NOTE 1: BASIS OF PRESENTATION

Vulcan Materials Company (the “Company,” “Vulcan,” “we,” “our”), a New Jersey corporation, is the nation’s largest producer of construction aggregates, primarily crushed stone, sand and gravel; a major producer of asphalt mix and ready-mixed concrete and a leading producer of cement in Florida.

Our accompanying unaudited condensed consolidated financial statements were prepared in compliance with the instructions to Form 10-Q and Article 10 of Regulation S-X and thus do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Our condensed consolidated balance sheet as of December 31, 2011 was derived from the audited financial statement at that date. In the opinion of our management, the statements reflect all adjustments, including those of a normal recurring nature, necessary to present fairly the results of the reported interim periods. Operating results for the three and six month periods ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012. For further information, refer to the consolidated financial statements and footnotes included in our most recent Annual Report on Form 10-K.

Due to the 2005 sale of our Chemicals business as presented in Note 2, the operating results of the Chemicals business are presented as discontinued operations in the accompanying Condensed Consolidated Statements of Comprehensive Income.

RECLASSIFICATIONS

Certain items previously reported in specific financial statement captions have been reclassified to conform with the 2012 presentation.

RESTRUCTURING CHARGES

In 2011, we substantially completed the implementation of a multi-year project to replace our legacy information technology systems with new ERP and Shared Services platforms. These platforms are helping us streamline processes enterprise-wide and standardize administrative and support functions while providing enhanced flexibility to monitor and control costs. Leveraging this significant investment in technology allowed us to reduce overhead and administrative staff, resulting in $2,137,000 of severance and related charges in the first six months of 2011 and $12,971,000 for the full year 2011. There were no significant charges related to this restructuring plan in 2012.

In 2012, our Board approved a Profit Enhancement Plan that further leverages our streamlined management structure and substantially completed ERP and Shared Services platforms to achieve cost reductions and other earnings enhancements. During the second quarter and for the first half of 2012, we incurred $4,551,000 and $5,962,000, respectively, of costs related to the implementation of this plan. We expect to recognize the total estimated $8,870,000 cost of this plan in 2012.

UNSOLICITED EXCHANGE OFFER

In December 2011, Martin Marietta Materials, Inc. (Martin Marietta) commenced an unsolicited exchange offer for all outstanding shares of our common stock at a fixed exchange ratio of 0.50 shares of Martin Marietta common stock for each Vulcan common share and indicated its intention to nominate a slate of directors to our Board. After careful consideration, including a thorough review of the offer with its financial and legal advisors, our Board unanimously determined that Martin Marietta’s offer was inadequate, substantially undervalued Vulcan, was not in the best interests of Vulcan and its shareholders and had substantial risk.

In May 2012, the Delaware Chancery Court ruled and the Delaware Supreme Court affirmed that Martin Marietta had breached two confidentiality agreements between the companies, and enjoined Martin Marietta for a period of four months from pursuing its exchange offer for our shares, prosecuting its proxy contest, or otherwise taking steps to acquire control of our shares or assets and from any further violations of the two confidentiality agreements between the parties.

In response to Martin Marietta’s actions, we incurred legal, professional and other costs as follows: second quarter of 2012 — $32,060,000, first quarter of 2012 — $10,065,000 and fourth quarter of 2011 — $2,227,000. As of June 30, 2012, $8,087,000 of the costs incurred in 2012 were paid.

 

CORRECTION OF PRIOR PERIOD FINANCIAL STATEMENTS

In preparation for an Internal Revenue Service (IRS) exam during 2011, we identified improper deductions and errors in the calculation of taxable income for items primarily associated with the 2007 acquisition of Florida Rock. These items have been voluntarily submitted to the IRS for use in their examination.

