to the UBB tragedy.  See Note 16 to the Notes to Condensed Consolidated Financial Statements for more information.

 
(10)             Black Lung and Workers’ Compensation Expense

Expenses for black lung benefits and workers’ compensation related benefits include the following components:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In Thousands)
 
Self-insured black lung benefits:
                       
Service cost
  $ 578     $ 1,145     $ 1,578     $ 1,845  
Interest cost
    880       686       1,655       1,436  
Amortization of actuarial gain
    (4,126 )     (1,263 )     (5,001 )     (2,288 )
Subtotal black lung benefits expense
    (2,668 )     568       (1,768 )     993  
Other workers' compensation and
                               
    supplemental compensation
    38,012       5,696       45,485       15,065  
Total black lung and workers'
                               
compensation benefits expense
  $ 35,344     $ 6,264     $ 43,717     $ 16,058  


During the three months ended June 30, 2010 we recorded expenses of $25.4 million for workers’ compensation and supplemental compensation benefits related to the UBB tragedy.  The workers’ compensation benefits are being measured and paid from our existing plan.  Both the workers’ compensation and supplemental compensation benefits were calculated using independent actuaries, who after review and consultation with management with regards to actuarial assumptions, including discount rate, prepared an evaluation of the self-insured liabilities as of June 30, 2010.  Actual experience in settling these liabilities could differ from these estimates.
 
Payments for benefits, premiums and other costs related to black lung, workers’ compensation and supplemental compensation benefit liabilities were $15.0 million and $5.7 million for the three months ended June 30, 2010 and 2009, respectively, and were $21.7 million and $17.6 million for the six months ended June 30, 2010 and 2009, respectively.

Certain of our operations are fully insured by a third-party insurance provider for black lung claims.

The PPACA amended previous legislation related to coal workers’ pneumoconiosis (black lung), providing automatic extensions of awarded lifetime benefits to surviving spouses and providing changes to the legal criteria
 
 
13

 
used to assess and award claims.  The impact of these changes to our current population of beneficiaries and claimants results in an estimated $3.6 million increase to our obligation.  As of June 30, 2010, we recorded this estimate as an increase to our black lung liability and a decrease to our actuarial gain included in “Accumulated other comprehensive loss” on our Condensed Consolidated Balance Sheets.  This increase to our obligation excludes the impact of the reevaluation of closed claims as we do not have sufficient information to determine what, if any, such claims will be filed. We will continue to evaluate the impact of these changes on such claims and record any necessary charges in the period in which the additional liability is estimable.  We do not believe the impact of these changes will significantly impact our financial position or results of operations.  

(11)           Other Postretirement Benefits Expense

Net periodic postretirement benefit cost includes the following components:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In Thousands)
 
Service cost
  $ 305     $ 920     $ 1,117     $ 1,957  
Interest cost
    2,384       2,491       4,762       5,009  
Recognized loss
    759       566       1,589       1,152  
Amortization of prior service credit
    (677 )     (188 )     (1,439 )     (376 )
Net periodic postretirement benefit cost
  $ 2,771     $ 3,789     $ 6,029     $ 7,742  

Payments for benefits related to postretirement benefit cost were $1.4 million and $1.8 million for the three months ended June 30, 2010 and 2009, respectively, and were $3.0 million and $3.3 million for the six months ended June 30, 2010 and 2009, respectively.

The PPACA may potentially impact our costs to provide healthcare benefits to our eligible active and certain retired employees.  The PPACA has both short-term and long-term implications on healthcare benefit plan standards.  Implementation of this legislation is planned to occur in phases, with plan standard changes taking effect beginning in 2010, but to a greater extent with the 2011 benefit plan year and extending through 2018.  Plan standard changes that could affect us in the short term include raising the maximum age for covered dependents to receive benefits, the elimination of lifetime dollar limits per covered individual and restrictions on annual dollar limits per covered individual, among other standard requirements.  Plan standard changes that could affect us in the long term include a tax on “high cost” plans (excise tax) and the elimination of annual dollar limits per covered individual, among other standard requirements.  We are currently analyzing this legislation to determine the full extent of the impact of the required plan standard changes on our employee healthcare plans and the resulting costs. Beginning in 2018, the PPACA will impose a 40% excise tax on employers to the extent that the value of their healthcare plan coverage exceeds certain dollar thresholds.  We anticipate that certain government agencies will provide additional regulations or interpretations concerning the application of this excise tax.  Until these regulations or interpretations are published, it is impractical to reasonably estimate the impact of the excise tax on our future healthcare costs or postretirement benefit obligation.  Accordingly, as of June 30, 2010, we have not made any changes to our assumptions used to determine our postretirement benefit obligation.  With the exception of the excise tax, we do not believe any other plan standard changes will be significant to our future healthcare costs for eligible active employees and our postretirement benefit obligation for certain retired employees. However, we will need to continue to evaluate the impact of the PPACA in future periods as additional information and guidance becomes available.

(12)           Earnings Per Share

The number of shares of our Common Stock used to calculate basic earnings per share for the three months ended June 30, 2010 and 2009, is based on the weighted average of outstanding shares of Common Stock during the respective periods.  The number of shares of Common Stock used to calculate diluted earnings per share is based on the number of shares of Common Stock used to calculate basic earnings per share plus the dilutive effect of stock options and other stock-based instruments held by our employees and directors during each period and debt
 
 
14

 
securities currently convertible into shares of Common Stock during each period.  The effect of dilutive securities issuances in the amount of 2.1 million and 2.3 million shares of Common Stock for the three and six months ended June 30, 2010, respectively, and 2.7 million and 3.0 million shares of Common Stock for the three and six months ended June 30, 2009, respectively, were excluded from the calculation of diluted (loss) income per share of Common Stock, as such inclusion would result in antidilution.
 
The computations for basic and diluted (loss) income per share are based on the following per share information:

   
Three Months Ended
     
Six Months Ended
 
   
June 30,
     
June 30,
 
   
2010
   
2009
     
2010
   
2009
 
      (In Thousands, Except Per Share Amounts)  
Numerator:
                         
Net (loss) income - numerator for basic
  $ (88,714 )   $ 20,192       $ (55,088 )   $ 63,618  
Effect of convertible notes
    -       43         -       87  
Adjusted net (loss) income - numerator
                                 
  for diluted
  $ (88,714 )   $ 20,235       $ (55,088 )   $ 63,705  
                                   
Denominator:
                                 
Weighted average shares - denominator
                                 
 for basic
    100,664       84,872         93,400       84,865  
Effect of stock options/restricted stock
    -       109         -       71  
Effect of convertible notes
    -       289         -       290  
Adjusted weighted average
                                 
  shares - denominator for diluted
    100,664       85,270         93,400       85,226  
                                   
Net (loss) income per share:
                                 
Basic
  $ (0.88 )   $ 0.24       $ (0.59 )   $ 0.75  
Diluted
  $ (0.88 )   $ 0.24       $ (0.59 )   $ 0.75  


The 2.25% Notes are convertible by holders into shares of Common Stock during certain periods under certain circumstances.  The 2.25% Notes were not eligible for conversion at June 30, 2010.  If all of the 2.25% Notes outstanding at June 30, 2010 had been eligible for conversion and were converted at that date, we would have issued 287,113 shares of Common Stock.

