Business Combination

6 Months Ended

Jun. 30, 2011

Business Combination

Business Combination

3. Business Combination

On June 15, 2011, the Company completed its acquisition of ICG, a leading coal producer, operating 12 mining complexes in Appalachia and one complex in the Illinois basin.  In addition, a mine is currently under development in Appalachia.  The Company acquired all of ICG's outstanding shares of common stock for $3.1 billion. To finance the acquisition, the Company received net proceeds of $1.25 billion from the sale of 48.0 million shares of its common stock and issued $2.0 billion in aggregate principal amount of senior unsecured notes.  See Note 4, "Equity Offering" and Note 5, "Debt and Financing Arrangements" for further information about these transactions.

The Company has not finalized the determination of the fair values of the assets acquired and liabilities assumed in the acquisition.  The following table summarizes the consideration paid for ICG and the estimated amounts of assets acquired and liabilities assumed that were recognized at the acquisition date:

	(in millions)
Consideration paid, net of cash acquired	$	2,910.4
Recognized amounts of net tangible and intangible assets acquired and liabilities assumed:
Restricted cash	15.5
Receivables	114.2
Inventories	77.5
Net property, plant and equipment, including mineral rights	4,516.4
Goodwill	425.0
Other assets	49.2
Accounts payable	(82.4		)
Other accrued expenses and current liabilities	(53.0		)
Executive change in control payments	(10.0		)
Debt	(604.8		)
Litigation accrual	(105.3		)
Accrued postretirement benefits	(49.4		)
Asset retirement obligation	(80.4		)
Coal supply agreements, net	(77.7		)
Deferred income taxes, net	(1,189.9		)
Other	(34.5		)
Net tangible and intangible assets acquired	$	2,910.4

Because the Company's valuation efforts are ongoing, the preliminary fair values above could change substantially.  Notably, the assigned value of goodwill was calculated as the present value of the estimated synergies from the acquisition and the fair value of the coal reserves acquired has not yet been determined and will involve estimating the amounts and timing of cash flows from the properties acquired.

The allocation of goodwill to reporting units will not be completed until the valuation process is completed.  Any goodwill related to the acquisition is not expected to be deductible for tax purposes.

The revenues and income before income taxes related to the acquired operations that have been included in the consolidated statements of income since the date of acquisition were $48.0 million and $11.9 million, respectively.

The following unaudited pro forma information has been prepared for illustrative purposes and assumes that the business combination occurred on January 1, 2010.  The unaudited pro forma results have been prepared based upon ICG's historical results and estimates of the ongoing effects of the transactions that the Company believes are reasonable and supportable.  The results are not necessarily reflective of the consolidated results of operations had the acquisition actually occurred on January 1, 2010, nor are they indicative of future operating results.

The unaudited supplemental pro forma financial information of the combined entity follows:

	Three Months Ended June 30					Six Months Ended June 30
	2011		2010			2011		2010
	((In thousands)
Total revenues
As reported	$	985.1	$	764.3		$	1,858.0	$	1,476.2
Pro forma	$	1,233.9	$	1,044.0		$	2,397.7	$	2,035.8
Income (loss) before income taxes
As reported	$	11.6	$	72.0		$	80.0	$	69.5
Pro forma	$	62.0	$	(67.8	)	$	74.9	$	(86.2	)

The pro forma income before income taxes reflects adjustments to depreciation, depletion and amortization for the new basis in assets acquired and interest expense to reflect the debt incurred to finance the acquisition.  In addition, the following costs and expenses reflected in the income before income taxes for the six month period ended June 30, 2011 reported in the condensed consolidated statement of operations are reversed out of 2011 and reflected in 2010 in the pro forma results.

Costs of affecting the acquisition - Arch	$	27,852
Costs of affecting the acquisition - ICG	23,503
Severance costs	13,498
Write off of acquired assets	7,316
Bridge financing fees	49,490
	$	121,659

Severance costs represent both change in control payments to executives and severance for employees terminated after the acquisition.  Additional severance costs of $3.4 million are expected to be incurred in the remainder of 2011.  The acquired asset write-off relates to a preparation plant and loadout of an acquired ICG mining operation.  The acquired operation has been combined with an existing operation of the Company, and will utilize an existing facility.

Anticipated synergies are not reflected in the pro forma results.

In conjunction with the acquisition, the Company has $351.0 million of restricted cash at June 30, 2011 to discharge the Company's obligation under certain ICG debt, to provide collateral for ICG letters of credit until they can be eliminated or replaced and to fund executive change in control payments.  See further discussion of the ICG debt in Note 5, "Debt."