The errors arose during periods prior to 2009, did not impact earnings or cash flows for any years presented and are not material to previously issued financial statements. As a result, we did not amend previously filed financial statements but have restated the affected Condensed Consolidated Balance Sheet presented in this Form 10-Q. The correction of these errors resulted in adjustments to the following opening balances:

 

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an increase to current deferred income tax assets of $910,000

 

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an increase to prepaid income taxes of $735,000

 

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an increase to current income taxes payable of $16,676,000

 

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a decrease to noncurrent deferred income tax liabilities of $5,849,000

 

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a decrease to retained earnings of $9,182,000

A summary of the effects of the correction of the errors on our Condensed Consolidated Balance Sheet as of June 30, 2011, is presented in the table below:

 

		As of June 30, 2011
in thousands		As Reported				Correction				As Restated
Balance Sheet
Assets
Current deferred income taxes			$44,794				$910				$45,704
Prepaid expenses			21,659				735				22,394
Total current assets			892,353				1,645				893,998
Total assets			$8,385,610				$1,645				$8,387,255
Liabilities
Other current liabilities			$162,001				$16,676				$178,677
Total current liabilities			420,960				16,676				437,636
Noncurrent deferred income taxes			762,406				(5,849	)			756,557
Total liabilities			$4,504,345				$10,827				$4,515,172
Equity
Retained earnings			$1,385,208				($9,182	)			$1,376,026
Total equity			3,881,265				(9,182	)			3,872,083
Total liabilities and equity			$8,385,610				$1,645				$8,387,255

NOTE 2: DISCONTINUED OPERATIONS

In 2005, we sold substantially all the assets of our Chemicals business to Basic Chemicals, a subsidiary of Occidental Chemical Corporation. In addition to the initial cash proceeds, Basic Chemicals was required to make payments under two earn-out agreements subject to certain conditions. During 2007, we received the final payment under the ECU (electrochemical unit) earn-out, bringing cumulative cash receipts to its $150,000,000 cap.

Proceeds under the second earn-out agreement are based on the performance of the hydrochlorocarbon product HCC-240fa (commonly referred to as 5CP) from the closing of the transaction through December 31, 2012 (5CP earn-out). The primary determinant of the value for this earn-out is the level of growth in 5CP sales volume.

In March 2012, we received a payment of $11,336,000 under the 5CP earn-out related to performance during the year ended December 31, 2011. During the first quarter of 2011, we received $12,284,000 under the 5CP earn-out related to the year ended December 31, 2010. Through June 30, 2012, we have received a total of $66,327,000 under the 5CP earn-out, a total of $33,226,000 in excess of the receivable recorded on the date of disposition.

 

We are liable for a cash transaction bonus payable annually to certain former key Chemicals employees based on prior year’s 5CP earn-out results. We expect the 2012 payout will be $1,134,000 and have accrued this amount as of June 30, 2012. In comparison, we had accrued $1,228,000 as of June 30, 2011.

The financial results of the Chemicals business are classified as discontinued operations in the accompanying Condensed Consolidated Statements of Comprehensive Income for all periods presented. There were no net sales or revenues from discontinued operations during the six month periods ended June 30, 2012 and 2011. Results from discontinued operations are as follows:

 

		Three Months Ended June 30										Six Months Ended June 30
in thousands		2012				2011						2012				2011
Discontinued Operations
Pretax earnings (loss) from results			($2,097	)			($1,719	)					($4,077	)			$3,587
Gain on disposal, net of transaction bonus			0				0						10,203				11,056
Income tax (provision) benefit			799				682						(2,426	)			(5,791	)
Earnings (loss) on discontinued operations,net of tax			($1,298	)			($1,037	)					$3,700				$8,852

The second quarter pretax losses from results of discontinued operations of $2,097,000 in 2012 and $1,719,000 in 2011 were due primarily to general and product liability costs, including legal defense costs, and environmental remediation costs associated with our former Chemicals business. The pretax loss from results of discontinued operations of $4,077,000 for the six months ended June 30, 2012 was also due primarily to general and product liability claims, including legal defense costs, and environmental remediation costs associated with our former Chemicals business. The pretax earnings from results of discontinued operations of $3,587,000 for the six months ended June 30, 2011 include a $7,500,000 pretax gain recognized on recovery from an insurer in lawsuits involving perchloroethylene. This gain was offset in part by general and product liability costs, including legal defense costs, and environmental remediation costs.