The 3.25% Notes are convertible under certain circumstances and during certain periods into (i) cash, up to the aggregate principal amount of the 3.25% Notes subject to conversion and (ii) cash, Common Stock or a combination thereof, at our election in respect to the remainder (if any) of our conversion obligation.  As of June 30, 2010, the 3.25% Notes had not reached the specified threshold for conversion.

 (13)           Derivative Instruments

Upon entering into each coal sales and coal purchase contract, we evaluate each of our contracts to determine if they qualify for the normal purchase normal sale (“NPNS”) exception prescribed by current accounting guidance.  We use coal purchase contracts to supplement our produced and processed coal in order to provide coal to meet customer requirements under sales contracts.  We are exposed to certain risks related to coal price volatility.  The purchases and sales contracts we enter into allow us to mitigate a portion of the underlying risk associated with coal price volatility.  The majority of our contracts qualify for the NPNS exception and therefore are not accounted for at fair value.  For those contracts that do not qualify for the NPNS exception at inception or lose their designation at some point during the duration of the contract, the contracts are required to be accounted for as derivative instruments and must be recognized as assets or liabilities and measured at fair value.  Those contracts that do not qualify for the NPNS exception have not been designated as cash flow or fair value hedges and, accordingly, the net change in fair value is recorded in current period earnings.  Our coal sales and coal purchase contracts that do not
 
 
15

 
qualify for the NPNS exception as prescribed by current accounting guidance are offset on a counterparty-by-counterparty basis for derivative instruments executed with the same counterparty under a master netting arrangement.
Tons outstanding under coal purchase and coal sales contracts that do not qualify for the NPNS exception are as follows:
   
June 30,
   
December 31,
 
   
2010
   
2009
 
   
(In Thousands)
 
Purchase contracts
    1,050       980  
Sales contracts 
    2,107       1,120  
 
The increase in tons outstanding under coal purchase and coal sales contracts that do not qualify for the NPNS exception as of June 30, 2010, is primarily due to certain contracts identified in 2010 that no longer qualified for the NPNS exception, which are now accounted for at fair value.

The fair values of our purchase and sales derivative contracts have been aggregated in the Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009, as follows:
 
   
June 30,
   
December 31,
 
   
2010
   
2009
 
   
(In Thousands)
 
Other current assets
  $ 27,133     $ 30,564  
Other noncurrent assets
    8,725       -  
Total aggregated derivative balance
  $ 35,858     $ 30,564  
 
We have recorded net gains related to coal sales and purchase contracts that did not qualify for the NPNS exception in the Condensed Consolidated Statements of Income under the caption Loss (Gain) on derivative instruments.
 
   
For the three months ended
 
   
June 30,
 
   
2010
   
2009
 
   
(In Thousands)
 
Realized (gains) losses due to settlements on existing contracts
  $ (10,274 )   $ 3,971  
Unrealized losses (gains) on outstanding contracts
    22,723       (4,348 )
Loss (Gain) on derivative instruments
  $ 12,449     $ (377 )
                 
                 
   
For the six months ended
 
   
June 30,
 
      2010       2009  
   
(In Thousands)
 
Realized (gains) losses due to settlements on existing contracts
  $ (18,710 )   $ 15,792  
Unrealized gains on outstanding contracts
    (5,294 )     (25,036 )
Loss (Gain) on derivative instruments
  $ (24,004 )   $ (9,244 )


(14)           Fair Value

Financial and non-financial assets and liabilities that are required to be measured at fair value must be categorized based upon the levels of judgment associated with the inputs used to measure their fair value. 
 
 
16

 
Hierarchical levels – directly related to the amount of subjectivity associated with the inputs used to determine the fair value of financial assets and liabilities – are as follows:

 
Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
 
 
Level 2 – Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the assets or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
 
 
Level 3 – Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.  Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Each major category of financial assets and liabilities measured at fair value on a recurring basis are categorized in the tables below based upon the lowest level of significant input to the valuations.
   
June 30, 2010
 
   
(In Thousands)
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Fixed income securities
                       
U.S. Treasury securities
  $ 10,868     $ -     $ -     $ 10,868  
Certificates of Deposit
    50,008       -       -       50,008  
Money market funds
                               
U.S. Treasury money market fund
    24,105       -       -       24,105  
Other money market funds
    432,362       -       -       432,362  
Derivative instruments
    -       35,858       -       35,858  
Total securities
  $ 517,343     $ 35,858     $ -     $ 553,201  
                                 
                                 
   
December 31, 2009
 
   
(In Thousands)
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Fixed income securities
                               
U.S. Treasury securities
  $ 12,147     $ -     $ -     $ 12,147  
Money market funds
                               
U.S. Treasury money market fund
    74,103       -       -       74,103  
Other money market funds
    689,470       -       -       689,470  
Derivative instruments
    -       30,564       -       30,564  
Short-term investment
    -       -       10,864       10,864  
Total securities
  $ 775,720     $ 30,564     $ 10,864     $ 817,148  


Fixed income securities and money market funds

All fixed income securities are deposits, consisting of obligations of the U.S. Treasury and Certificates of Deposit (all insured by the Federal Deposit Insurance Corporation), supporting various regulatory obligations.  All investments in money market funds are cash equivalents or deposits pledged as collateral and are invested in prime money market funds and Treasury-backed funds.  Included in the money market funds are $59.4 million of funds pledged as collateral to support $58.2 million of outstanding letters of credit.  See Note 4 to the Notes to Condensed Consolidated Financial Statements for more information on deposits.

Derivative Instruments

Certain of our coal sales and coal purchase contracts that do not qualify for the NPNS exception at inception or lose their designation at some point during the life of the contract are accounted for as derivative instruments and are required to be recognized as assets or liabilities and measured at fair value.  To establish fair values for these
 
 
17

 
contracts, we use bid/ask price quotations obtained from independent third-party brokers. We also consider the risk of nonperformance of or nonpayment by the counterparties when determining the fair values for these contracts by evaluating the credit quality and financial condition of each counterparty.  We could experience difficulty in valuing our derivative instruments if the number of third-party brokers should decrease or market liquidity is reduced.  See Note 12 to the Notes to Condensed Consolidated Financial Statements for more information.

Asset and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, for example, when there is evidence of impairment.  In accordance with relevant accounting requirements, Property, plant and equipment (which included mine development) and longwall panel costs located at UBB with a carrying amount of $34.0 million and $28.2 million (of which $5.1 million was considered current assets and $23.1 million noncurrent assets), respectively, was deemed to be destroyed or probable of abandonment.  Accordingly, the carrying value of the assets was completely written off.  For impairment tests, we compare the carrying value of the asset tested to its estimated fair value. The fair value is determined using the estimated discounted cash flows expected to be generated by the assets along with, where appropriate, market inputs.  Given the assets were deemed to be destroyed or probable of abandonment, the fair value was estimated to be $0.  The determination of fair value was based on our assumptions about future operations at the UBB mine and possible alternatives to accessing the related coal reserves.  Given the ongoing investigations into the cause of the accident and the uncertainty around the future operations at the UBB mine, there is a reasonable possibility that additional impairments could be recorded in future periods.
 
