Impairment charges

9 Months Ended

Sep. 30, 2012

Impairment charges

Impairment charges

Note 3—Impairment charges

        During the third quarter of 2012, domestic and international metallurgical coal markets deteriorated due to an oversupply of coal as a result of a decline in steelmaking activity due to weak economic activity in Europe and Asia combined with the increased production of metallurgical coal as a result of the settlement of labor unrest issues in Australia. The changes to the near-term market outlook resulted in the Company reviewing its operating strategy and related capital investment projects. Based on this review, the Company decided to reduce capital spending for 2012 and 2013. The Company also decided to temporarily curtail mining operations at certain mines in its Canadian and U.K. Operations segment. In addition to these events, the overall macroeconomic environment has resulted in a significant decrease in the market price of our common stock.

        U.S. GAAP requires that a long-lived asset (or asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Due to the metallurgical coal market deterioration and management actions as described above, the Company determined that these factors could be potential indicators of impairment with respect to certain long-lived assets, including goodwill. Upon analysis, the Company determined that the undiscounted cash flows for potentially affected long-lived assets, exceeded the carrying value and no further testing was necessary, except for a shale natural gas exploration project, which was impaired. The Company also performed a separate interim goodwill impairment test as of July 31, 2012 and, as a result, an estimated goodwill impairment charge of $1.1 billion was recorded in the three months ended September 30, 2012 eliminating the entire carrying value of goodwill for two reporting units in the U.S. Operations segment and two reporting units in the Canadian and U.K. Operations segment. The goodwill impairment charge will not be finalized until the allocation of fair value of the reporting units to the underlying assets and liabilities contained within the individual reporting units is complete. The Company intends to finalize the goodwill impairment analysis in the fourth quarter of 2012.

        The valuation methodology utilized to estimate the fair value of the reporting units was performed using a market approach. The market approach is based on a guideline public company methodology. Under the guideline public company method, certain operating metrics from a selected group of publicly traded guideline companies that have similar operations to the Company's reporting units were used to estimate the fair value of the reporting units. The valuation methodology utilized to allocate the estimated fair value of the reporting units to the underlying assets and liabilities contained within the individual reporting units for the goodwill impairment test was primarily based on an income approach. The income approach uses future discounted cash flow estimates in which future net cash flows projected to result from such assets, were discounted to present value using an appropriate after-tax weighted average cost of capital. The table below summarizes the impact of the goodwill impairment for the impacted reporting segments.

	Recast December 31, 2011		Impairments			Balance as of September 30, 2012
Goodwill, net:
U.S. Operations	$	74,320	$	(74,320	)	$	—
Canadian and U.K. Operations		992,434		(992,434	)		—
Total goodwill	$	1,066,754	$	(1,066,754	)	$	—

        In connection with the evaluation of our operating projects and the global macroeconomic environment, management reviewed a shale natural gas exploration project that has not yet proved capable of providing commercially sufficient quantities of proven reserves to be economical. As a result of this review, management decided to indefinitely abandon the natural gas exploration project. The natural gas exploration project was accounted for under the successful efforts accounting method under U.S. GAAP. Under the successful efforts method, if a commercially sufficient quantity of proved reserves is not discovered, any previously capitalized exploratory costs associated with the drilling are expensed. Accordingly, the Company recorded a pre-tax charge of $40 million and an after tax charge of $25 million to write-off the capitalized exploratory costs associated with the natural gas exploration project.