NOTE 3: EARNINGS PER SHARE (EPS)

We report two earnings per share numbers: basic and diluted. These are computed by dividing net earnings by the weighted-average common shares outstanding (basic EPS) or weighted-average common shares outstanding assuming dilution (diluted EPS) as set forth below:

 

		Three Months Ended June 30										Six Months Ended June 30
in thousands		2012				2011						2012				2011
Weighted-average common shares outstanding			129,676				129,446						129,634				129,263
Dilutive effect of
Stock options/SOSARs			0				0						0				0
Other stock compensation plans			0				0						0				0
Weighted-average common shares outstanding, assuming dilution			129,676				129,446						129,634				129,263

All dilutive common stock equivalents are reflected in our earnings per share calculations. Antidilutive common stock equivalents are not included in our earnings per share calculations. In periods of loss, shares that otherwise would have been included in our diluted weighted-average common shares outstanding computation are excluded. These excluded shares are as follows: three months ended June 30, 2012 — 341,000, three months ended June 30, 2011 — 291,000, six months ended June 30, 2012 — 372,000 and six months ended June 30, 2011 — 324,000.

 

The number of antidilutive common stock equivalents for which the exercise price exceeds the weighted-average market price, are as follows:

 

		Three Months Ended June 30										Six Months Ended June 30
in thousands		2012				2011						2012				2011
Antidilutive common stock equivalents			5,054				5,873						5,053				5,873

NOTE 4: INCOME TAXES

Our income tax provision and the corresponding annual effective tax rate are based on expected income, statutory tax rates, percentage depletion and tax planning alternatives available in the various jurisdictions in which we operate. For interim financial reporting, except in circumstances as described in the following paragraph, we estimate the annual effective tax rate based on projected taxable income for the full year and record a quarterly tax provision in accordance with the annual effective tax rate. As the year progresses, we refine the estimates of the year’s taxable income as new information becomes available, including year-to-date financial results. This continual estimation process often results in a change to our annual effective tax rate for the year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date income tax provision reflects the annual effective tax rate. Significant judgment is required in determining our annual effective tax rate and in evaluating our tax positions.

When projected taxable income for the full year is close to break-even, the annual effective tax rate becomes volatile and will distort the income tax provision for an interim period. When this happens, we calculate the interim income tax provision or benefit using the year-to-date effective tax rate in accordance with Accounting Standards Codification (ASC) 740-270-30- 18. This cut-off method results in an income tax provision or benefit based solely on the year-to-date pretax income or loss as adjusted for permanent differences on a pro rata basis.

We recognize an income tax benefit associated with an uncertain tax position when, in our judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, we initially and subsequently measure the income tax benefit as the largest amount that we judge to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. Our liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. Our income tax provision includes the net impact of changes in the liability for unrecognized income tax benefits and subsequent adjustments as we consider appropriate.

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns for which we have already properly recorded the tax benefit in the income statement. At least quarterly, we assess all positive and negative evidence to determine the likelihood that the deferred tax asset balance will be recovered from future taxable income. We take into account such factors as:

 

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cumulative losses in recent years

 

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taxable income in prior carryback years, if carryback is permitted under tax law

 

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future reversal of existing taxable temporary differences against deductible temporary differences

 

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future taxable income exclusive of reversing temporary differences

 

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the mix of taxable income in the jurisdictions in which we operate

 

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tax planning strategies

Deferred tax assets are reduced by a valuation allowance if, based on an analysis of the factors above, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

We recorded income tax benefits from continuing operations of $17,749,000 (51.1% effective tax rate) in the second quarter of 2012 using the cut-off method as described above, compared to $40,341,000 (85.0% effective tax rate) in the second quarter of 2011. The decrease in our income tax benefit resulted largely from applying the year-to-date effective tax rate in the second quarter of 2012 versus the annual effective tax rate in the second quarter of 2011. A catch-up entry was required in the second quarter of 2011 to record the income tax benefit consistent with the annual effective tax rate.