Short-Term Investment

Short-term investment at December 31, 2009 was comprised of an investment in the Reserve Primary Fund (“Primary Fund”), a money market fund that suspended redemptions and is being liquidated.  We determined that our investment in the Primary Fund as of December 31, 2009, no longer met the definition of a security, within the scope of current accounting guidance, since the equity investment no longer had a readily determinable fair value.  Therefore, the investment was classified as a short-term investment, subject to the cost method of accounting, on our Condensed Consolidated Balance Sheet.

Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3):
   
Short-term
 
(In Thousands)
 
investment
 
       
Balance at December 31, 2009
  $ 10,864  
Transfers out of Level 3
    (14,644 )
Total gains or (losses) realized/unrealized included in earnings
    3,780  
Purchases, issuances, sales and settlements
    -  
Balance at June 30, 2010
  $ -  
         
Total gains or (losses) for the period included in earnings attributable to the change
       
in unrealized gains or losses relating to assets still held at the reporting date
  $ -  
 
 
At December 31, 2009, our investment in the Primary Fund was $10.9 million, net of a $6.5 million write-down recorded in 2008, which represents the difference between cost and estimated fair value.  During January 2010, we received a distribution in the amount of $14.6 million. We recorded a $3.8 million gain on short-term investments which represents the difference between book value and total redemptions received.  As of June 30, 2010, the estimated fair value of our unrecovered investment of $2.7 million in the Primary Fund was zero.  In July 2010, we recovered $0.9 million.

 
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Other Financial Instruments

The following methods and assumptions were used to estimate the fair value of those financial instruments that are not required to be carried at fair value within our Condensed Consolidated Balance Sheets:

Short-term debt: The carrying amount reported in the Condensed Consolidated Balance Sheets for short-term debt approximates its fair value due to the short-term maturity of these instruments.

Long-term debt: The fair values of long-term debt are estimated using the most recent market prices quoted on or before June 30, 2010.

The carrying amounts and fair values of these financial instruments are presented in the table below.  The carrying value of the 3.25% Notes reflected in Long-term debt in the table below reflects the full face amount of $659 million, which is reflected net of discount in the Condensed Consolidated Balance Sheets.

   
June 30, 2010
   
 December 31, 2009
 
   
Carrying Value
   
Fair Value
   
Carrying Value
   
Fair Value
 
   
(In Thousands)
 
Short-term debt
  $ 3,469     $ 3,469     $ 23,531     $ 23,465  
Long-term debt
  $ 1,428,710     $ 1,325,149     $ 1,428,710     $ 1,348,699  
 
(15)           Common Stock

Common Stock Issuance

On March 23, 2010, we completed a registered underwritten public offering of 9,775,000 shares of our Common Stock at a public offering price of $49.75 per share, resulting in proceeds to us of $466.8 million, net of fees.  In April 2010, we used the net proceeds of this offering and 6,519,034 shares of our Common Stock (fair valued at $289.5 million on the day of the acquisition) to fund a portion of the consideration for the acquisition of Cumberland.  See Note 2 to the Notes to Condensed Consolidated Financial Statements for a more complete discussion of the acquisition of Cumberland.

Common Stock Repurchases

During the second quarter of 2010, we repurchased 861,439 shares of Common Stock at an average price of $36.92, for a total cost of $31.8 million.  The Common Stock was repurchased under a stock repurchase program (the “Repurchase Program”) authorized by our Board of Directors on November 14, 2005, authorizing us to repurchase shares of our Common Stock from time to time up to an aggregate amount not to exceed $500 million, as market conditions warrant and existing covenants permit.  Prior to the share repurchased this quarter, we had $420 million available under the 2005 authorization.  All shares repurchased under the program have been recorded as Treasury stock in the Condensed Consolidated Balance Sheet.

(16)           Contingencies

West Virginia Flooding

Since August 2004, five of our subsidiaries have been sued in six civil actions filed in the Circuit Courts of Boone, McDowell, Mingo, Raleigh, Summers and Wyoming Counties, West Virginia, for alleged property damages and personal injuries arising out of flooding on or about May 2, 2002.  These complaints cover approximately 350 plaintiffs seeking unquantified compensatory and punitive damages from approximately 35 defendants.  Of these cases two have been dismissed without prejudice for failure to prosecute and one settled for a nominal amount.  The other three cases remain active.

Since May 2006, we and 12 of our subsidiaries have been sued in three civil actions filed in the Circuit Courts of Logan and Mingo Counties, West Virginia, for alleged property damages and personal injuries arising out of
 
 
19

 
flooding between May 30 and June 4, 2004.  As to the Massey-related entities named, four have been dismissed without prejudice from one of the Logan County cases. These complaints cover approximately 425 plaintiffs seeking unquantified compensatory and punitive damages from approximately 52 defendants.

We believe the remaining cases that have not been settled will be resolved without a material adverse impact on our cash flows, results of operations or financial condition.

West Virginia Trucking

Since January 2003, an advocacy group and residents in Boone, Kanawha, Mingo and Raleigh Counties, West Virginia, filed 17 suits in the Circuit Courts of Kanawha and Mingo Counties, West Virginia, against 12 of our subsidiaries.  Plaintiffs alleged that defendants illegally transported coal in overloaded trucks, causing damage to state roads, thereby interfering with plaintiffs’ use and enjoyment of their properties and their right to use the public roads. Plaintiffs seek injunctive relief and compensatory and punitive damages.  The Supreme Court of Appeals of West Virginia (“WV Supreme Court”) referred the consolidated lawsuits, and similar lawsuits against other coal and transportation companies not involving our subsidiaries, to the Circuit Court of Lincoln County, West Virginia (“Circuit Court”), to be handled by a mass litigation panel judge. Plaintiffs filed motions requesting class certification. On June 7, 2007, plaintiffs voluntarily dismissed their public nuisance claims seeking monetary damages for road and bridge repairs.  Plaintiffs also agreed to an order limiting any damages for nuisance to two years prior to the filing of any suit.  A motion to dismiss any remaining public nuisance claims was resisted by plaintiffs and argued at hearings on December 14, 2007 and June 25, 2008.  No rulings on these matters have been made.  Defendants filed a motion requesting that the mass litigation panel judge recommend to the WV Supreme Court that the cases be sent back to the circuit courts of origin for resolution.  That motion was verbally denied as to those cases in which our subsidiaries are defendants, and a class certification hearing was held on October 21, 2009.  To date, no decision has been rendered by the Circuit Court on the class certification issues.  No date has been set for trial.  We believe we have insurance coverage applicable to these items and that they will be resolved without a material adverse impact on our cash flows, results of operations or financial condition.

