Alpha Natural (ANR) Enters Settlement with U.S. DoJ, WV Over UBB Incident; to Invest $80M for Mine Safety

On December 6, 2011, Alpha Natural Resources (NYSE: ANR) and its subsidiary, Alpha Appalachia Holdings, Inc., entered into a Non-Prosecution Agreement (NPA) with the United States Attorney’s Office for the Southern District of West Virginia and the United States Department of Justice. On the same day, Alpha also reached a comprehensive settlement with the Mine Safety and Health Administration (MSHA).

The NPA and the Settlement resolve a criminal investigation and regulatory civil proceedings against Massey Energy Company and its affiliates relating to the tragic explosion at Upper Big Branch Mine on April 5, 2010, as well as other health and safety and related issues at Massey. At the time of the explosion, UBB was owned by Performance Coal Company, an affiliate of Massey. Alpha acquired Massey on June 1, 2011, over a year after the UBB explosion. The agreement does not resolve individual responsibilities related to the UBB tragedy.

Under the terms of the NPA, Alpha has agreed to invest in additional measures designed to improve miner health and safety, including establishing a trust to fund mine health and safety research; resolving MSHA’s pending civil proceedings concerning Massey before it was acquired by Alpha; and provide certain restitution to the families of the fallen miners and two individuals injured in the explosion. More specifically, the NPA reflects Alpha’s commitment:

• to invest $80 million over the next two years in added safety measures at legacy Massey mines and Alpha mines, including ongoing safety skills and compliance training, construction of a state-of-the-art safety training facility, and the development and installation of next-generation mine safety equipment;
  
  
• to establish a $48 million trust to fund research and development projects over the next two years designed to improve mine health and safety;
  
  
• to pay $46.5 million to families of the fallen miners and two individuals physically injured by the explosion, of which $16.5 million has already been paid as part of or will be paid as part of settlements and anticipated settlements, in accordance with the NPA;
  
  
• to pay $34.8 million in connection with the resolution of outstanding citations, violations, and orders related to MSHA’s investigation arising from UBB explosion and other non-UBB related matters involving legacy Massey entities prior to Alpha’s acquisition of Massey on June 1, 2011.

In connection with entering into and fulfilling our obligations under the NPA and the Settlement, we expect to accrue a total of approximately $63 million (reflecting amounts for the trust and unaccrued MSHA amounts) as either an adjustment to the opening balance sheet for Massey, which was originally recorded at fair value on a provisional basis pursuant to acquisition accounting, or as a merger-related charge. Accordingly, these additional accruals are not expected to be reflected as reductions to adjusted EBITDA, adjusted net income or adjusted diluted earnings per share. The amounts specified in the NPA for restitution to the families of the miners killed or injured in the UBB explosion are largely encompassed by existing accruals with an additional $3 million to be accrued as an adjustment to the opening balance sheet for Massey. The $80 million of expenditures for future safety initiatives and safety equipment and training facilities is expected to include both capital and expense items that will be incurred in 2012 and 2013.

With respect to cash flow, we expect to pay approximately $10 million of the restitution to the families in the fourth quarter of 2011, and the MSHA amounts and the remaining portion of the restitution to the families in early 2012. The trust fund contributions and expenditures for safety initiatives and safety equipment and training facilities are expected to result in cash outflows during 2012 and 2013. We expect to be able to pay all amounts related to the NPA and Settlement from existing cash balances. We do not expect the NPA and Settlement to have an impact on the Company's credit ratings.

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