 

We recorded income tax benefits from continuing operations of $56,145,000 (43.1% effective tax rate) for the six months ended June 30, 2012 compared to $77,771,000 (52.0% effective tax rate) for the six months ended June 30, 2011. The decrease in our income tax benefit resulted largely from applying the year-to-date effective tax rate for the first six months of 2012 versus the annual effective tax rate for the first six months of 2011.

NOTE 5: DERIVATIVE INSTRUMENTS

During the normal course of operations, we are exposed to market risks including fluctuations in interest rates, foreign currency exchange rates and commodity pricing. From time to time, and consistent with our risk management policies, we use derivative instruments to hedge against these market risks. We do not utilize derivative instruments for trading or other speculative purposes.

The accounting for gains and losses that result from changes in the fair value of derivative instruments depends on whether the derivatives have been designated and qualify as hedging instruments and the type of hedging relationship. The interest rate swap agreements described below were designated as either cash flow hedges or fair value hedges. The changes in fair value of our interest rate swap cash flow hedges are recorded in accumulated other comprehensive income (AOCI) and are reclassified into interest expense in the same period the hedged items affect earnings. The changes in fair value of our interest rate swap fair value hedges are recorded as interest expense consistent with the change in the fair value of the hedged items attributable to the risk being hedged.

Derivative instruments are recognized at fair value in the accompanying Condensed Consolidated Balance Sheets. Fair values of derivative instruments designated as hedging instruments are as follows:

 

Fair Value 1

in thousands

Balance Sheet Location

June 30 2012

December 31 2011

June 30 2011

Liabilities

Interest rate swaps

Other noncurrent liabilities

$0

$0

$7,419

Total hedging instrument liabilities

$0

$0

$7,419

 

1

See Note 6 for further discussion of the fair value determination.

CASH FLOW HEDGES

We use interest rate swap agreements designated as cash flow hedges to minimize the variability in cash flows of liabilities or forecasted transactions caused by fluctuations in interest rates. In December 2007, we issued $325,000,000 of floating-rate notes due in 2010 that bore interest at 3-month London Interbank Offered Rate (LIBOR) plus 1.25% per annum. Concurrently, we entered into a 3-year interest rate swap agreement in the stated amount of $325,000,000. Under this agreement, we paid a fixed interest rate of 5.25% and received 3-month LIBOR plus 1.25% per annum. Concurrent with each quarterly interest payment, the portion of this swap related to that interest payment was settled and the associated realized gain or loss was recognized. This swap agreement terminated December 15, 2010, coinciding with the maturity of the notes due in 2010.

Additionally, during 2007, we entered into fifteen forward starting interest rate swap agreements for a total stated amount of $1,500,000,000. Upon the 2007 and 2008 issuances of the related fixed-rate debt, we terminated and settled these forward starting swaps for cash payments of $89,777,000. Amounts in AOCI are being amortized to interest expense over the term of the related debt. For the 12-month period ending June 30, 2013, we estimate that $6,055,000 of the pretax loss in AOCI will be reclassified to earnings.