Well Water Suits

Since September 2004, approximately 738 plaintiffs have filed approximately 400 suits against us and our subsidiary, Rawl Sales & Processing Co., in the Circuit Court of Mingo County, West Virginia (“Mingo Court”), for alleged property damage and personal injuries arising out of slurry injection and impoundment practices allegedly contaminating plaintiffs’ water wells. Plaintiffs seek injunctive relief and compensatory damages in excess of $170 million and unquantified punitive damages.  Specifically, plaintiffs are claiming that defendants’ activities during the period of 1978 through 1987 rendered their property valueless and request monetary damages to pay, inter alia, the value of their property and future water bills.  In addition, many plaintiffs are also claiming that their exposure to the contaminated well water caused neurological injury or physical injury, including cancers, kidney problems and gall stones.  Finally, all plaintiffs claimed entitlement to medical monitoring for the next 30 years and have requested unliquidated compensatory damages for pain and suffering, annoyance and inconvenience and legal fees.  On April 30, 2009, the Mingo Court held a mandatory settlement conference. At that settlement conference, all plaintiffs agreed to settle and dismiss their medical monitoring claims.  Additionally, 180 plaintiffs agreed to settle all of their remaining claims and be dismissed from the case.  Currently pending is a motion  to dismiss the claims of an additional 179 plaintiffs who did not attend the mandatory settlement conference.  All settlements to date will be funded by insurance proceeds.  Notwithstanding the earlier agreement to settle the medical monitoring claims, some plaintiffs are challenging the medical monitoring settlement.  A motion to enforce the medical monitoring settlement has been filed.  No ruling has been made.  There are currently 593 plaintiffs remaining.  As a result of the disqualification of Judge Thornsbury, on account of having been engaged as a lawyer in the 1980s on a matter on behalf of a Massey subsidiary adverse to one of the plaintiffs, the WV Supreme Court reassigned all the cases to Judge Thomas Evans.  Judge Evans requested the WV Supreme Court refer the cases to the statutory mass litigation panel for further proceedings.  The WV Supreme Court ordered all the cases to be transferred to the mass litigation panel.  No trial date has been set, nor has the mass litigation panel issued any orders as to how the cases will be resolved. A status conference is scheduled for August 20, 2010.

Beginning in December 2008, we and certain of our subsidiaries along with several other companies were sued in numerous actions in Boone County, West Virginia involving approximately 366 plaintiffs alleging well
 
 
20

 
water contamination resulting from coal mining operations.  The claims mirror those made above in the separate action before the Mingo Court.  The separate civil actions have been consolidated for discovery purposes with trial for 267 plaintiffs schedule for May 2, 2011.  No trial date is set for the remaining approximately 99 plaintiffs.

We do not believe there was any contamination caused by our activities or that plaintiffs suffered any damage and, therefore, we do not believe we have a probable loss related to this matter.  We plan to vigorously contest these claims.  We believe that we have insurance coverage applicable to these matters and have initiated litigation against our insurers to establish that coverage.  At this time, we believe that the litigation by the plaintiffs will be resolved without a material adverse impact on our cash flows, results of operations or financial condition.

Surface Mining Fills

Since September 2005, three environmental groups sued the United States Army Corps of Engineers (“Corps”) in the United States District Court for the Southern District of West Virginia (the “District Court”), asserting the Corps unlawfully issued permits to four of our surface mines to construct mining fills. The suit alleges the Corps failed to comply with the requirements of both Section 404 of the Clean Water Act and the National Environmental Policy Act, including preparing environmental impact statements for individual permits. We intervened in the suit to protect our interests. On March 23, 2007, the District Court rescinded four of our subsidiaries’ permits, resulting in the temporary suspension of mining at these surface mines. We appealed that ruling to the United States Court of Appeals for the Fourth Circuit (the “Fourth Circuit Court”). On April 17, 2007, the District Court partially stayed its ruling, permitting mining to resume in certain fills that were already under construction. On June 14, 2007, the District Court issued an additional ruling, finding the Corps improperly approved placement of sediment ponds in streams below fills on the four permits in question.  The District Court subsequently modified its ruling to allow these ponds to remain in place, as the ponds and fills have already been constructed.  The District Court’s ruling could impact the issuance of permits for the placement of sediment ponds for future operations. If the permits for the fills or sediment ponds are ultimately held to be unlawfully issued, production could be affected at these surface mines, and the process of obtaining new Corps permits for all surface mines could become more difficult. We appealed both rulings to the Fourth Circuit Court.  On February 13, 2009, the Fourth Circuit Court reversed the prior rulings of the District Court and remanded the matter for further proceedings. On March 30, 2009, the plaintiffs requested that the Fourth Circuit Court reconsider the case.  The request was denied on May 20, 2009. On August 26, 2009, the plaintiffs filed their request with the U.S. Supreme Court to review the Fourth Circuit Court’s decision.  Our subsidiaries’ response was due on August 5, 2010. However, on August 3, 2010, the plaintiffs moved to withdraw their petition in the wake of a new policy adopted by the Corps and the Environmental Protection Agency on July 30, 2010 for assessing “stream ecosystem structure and function” for Appalachian surface coal mining. The motion to withdraw the petition for certiorari will likely be granted, thereby finalizing the Fourth Circuit Court’s decision. However, the new stream ecosystem policy will likely require more data in future applications to the Corps and could cause the Corps to require more onerous mitigation requirements as compensation for filling activities at our Appalachian  surface mines.

Customer Disputes

We have customers who claim they did not receive, or did not timely receive, all of the coal required to be shipped to them during 2008 (“unshipped tons”). In such cases, it is typical for a customer and coal producer to agree upon a schedule for shipping unshipped tons in subsequent years.  A few of our customers, however, filed claims or notified us of potential claims for cover damages, which damages are equal to the difference between the contract price of the coal that was not delivered and the market price of replacement coal or comparable quality coal. We resolved a number of these claims in 2009 and 2010, while discussions with other customers remain ongoing.

We believe we have strong defenses to the remaining claims for cover damages.  In many cases, there was untimely or insufficient delivery of railcars by the rail carrier or the customer.  In other cases, factors beyond our control caused production or shipment problems.  Additionally, we believe that certain customers previously agreed to accept unshipped tons in subsequent years.  We believe that all of these factors, and other factors, provide defenses to claims or potential claims for unshipped tons.

Separately, we are currently in litigation with one customer regarding whether or not binding contracts for the sale of coal were reached.  We maintain that this customer improperly terminated a signed, higher-priced contract;
 
 
21

 
the customer argues that it was only required to purchase coal under a purported agreement reached by email. On February 12, 2010, we received a decision from an arbitration panel awarding this customer $10.5 million on the grounds that the purported agreement by email was valid and that the higher-priced contract was invalid.  We believed that the arbitration panel’s decision as to the validity of the higher-priced contract was beyond the panel’s jurisdiction of the award, which amounts to $8.2 million, and challenged that decision in federal court.  On June 2, 2010, the federal court rejected our challenge.  We are appealing this matter to the United States Court of Appeals for the Fourth Circuit.  While we will vigorously pursue this appeal, we now consider this loss as probable and we have accrued the remainder of the judgment in Other current liabilities at June 30, 2010.  We have paid $2.3 million for the award relating to the panels’ decision that the agreement by email was valid, but have not yet paid the portion of the award under appeal.

We believe that we have strong defenses to the other claims and potential claims and further feel that many or all of these claims may be resolved without trial. We have recorded an accrual for our best estimate of probable losses related to these matters. While we believe that all of these matters discussed above will be resolved without a material adverse impact on our cash flows, results of operations or financial condition, it is reasonably possible that our judgments regarding some or all of these matters could change in the near term. We believe the aggregate exposure related to these claims in excess of our accrual is up to $50 million of charges that would affect our future operating results and financial position.