 

The effects of changes in the fair values of derivatives designated as cash flow hedges on the accompanying Condensed Consolidated Statements of Comprehensive Income are as follows:

 

		Location on				Three Months Ended June 30										Six Months Ended June 30
in thousands			Statement				2012				2011						2012				2011
Cash Flow Hedges
Loss reclassified from AOCI (effective portion)			Interest expense				($1,605)				($6,678)						($3,180)				($8,672)

FAIR VALUE HEDGES

We use interest rate swap agreements designated as fair value hedges to minimize exposure to changes in the fair value of fixed-rate debt that results from fluctuations in the benchmark interest rates for such debt. In June 2011, we issued $500,000,000 of 6.50% fixed-rate notes due in 2016. Concurrently, we entered into interest rate swap agreements in the stated amount of $500,000,000. Under these agreements, we paid 6-month LIBOR plus a spread of 4.05% and received a fixed interest rate of 6.50%. Additionally, in June 2011, we entered into interest rate swap agreements on our $150,000,000 10.125% fixed-rate notes due in 2015. Under these agreements, we paid 6-month LIBOR plus a spread of 8.03% and received a fixed interest rate of 10.125%. In August 2011, we terminated and settled these interest rate swap agreements for $25,382,000 of cash proceeds. The $23,387,000 forward component of the settlement (cash proceeds less $1,995,000 of accrued interest) was added to the carrying value of the related debt and is being amortized as a reduction to interest expense over the remaining lives of the related debt using the effective interest method. During the three and six months ended June 30, 2012, $1,004,000 and $1,992,000, respectively, was amortized to earnings as a reduction to interest expense.

The effects of changes in the fair values of derivatives designed as fair value hedges on the accompanying Condensed Consolidated Statements of Comprehensive Income are as follows:

 

		Location on				Three Months Ended June 30										Six Months Ended June 30
in thousands			Statement				2012				2011						2012				2011
Fair Value Hedges
Gain (loss) recognized in income - Interest rate swaps			Interest expense				$0				($7,419	)					$0				($7,419	)
Gain (loss) recognized in income - Fixed rate debt			Interest expense				0				7,419						0				7,419

 

NOTE 6: FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as described below:

Level 1: Quoted prices in active markets for identical assets or liabilities

Level 2: Inputs that are derived principally from or corroborated by observable market data

Level 3: Inputs that are unobservable and significant to the overall fair value measurement

Our assets and liabilities subject to fair value measurements on a recurring basis are summarized below:

 

in thousands		Level 1
		June 30 2012				December 31 2011				June 30 2011
Fair Value Recurring
Rabbi Trust Mutual funds			$14,404				$13,536				$14,836
Equities			7,726				7,057				8,413
Total			$22,130				$20,593				$23,249
in thousands		Level 2
		June 30 2012				December 31 2011				June 30 2011
Fair Value Recurring
Interest rate swaps			$0				$0				($7,419	)
Rabbi Trust Common/collective trust funds			384				2,192				1,368
Total			$384				$2,192				($6,051	)

The Rabbi Trust investments provide funding for the executive nonqualified deferred compensation and excess benefit plans. The fair values of these investments are estimated using a market approach. The Level 1 investments include mutual funds and equity securities for which quoted prices in active markets are available. Investments in Level 2 common/collective trust funds are stated at estimated fair value based on the underlying investments in those funds. The underlying investments are comprised of short-term, highly liquid assets in commercial paper, short-term bonds and treasury bills.

Interest rate swaps are measured at fair value using quoted market prices or pricing models using prevailing market interest rates as of the measurement date. These interest rate swaps are more fully described in Note 5.

The carrying values of our cash equivalents, accounts and notes receivable, current maturities of long-term debt, short-term borrowings, trade payables and accruals, and other current liabilities approximate their fair values because of the short-term nature of these instruments. Additional disclosures for derivative instruments and interest-bearing debt are presented in Notes 5 and 10, respectively.

There were no assets or liabilities subject to fair value measurements on a nonrecurring basis in 2012 and 2011.

 

NOTE 7: OTHER COMPREHENSIVE INCOME (OCI)

Comprehensive income includes charges and credits to equity from nonowner sources and comprises two subsets: net earnings and other comprehensive income. The components of other comprehensive income are presented in the accompanying Condensed Consolidated Statements of Comprehensive Income, net of applicable taxes.