Spartan Unfair Labor Practice Matter & Related Age Discrimination Class Action

In 2005, the United Mine Workers of America (“UMWA”) filed an unfair labor practice charge with the National Labor Relations Board (“NLRB”) alleging that one of our subsidiaries, Spartan Mining Company (“Spartan”), discriminated on the basis of anti-union animus in its employment offers.  The NLRB issued a complaint and an NLRB Administrative Law Judge (“ALJ”) issued a recommended decision making detailed findings that Spartan committed a number of unfair labor practice violations and awarding, among other relief, back pay damages to union discriminatees.  On September 30, 2009, the NLRB upheld the ALJ’s recommended decision.  Spartan has appealed the NLRB’s decision to the United States Court of Appeals for the Fourth Circuit. We have no insurance coverage applicable to this unfair labor practice matter; however, its resolution is not expected to have a material impact on our cash flows, results of operations or financial condition.

Upper Big Branch Mine
 
On April 5, 2010, an explosion occurred at UBB of our Performance resource group, tragically resulting in the deaths of 29 miners and seriously injuring two others.  The Federal Mine Safety and Health Administration (“MSHA”) and the State of West Virginia have undertaken a joint investigation into the cause of the explosion.  We also have commenced our own investigation.  We believe these investigations will continue for the foreseeable future, and we cannot provide any assurance as to their outcome, including whether we become subject to possible civil penalties or enforcement actions.  In order to accommodate these investigations, the mine will be closed for an extended period of time, the length of which we cannot predict at this time.  It is also possible that we may decide or be required by regulators to permanently close this mine.  We self-insure our underground mining equipment, including longwalls.  We do not currently carry business interruption insurance for the UBB mine.  We have third-party general liability insurance coverage that applies to litigation risk, which coverage we believe applies to litigation stemming from the UBB tragedy.

While updated analyses will continue in future quarters, we have recorded our best estimate of probable losses related to this matter.  The most significant components of these losses related to: the benefits being provided to the families of the fallen miners (see Note 10 to the Notes to Condensed Consolidated Financial Statements for more information about the significant benefits provided), costs associated with the rescue and recovery efforts, possible legal and other contingencies, and asset impairment charges (see Note 5 to the Notes to Condensed Consolidated Financial Statements for more information).  We have recorded an $87 million liability in Other accrued liabilities at June 30, 2010, which represents our best estimate of the probable loss related to estimated litigation settlements associated with the UBB tragedy.  To date, two wrongful death suits have been filed against us.  Insurance recoveries related to our general liability insurance policy that are deemed probable and that are reasonably estimable have been recognized in the Condensed Consolidated Statements of Income to the extent of the related
 
 
22

 
losses, less applicable deductibles.  Such recognized recoveries for litigation settlements associated with the UBB tragedy totaled $82 million and are included in Trade and other accounts receivable at June 30, 2010.

Given the uncertainty of the outcome of current investigations, including whether we become subject to possible civil penalties or enforcement actions, it is possible that the total costs incurred related to this tragedy could exceed our current estimates.  As of June 30, 2010, we believe that the reasonably possible aggregate loss related to these claims in excess of amounts currently recorded cannot be estimated.  It is possible, however, that the ultimate liabilities in the future with respect to these claims, in the aggregate, may be material.  We will continue to review the amount of any necessary accruals, potential asset impairments, or other related expenses and record the charges in the period in which the determination is made and an adjustment is required.

Following the UBB tragedy, several stockholder derivative suit proceedings have been filed naming us as a nominal defendant.  Each of the current and certain former members of the Board of Directors and certain of our officers have also been named as defendants (the “Defendants”).  A contempt proceeding has also been filed relating to a previously settled stockholder derivative suit.  In addition, two putative class actions have been filed on behalf of certain of our stockholders alleging disclosure violations of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  We and the Defendants have insurance coverage applicable to these proceedings.  While we cannot predict the outcome of any of these proceedings (which are discussed in further detail in Part II Item 1. Legal Proceedings of this Quarterly Report on Form 10-Q), based on our current assessment of these matters, we do not believe that liabilities arising from these proceedings individually or in the aggregate should have a material adverse impact upon our consolidated cash flows, results of operations or financial condition.
 
Other Legal Proceedings

We are parties to a number of other legal proceedings, incident to our normal business activities.  These include, for example, contract disputes, personal injury claims, property damage claims and employment and safety matters. While we cannot predict the outcome of any of these proceedings, based on our current estimates we do not believe that any liability arising from these matters individually or in the aggregate should have a material adverse impact upon our consolidated cash flows, results of operations or financial condition.  It is possible, however, that the ultimate liabilities in the future with respect to these lawsuits and claims, in the aggregate, may be materially adverse to our cash flows, results of operations or financial condition.

 

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

The following discussion and analysis is provided to increase understanding of, and should be read in conjunction with, the Condensed Consolidated Financial Statements and accompanying notes included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2009.

Forward-Looking Information

From time to time, we make certain comments and disclosures in reports, including this report, or through statements made by our officers that may be forward-looking in nature.  Examples include statements related to our future outlook, anticipated capital expenditures, projected cash flows and borrowings and sources of funding.  We caution readers that forward-looking statements, including disclosures that use words such as “target,” “goal,” “objective,” “believe,” “anticipate,” “expect,” “estimate,” “intend,” “may,” “plan,” “project,” “will” and similar words or statements are subject to certain risks, trends and uncertainties that could cause actual cash flows, results of operations, financial condition, cost reductions, acquisitions, dispositions, financing transactions, operations, expansion, consolidation and other events to differ materially from the expectations expressed or implied in such forward-looking statements.  Any forward-looking statements are also subject to a number of assumptions regarding, among other things, future economic, competitive and market conditions.  These assumptions are based on facts and conditions, as they exist at the time such statements are made as well as predictions as to future facts and conditions, the accurate prediction of which may be difficult and involve the assessment of circumstances and events beyond our control.  We disclaim any intent or obligation to update these forward-looking statements unless required by securities law, and we caution the reader not to rely on them unduly.

We have based any forward-looking statements we have made on our current expectations and assumptions about future events and circumstances that are subject to risks, uncertainties and contingencies that could cause results to differ materially from those discussed in the forward-looking statements, including, but not limited to:

 
(i)
our cash flows, results of operations or financial condition;
 
 
(ii)
the impact of the Upper Big Branch mine tragedy;
 
 
(iii)
the successful completion of acquisition, disposition or financing transactions and the effect thereof on our business;
 
 
(iv)
our ability to successfully integrate the operations we acquire, including as a result of the Cumberland acquisition;
 
 
(v)
governmental policies, laws, regulatory actions and court decisions affecting the coal industry or our customers’ coal usage;
 
 
(vi)
legal and administrative proceedings, settlements, investigations and claims and the availability of insurance coverage related thereto;
 
 
(vii)
inherent risks of coal mining beyond our control, including weather and geologic conditions or catastrophic weather-related damage;
 
 
(viii)
inherent complexities make it more difficult and costly to mine in Central Appalachia than in other parts of the United States;
 
 
(ix)
our production capabilities to meet market expectations and customer requirements;
 
 
(x)
our ability to obtain coal from brokerage sources or contract miners in accordance with their contracts;
 
 
(xi)
our ability to obtain and renew permits necessary for our existing and planned operations in a timely manner;
 
 
(xii)
the cost and availability of transportation for our produced coal;
 
 
(xiii)
our ability to expand our mining capacity;
 
 
(xiv)
our ability to manage production costs, including labor costs;
 
 
(xv)
adjustments made in price, volume or terms to existing coal supply agreements;
 
 
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(xvi)
the worldwide market demand for coal, electricity and steel;

 
(xvii)
environmental concerns related to coal mining and combustion and the cost and perceived benefits of alternative sources of energy such as natural gas and nuclear energy;
 
 
(xviii)
competition among coal and other energy producers, in the United States and internationally;
 
 
(xix)
our ability to timely obtain necessary supplies and equipment;
 
 
(xx)
our reliance upon and relationships with our customers and suppliers;
 
 
(xxi)
the creditworthiness of our customers and suppliers;
 
 
(xxii)
our ability to attract, train and retain a skilled workforce to meet replacement or expansion needs;
 
 
(xxiii)
our assumptions and projections concerning economically recoverable coal reserve estimates;
 
 
(xxiv)
our failure to enter into anticipated new contracts;
 
 
(xxv)
future economic or capital market conditions;
 
 
(xxvi)
foreign currency fluctuations;
 
 
(xxvii)
the availability and costs of credit, surety bonds and letters of credit that we require;
 
 
(xxviii)
the lack of insurance against all potential operating risks;
 
 
(xxix)
our assumptions and projections regarding pension and other post-retirement benefit liabilities;
 
 
(xxx)
our interpretation and application of accounting literature related to mining specific issues; and
 
 
(xxxi)
the successful implementation of our strategic plans and objectives for future operations and expansion or consolidation.

We are including this cautionary statement in this Quarterly Report on Form 10-Q to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf, of us.  Any forward-looking statements should be considered in context with the various disclosures made by us about our businesses in our public filings with the SEC, including without limitation the risk factors more specifically described in Part II Item 1A.  Risk Factors of this Quarterly Report on Form 10-Q and in Part I Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2009.

Available Information

We file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information with the SEC.  Our SEC filings are available to the public over the Internet at the SEC’s website at www.sec.gov.  You may also read and copy any document we file at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549.  Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.  We make available, free of charge through our Internet website, www.masseyenergyco.com (which website is not incorporated by reference into this report), our annual report, quarterly reports, current reports, proxy statements, section 16 reports and other information (and any amendments thereto) as soon as practicable after filing or furnishing the material to the SEC, in addition to our Corporate Governance Guidelines, codes of ethics and the charters of the Audit, Compensation, Executive, Finance, Governance and Nominating, Safety and Environmental, and Public Policy Committees.  These materials also may be requested at no cost by telephone at (866) 814-6512 or by mail at: Massey Energy Company, Post Office Box 26765, Richmond, Virginia 23261, Attention: Investor Relations.

 
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Executive Overview

We operate coal mines and processing facilities in Central Appalachia, which generate revenues and cash flow through the mining, processing and selling of steam and metallurgical grade coal, primarily of a low sulfur content.  We also generate income and cash flow through other coal-related businesses, including the management of material handling facilities.  Other revenue is obtained from royalties, rentals, gas well revenues, gains on the sale or exchange of non-strategic assets and miscellaneous income.  

We reported a net loss for the second quarter of 2010, of $88.7 million, or $0.88 loss per share, compared to net income of $20.2 million, or $0.24 income per share, for the second quarter of 2009.  The results of the second quarter of 2010 were negatively impacted by the following pre-tax items: $128.9 million estimated expense related to the Upper Big Branch mine (“UBB”) tragedy (see Notes 5, 10 and 16 to the Notes to Condensed Consolidated Financial Statements for further discussion), $8.5 million charge recorded in relation to a customer pricing dispute and a $5.0 million bad debt reserve related to a note receivable from a supplier.  The results of the second quarter of 2010 were favorably impacted by the following pre-tax items: $9.7 million from the settlement of certain claims against a service provider, $7.2 million related to the sale of a claim in a customer bankruptcy proceeding, and a gain of $3.6 million on exchanges of coal reserves.  Also, in the second quarter of 2010, we recorded a loss on derivative instruments of $12.4 million ($22.7 million of unrealized losses primarily due to certain contracts identified in the first quarter that no longer qualified for the normal purchase normal sale (“NPNS”) exception that are now accounted for at fair value and $10.3 million of realized gains due to settlements on existing purchase and sales contracts).

Produced tons sold were 9.8 million in the second quarter of 2010, compared to 9.4 million in the second quarter of 2009. We produced 9.5 million and 9.4 million tons in the second quarters of 2010 and 2009, respectively.  Shipments of metallurgical coal were up 11% as demand for this grade of coal remained strong during the quarter.  Exports remained the same at 1.4 million tons for both second quarters of 2010 and 2009.

During the second quarter of 2010, Produced coal revenue increased by 15% compared to the first quarter of 2009, reflecting improved pricing for utility coal and higher shipments of industrial and metallurgical coal in 2010, compared to the second quarter of 2009.  Our average Produced coal revenue per ton sold in the second quarter of 2010 increased to $70.45 compared to $64.14 in the second quarter of 2009, primarily due to an increase in the average per ton sales price for utility coal of 15% during the second quarter of 2010, compared to the second quarter of 2009.

Our Average cash cost per ton sold (see Note 1 below), which is a non-GAAP financial measure, was $59.51, compared to $51.53 in the previous year’s second quarter (2010 Average cash cost per ton is calculated exclusive of UBB related charges).  The increase was due largely to lower productivity attributable to discrete geologic conditions, increased regulatory enforcement actions and related temporary shutdowns, increased labor turnover rates, unplanned transfers of crews and equipment, and higher surface mine ratios.
 
On April 5, 2010, an explosion occurred at UBB of our Performance resource group, tragically resulting in the deaths of 29 miners and seriously injuring two miners.  The Federal Mine Safety and Health Administration (“MSHA”) and the State of West Virginia have undertaken a joint investigation into the cause of the explosion.  We also have commenced our own investigation.  We believe these investigations will continue for the foreseeable future, and we cannot provide any assurance as to their outcome, including whether we become subject to possible civil penalties or enforcement actions.  In order to accommodate these investigations, the mine will be closed for an extended period of time, the length of which we cannot predict at this time.  It is also possible that we may decide or be required by regulators to permanently close this mine.  We self-insure our underground mining equipment, including longwalls. We do not currently carry business interruption insurance for the UBB mine.  We have third-party general liability insurance coverage that applies to litigation risk, which coverage we believe applies to litigation stemming from the UBB tragedy.

While updated analyses will continue in future quarters, we have recorded our best estimate of probable losses related to this matter. The most significant components of these losses relate to: the benefits being provided to the families of the fallen miners (see Note 10 to the Notes to Condensed Consolidated Financial Statements for more information about the significant benefits provided), costs associated with the rescue and recovery efforts, possible
 
 
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legal and other contingencies, and asset impairment charges (see Note 5 to the Notes to Condensed Consolidated Financial Statements for more information). We have recorded an $87 million liability in Other accrued liabilities at June 30, 2010, which represents our best estimate of the probable loss related to estimated litigation settlements associated with the UBB tragedy.  To date, two wrongful death suits have been filed against us.  Insurance recoveries related to our general liability insurance policy that are deemed probable and that are reasonably estimable have been recognized in the Condensed Consolidated Statements of Income to the extent of the related losses, less applicable deductibles.  Such recognized recoveries for litigation settlements associated with the UBB tragedy totaled $82 million and are included in Trade and other accounts receivable at June 30, 2010.