Amounts in accumulated other comprehensive income (loss), net of tax, are as follows:

 

in thousands		June 30 2012				December 31 2011				June 30 2011
Accumulated Other Comprehensive Loss
Cash flow hedges			($30,093)				($31,986)				($33,685)
Pension and postretirement plans			(178,689)				(184,858)				(134,044)
Total			($208,782)				($216,844)				($167,729)

Amounts reclassified from accumulated other comprehensive income (loss) to earnings, are as follows:

 

		Three Months Ended June 30								Six Months  Ended June 30
in thousands		2012				2011				2012				2011
Reclassification Adjustment for Cash Flow Hedges
Interest expense			$1,585				$6,658				$3,140				$8,632
Benefit from income taxes			(630	)			(2,655	)			(1,247	)			(3,179	)
Total			$955				$4,003				$1,893				$5,453
Amortization of Pension and Postretirement Plan Actuarial Loss and Prior Service Cost
Cost of goods sold			$4,039				$2,454				$7,974				$4,697
Selling, administrative and general expenses			1,030				761				2,164				1,545
Benefit from income taxes			(1,985	)			(1,274	)			(3,970	)			(2,084	)
Total			$3,084				$1,941				$6,168				$4,158
Total reclassifications from AOCI to earnings			$4,039				$5,944				$8,061				$9,611

NOTE 8: EQUITY

In February 2011, we issued 372,992 shares (368,527 shares net of acquired cash) of common stock in connection with a business acquisition as described in Note 13.

We periodically sell shares of common stock to the trustee of our 401(k) savings and retirement plan to satisfy the plan participants’ elections to invest in our common stock. The resulting cash proceeds provide a means of improving cash flow, increasing equity and reducing leverage. Under this arrangement, the stock issuances and resulting cash proceeds were as follows:

 

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six months ended June 30, 2012 — no shares issued

 

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twelve months ended December 31, 2011 — issued 110,881 shares for cash proceeds of $4,745,000

 

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six months ended June 30, 2011 — issued 110,881 shares for cash proceeds of $4,745,000

No shares were held in treasury as of June 30, 2012, December 31, 2011 and June 30, 2011. As of June 30, 2012, 3,411,416 shares may be repurchased under the current purchase authorization of our Board of Directors.

 

NOTE 9: BENEFIT PLANS

The following tables set forth the components of net periodic benefit cost:

 

PENSION BENEFITS		Three Months Ended June 30								Six Months Ended June 30
in thousands		2012				2011				2012				2011
Components of Net Periodic Benefit Cost
Service cost			$5,588				$5,191				$11,175				$10,381
Interest cost			10,799				10,650				21,597				21,192
Expected return on plan assets			(12,195	)			(12,370	)			(24,390	)			(24,740	)
Amortization of prior service cost			68				85				137				170
Amortization of actuarial loss			4,881				3,011				9,763				5,835
Net periodic pension benefit cost			$9,141				$6,567				$18,282				$12,838
Pretax reclassification from AOCI included in net periodic pension benefit cost			$4,949				$3,096				$9,900				$6,005

 

OTHER POSTRETIREMENT BENEFITS		Three Months Ended June 30								Six Months Ended June 30
in thousands		2012				2011				2012				2011
Components of Net Periodic Benefit Cost
Service cost			$1,167				$1,198				$2,333				$2,395
Interest cost			1,562				1,612				3,124				3,225
Amortization of prior service credit			(168	)			(168	)			(337	)			(337	)
Amortization of actuarial loss			288				287				575				574
Net periodic postretirement benefit cost			$2,849				$2,929				$5,695				$5,857
Pretax reclassification from AOCI included in net periodic postretirement benefit cost			$120				$119				$238				$237

The reclassifications from AOCI noted in the tables above are related to amortization of prior service costs or credits and actuarial losses as shown in Note 7.

Prior contributions, along with the existing funding credits, should be sufficient to cover expected required contributions to the qualified plans through 2012.