Given the uncertainty of the outcome of current investigations, including whether we become subject to possible civil penalties or enforcement actions, it is possible that the total costs incurred related to this tragedy could exceed our current estimates. As of June 30, 2010, we believe that the reasonably possible aggregate loss related to these claims in excess of amounts currently recorded cannot be estimated. It is possible, however, that the ultimate liabilities in the future with respect to these claims, in the aggregate, may be material. We will continue to review the amount of any necessary accruals or other related expenses and record the charges in the period in which the determination is made and an adjustment is required.
 
Our original sales plan for the period after the tragedy was to ship approximately 1.6 million tons of metallurgical coal from UBB in 2010.  In order to offset some of the production lost from UBB, we added Saturday production (six days a week versus five) at all currently operating metallurgical coal mines and added two continuous miner sections at existing mines within our Elk Run resource group.  A third continuous miner section is planned to be added at Elk Run during the third quarter of 2010.  In total, we estimate these efforts will result in approximately 1.3 million tons of annualized metallurgical coal production.  Some of the coal produced through these efforts may not be of similar enough qualities to meet the quality specifications our metallurgical coal sales contracts previously fulfilled with coal from UBB.  In the second quarter, the incremental production from added Saturday shifts and the two added sections was more than offset by production lost when miners were diverted from their normal jobs to assist with the UBB rescue, recovery and support efforts and from lost shifts resulting from increased regulatory enforcement.

As a result of the April 5, 2010 tragedy at UBB, MSHA significantly increased regulatory enforcement in our mines in the second quarter of 2010.  The increased regulatory enforcement significantly impacted our productivity and operating results for the second quarter of 2010.  If MSHA continues to order certain of our mines to be temporarily closed or permanently closes such mines, our ability to meet our customers’ demands could be adversely affected.

Following the UBB tragedy, several stockholder derivative suit proceedings have been filed naming us as a nominal defendant.  Each of the current and certain former members of the Board of Directors and certain of our officers have also been named as defendants (the “Defendants”).  A contempt proceeding has also been filed relating to a previously settled stockholder derivative suit.  In addition, two putative class actions have been filed on behalf of certain of our stockholders alleging disclosure violations of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  We and the Defendants have insurance coverage applicable to these proceedings.  While we cannot predict the outcome of any of these proceedings (which are discussed in further detail in Part II Item 1. Legal Proceedings of this Quarterly Report on Form 10-Q), based on our current assessment of these matters, we do not believe that liabilities arising from these proceedings individually or in the aggregate should have a material adverse impact upon our consolidated cash flows, results of operations or financial condition.
 
On April 19, 2010, we completed the acquisition of Cumberland Resources Corporation and certain affiliated companies (“Cumberland”) for a purchase price of $934.2 million ($644.7 million in cash and $289.5 million in shares of Common Stock).  Prior to the acquisition, Cumberland was one of the largest privately held coal producers in the United States with 2009 produced coal revenue of $550 million generated from the production and sale of 8.0 million tons of high quality Central Appalachian coal. We did not incur or assume any third-party debt as a result of the Cumberland acquisition.  The Cumberland operations include primarily underground coal mines in Southwestern Virginia and Eastern Kentucky. We obtained an estimated 416 million tons of contiguous coal reserves, a
 
 
27

 
preparation plant in Kentucky served by the CSX railroad and a preparation plant in Virginia served by the Norfolk Southern railroad. Of the estimated reserves, we believe more than half (216 million tons) have metallurgical coal qualities.  The operations acquired from Cumberland shipped 1.6 million tons of coal during the second quarter of 2010, at an average price of $85.35 per ton.  Total revenue reported in the Condensed Consolidated Statements of Income for the second quarter of 2010, included $138.8 million from operations acquired from Cumberland.  See Note 2 to the Notes to Condensed Consolidated Financial Statements for further discussion.
___________________
Note 1: Average cash cost per ton is calculated as the Cost of produced coal revenue (excluding Selling, general and administrative expense (“SG&A”), Depreciation, depletion and amortization (“DD&A”) and UBB related charges) divided by the number of produced tons sold.  In 2009, in order to conform more closely to common industry reporting practices, we changed our calculation of cash cost to exclude SG&A expense.  This change has been reflected in the presentation of data for both the current and comparative past reporting periods in this report. Although Average cash cost per ton is not a measure of performance calculated in accordance with GAAP, management believes that it is useful to investors in evaluating us because it is widely used in the coal industry as a measure to evaluate a company’s control over its cash costs. Average cash cost per ton should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP. In addition, because Average cash cost per ton is not calculated identically by all companies, the presentation here may not be comparable to other similarly titled measures of other companies. The table below reconciles the GAAP measure of Total costs and expenses to Average cash cost per ton.

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In Millions, Except Per Ton Amounts)
 
Total costs and expenses
  $ 920.9     $ 648.9     $ 1,542.8     $ 1,344.3  
Less: Freight and handling costs
    61.5       60.9       135.8       118.7  
Less: Cost of purchased coal revenue
    18.5       15.5       39.1       20.7  
Less: Depreciation, depletion and
                               
amortization
    148.9       67.6       213.4       140.3  
Less:  Selling, general and administrative
    24.5       20.0       52.6       41.9  
Less: Other expense
    5.7       0.6       6.6       1.3  
Less: Loss (Gain) on derivative instruments
    12.4       (0.4 )     (24.0 )     (9.2 )
Less: UBB charge(1)
    64.0       -       64.0       -  
Average cash cost
  $ 585.4     $ 484.6     $ 1,055.4     $ 1,030.7  
Average cash cost per ton
  $ 59.51     $ 51.53     $ 57.60     $ 51.00  
                                 
(1) The UBB charge is reconciled as follows:
                               
   Expense related to the UBB explosion
  $ 128.9                          
   Less: Expense included in SG&A
    2.7                          
   Less: Expense included in DD&A
    62.2                          
       UBB charge included in Costs of
                               
       produced coal revenue
  $ 64.0                          


 
28

 
Results of Operations

Three months ended June 30, 2010 compared to three months ended June 30, 2009

Revenues
   
Three Months Ended
             
   
June 30,
             
               
Increase
   
% Increase
 
   
2010
   
2009
   
(Decrease)
   
(Decrease)
 
   
(In Thousands)
       
Revenues
                       
   Produced coal revenue
  $ 693,060     $ 603,219     $ 89,841       15%  
   Freight and handling revenue
    61,465       60,948       517       1%  
   Purchased coal revenue
    22,116       19,231       2,885       15%  
   Other revenue
    33,507       14,229       19,278       100%  
Total revenues
  $ 810,148     $ 697,627     $ 112,521       16%  
 
The following is a breakdown by market served of the changes in produced tons sold and average produced coal revenue per ton sold for the second quarter of 2010, compared to the second quarter of 2009:
   
Three Months Ended
             
   
June 30,
             
               
Increase
   
% Increase
 
   
2010
   
2009
   
(Decrease)
   
(Decrease)
 
   
(In millions, except per ton amounts)
       
Produced tons sold:
                       
   Utility
    7.0       7.1       (0.1 )     (1%)  
   Metallurgical
    2.0       1.8       0.2       11%  
   Industrial
    0.8       0.5       0.3       60%  
      Total
    9.8       9.4       0.4       4%  
                                 
Average produced coal revenue per ton sold:
                               
   Utility
  $ 61.32     $ 53.19     $ 8.13       15%  
   Metallurgical
    102.92       105.98       (3.06 )     (3%)  
   Industrial
    67.42       70.84       (3.42 )     (5%)  
      Weighted average
  $ 70.45     $ 64.14     $ 6.31       10%  
 
Shipments of industrial and metallurgical coal increased during the second quarter of 2010, compared to the same period in 2009 to meet higher demand in 2010 as economic conditions have improved.  The average per ton sales price for utility coal was higher in the second quarter of 2010, compared to the second quarter of 2009, mainly attributable to the addition of higher priced utility coal contracts assumed in the acquisition of Cumberland.  Additionally, an increase in the proportional mix of higher price metallurgical and industrial coal sold during the quarter added to the overall improvement in average produced coal revenue per ton.

Purchased coal revenue increased in the first quarter of 2010, compared to the same period in 2009, primarily due to an increase in purchased coal revenue per ton from $71.44 during the second quarter of 2009, to $72.34 during the second quarter of 2010. Purchased tons sold increased 10% in the second quarter of 2010 compared to the second quarter of 2009.

Other revenue includes refunds on railroad agreements, royalties related to coal lease agreements, gas well revenue, gains on the sale or exchange of non-strategic assets and reserve exchanges, joint venture revenue and other miscellaneous revenue. Other revenue for the second quarter of 2010 includes $9.7 million (pre-tax) from the
 
 
29

 
settlement of certain claims against a service provider, $7.2 million (pre-tax) related to the sale of a claim in a customer bankruptcy proceeding, and a pre-tax gain of $3.6 million on exchanges of coal reserves.

Costs
   
Three Months Ended
             
   
June 30,
             
               
Increase
   
% Increase
 
   
2010
   
2009
   
(Decrease)
   
(Decrease)
 
   
(In Thousands)
       
Costs and expenses
                       
   Cost of produced coal revenue
  $ 649,430     $ 484,641     $ 164,789       34%  
   Freight and handling costs
    61,465       60,948       517       1%  
   Cost of purchased coal revenue
    18,463       15,489       2,974       19%  
   Depreciation, depletion and amortization,
                               
   applicable to:
                               
      Cost of produced coal revenue
    132,916       66,801       66,115       99%  
      Selling, general and administrative
    15,982       840       15,142       100%  
   Selling, general and administrative
    24,526       20,001       4,525       23%  
   Other expense
    5,722       579       5,143       100%  
   Loss (Gain) on derivative instruments
    12,449       (377 )     12,826       (100%)  
Total costs and expenses
  $ 920,953     $ 648,922     $ 272,031       42%  


Cost of produced coal revenue increased primarily due to increased volume of produced tons sold from 9.4 million in the second quarter of 2009, to 9.8 million in the second quarter of 2010.  A significant factor for the increase was the UBB tragedy, which contributed an additional $64.0 million to our Cost of produced coal revenue. Additional factors leading to the increase were lower productivity attributable to discrete geologic conditions, increased regulatory enforcement actions and related temporary shutdowns, increased labor turnover rates, unplanned transfers of crews and equipment, and higher surface mine ratios.

Cost of purchased coal revenue increased in the second quarter of 2010, compared to the same period in 2009, primarily due to an increase in cost of purchased coal revenue per ton from $57.46 during the second quarter of 2009, to $60.42 during the second quarter of 2010.  Purchased tons sold increased 10% in the second quarter of 2010 compared to the second quarter of 2009.  Cost of purchased coal revenue for the second quarter of 2009 was partially offset by a $2.5 million black lung excise tax refund.

Depreciation, depletion and amortization increased in the second quarter of 2010, compared to the same period in 2009, primarily due to the $62.2 million impairment of assets at the UBB mine (see Note 5 to the Notes to Condensed Consolidated Financial Statements for further discussion), $17.1 million in additional amortization expense related to newly acquired intangible assets (see Note 6 to the Notes to Condensed Consolidated Financial Statements for further discussion) and the addition of the operations acquired from Cumberland.

Selling, general and administrative expense was higher in the second quarter of 2010, compared to the second quarter of 2009, due to an $8.5 million charge recorded in relation to a customer pricing dispute and $2.7 million related to the UBB tragedy, offset by a decrease due to lower stock-based and performance-based compensation expenses due to decrease in stock price value during the second quarter of 2010, compared to an increase in stock price value during the second quarter of 2009.

Other expense includes a $5.0 million bad debt charge for the second quarter of 2010 related to the reserve on a note receivable from a supplier.

Loss (Gain) on derivative instruments for the second quarter of 2010, represents a loss on derivative instruments of $12.4 million ($22.7 million of unrealized losses primarily due to certain contracts identified in the first quarter that no longer qualified for the NPNS exception that are now accounted for at fair value plus $10.3 million of realized gains due to settlements on existing purchase and sales contracts).  The second quarter of 2009
 
 
30

 
results included a gain on derivative instruments of $0.4 million ($4.3 million of unrealized gains less $3.9 million of realized losses).  See Note 13 to the Notes to Condensed Consolidated Financial Statements for further discussion.

Interest Income

Interest income decreased for the second quarter of 2010, compared to the same period in 2009, as a result of $1.6 million in interest received related to black lung excise tax refunds during the second quarter of 2009 and by a significant reduction in interest earned on money market funds during second quarter of 2010, compared to the same period in 2009.

Interest Expense

Interest expense includes $4.8 million and $4.6 million of non-cash interest expense for the amortization of the discount of our 3.25% Notes for the second quarter of 2010 and 2009, respectively (see Note 7 to the Notes to Condensed Consolidated Financial Statements for further discussion).

Income Taxes

Our effective tax rate is sensitive to changes in estimates of annual pre-tax earnings and percentage depletion.  The decrease in the effective tax rate from the second quarter of 2009 to the second quarter of 2010 is primarily the result of differences in pre-tax income, the impact of percentage depletion and projected changes in deferred taxable and deductible differences.  The UBB charges of $128.9 million impacted the 2010 income tax rate with a $41.8 million benefit.  Also impacting the 2010 income tax rate was a $2.6 million charge related to the reduction in the tax benefit available to us as a result of the Patient Protection and Affordable Care Act (“PPACA”) signed into law in March 2010.  The 2009 income tax rate was impacted by favorable adjustments in connection with the election to forego bonus depreciation and claim a refund for alternative minimum tax credits.

Six months ended June 30, 2010 compared to three months ended June 30, 2009

Revenues

   
Six Months Ended
             
   
June 30,
             
               
Increase
   
% Increase
 
   
2010
   
2009
   
(Decrease)
   
(Decrease)
 
   
(In Thousands)
       
Revenues
                       
   Produced coal revenue
  $ 1,264,862     $ 1,284,246