 

NOTE 10: DEBT

Debt is summarized as follows:

 

in thousands		June 30 2012				December 31 2011				June 30 2011
Short-term Borrowings
Bank line of credit											$100,000
Total short-term borrowings											$100,000
Long-term Debt
Bank line of credit			$0				$0
5.60% notes due 2012 1			134,535				134,508				$134,483
6.30% notes due 2013 2			140,382				140,352				140,322
10.125% notes due 2015 3			153,100				153,464				149,628
6.50% notes due 2016 4			516,701				518,293				500,000
6.40% notes due 2017 5			349,878				349,869				349,861
7.00% notes due 2018 6			399,711				399,693				399,675
10.375% notes due 2018 7			248,599				248,526				248,457
7.50% notes due 2021 8			600,000				600,000				600,000
7.15% notes due 2037 9			239,549				239,545				239,717
Medium-term notes			16,000				16,000				21,000
Industrial revenue bonds			14,000				14,000				14,000
Other notes			1,084				1,189				1,349
Fair value adjustments 10			0				0				(7,419	)
Total long-term debt including current maturities			$2,813,539				$2,815,439				$2,791,073
Less current maturities of long-term debt			285,152				134,762				5,230
Total long-term debt			$2,528,387				$2,680,677				$2,785,843
Estimated fair value of long-term debt			$2,636,409				$2,796,504				$2,857,684

 

1

Includes decreases for unamortized discounts, as follows: June 30, 2012 — $22 thousand, December 31, 2011 — $49 thousand and June 30, 2011 — $74 thousand. The effective interest rate for these notes is 6.57%.

 

2

Includes decreases for unamortized discounts, as follows: June 30, 2012 — $62 thousand, December 31, 2011 — $92 thousand and June 30, 2011 — $122 thousand. The effective interest rate for these notes is 7.48%.

 

3

Includes an increase for the unamortized portion of the deferred gain realized upon the August 2011 settlement of interest rate swaps, as follows: June 30, 2012 — $3,402 thousand and December 31, 2011 — $3,802 thousand. Additionally, includes decreases for unamortized discounts, as follows: June 30, 2012 — $302 thousand, December 31, 2011 — $338 thousand, and June 30, 2011 — $372 thousand. The effective interest rate for these notes is 9.59%.

 

4

Includes an increase for the unamortized portion of the deferred gain realized upon the August 2011 settlement of interest rate swaps, as follows: June 30, 2012 — $16,701 thousand and December 31, 2011 — $18,293 thousand. The effective interest rate for these notes is 6.02%.

 

5

Includes decreases for unamortized discounts, as follows: June 30, 2012 — $122 thousand, December 31, 2011 — $131 thousand and June 30, 2011 — $139 thousand. The effective interest rate for these notes is 7.41%.

 

6

Includes decreases for unamortized discounts, as follows: June 30, 2012 — $289 thousand, December 31, 2011 — $307 thousand and June 30, 2011 — $325 thousand. The effective interest rate for these notes is 7.87%.

 

7

Includes decreases for unamortized discounts, as follows: June 30, 2012 — $1,401 thousand, December 31, 2011 — $1,474 thousand and June 30, 2011 — $1,543 thousand. The effective interest rate for these notes is 10.62%.

 

8

The effective interest rate for these notes is 7.75%.

 

9

Includes decreases for unamortized discounts, as follows: June 30, 2012 — $639 thousand, December 31, 2011 — $643 thousand and June 30, 2011 — $646 thousand. The effective interest rate for these notes is 8.05%.

 

10

See Note 5 for additional information about our fair value hedging strategy.

Our long-term debt is presented in the table above net of unamortized discounts from par and unamortized deferred gains realized upon settlement of interest rate swaps. Discounts, deferred gains and debt issuance costs are being amortized using the effective interest method over the respective terms of the notes.

 

The estimated fair value of long-term debt presented in the table above was determined by discounting expected future cash flows based on credit-adjusted interest rates on U.S. Treasury bills, notes or bonds, as appropriate. The fair value estimates were based on Level 2 information (as defined in Note 6) available to us as of the respective balance sheet dates. Although we are not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since those dates.

During 2011, we replaced our $1,500,000,000 bank line of credit that was set to expire on November 16, 2012 with a $600,000,000 bank line of credit. The $600,000,000 bank line of credit expires on December 15, 2016 and is secured by certain domestic accounts receivable and inventory. Borrowing capacity fluctuates with the level of eligible accounts receivable and inventory and may be less than $600,000,000 at any point in time.

Borrowings under the $600,000,000 bank line of credit bear interest at a rate determined at the time of borrowing equal to the lower of LIBOR plus a margin ranging from 1.75% to 2.25% based on the level of utilization, or an alternative rate derived from the lender’s prime rate. Borrowings bearing interest at LIBOR plus the margin are made for periods of 1, 2, 3 or 6 months, and may be extended. Borrowings bearing interest at the alternative rate are made on an overnight basis and may be extended each day. As of June 30, 2012, the applicable margin for LIBOR based borrowing was 1.75%.

Borrowings under the $600,000,000 bank line of credit are classified as long-term debt due to our ability to extend borrowings at the end of each borrowing period. Prior to December 31, 2011, we classified bank line of credit borrowings as short-term debt based on our intent to pay outstanding borrowings within one year.

In June 2011, we issued $1,100,000,000 of long-term notes in two series, as follows: $500,000,000 of 6.50% notes due in 2016 and $600,000,000 of 7.50% notes due in 2021. These notes were issued principally to:

 

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repay and terminate our $450,000,000 floating-rate term loan due in 2015

 

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fund the purchase through a tender offer of $165,443,000 of our outstanding 5.60% notes due in 2012 and $109,556,000 of our outstanding 6.30% notes due in 2013

 

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repay $275,000,000 outstanding under our revolving credit facility

 

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and for general corporate purposes

Unamortized deferred financing costs of $2,423,000 associated with the terminated $450,000,000 floating-rate term loan were recognized in June 2011 as a component of interest expense upon the termination of this floating-rate term loan.

The June 2011 purchases of the 5.60% and 6.30% notes cost $294,533,000, including a $19,534,000 premium above the $274,999,000 face value of the notes. This premium primarily reflects the trading price of the notes at the time of purchase relative to par value. Additionally, $4,711,000 of expense associated with a proportional amount of unamortized discounts, deferred financing costs and amounts accumulated in OCI was recognized in June 2011 upon the partial termination of the notes. The combined expense of $24,245,000 was recognized as a component of interest expense in June 2011.

 

NOTE 11: STANDBY LETTERS OF CREDIT

We provide certain third parties with irrevocable standby letters of credit in the normal course of business. We use commercial banks to issue such letters of credit to back our obligations to pay or perform when required to do so according to the requirements of an underlying agreement. The standby letters of credit listed below are cancelable only at the option of the beneficiaries who are authorized to draw drafts on the issuing bank up to the face amount of the standby letter of credit in accordance with its terms. Our standby letters of credit as of June 30, 2012 are summarized in the table below:

 

in thousands		June 30 2012
Standby Letters of Credit
Risk management requirement for insurance claims			$43,833
Payment surety required by utilities			100
Contractual reclamation/restoration requirements			7,522
Financial requirement for industrial revenue bond			14,230
Total			$65,685

Since banks consider standby letters of credit as contingent extensions of credit, we are required to pay a fee until they expire or are canceled. Substantially all of our standby letters of credit have a one-year term and are automatically renewed unless cancelled with the approval of the beneficiary. All $65,685,000 of our outstanding standby letters of credit as of June 30, 2012, is backed by our $600,000,000 bank line of credit which expires December 15, 2016.

NOTE 12: ASSET RETIREMENT OBLIGATIONS

Asset retirement obligations (AROs) are legal obligations associated with the retirement of long-lived assets resulting from the acquisition, construction, development and/or normal use of the underlying assets.

Recognition of a liability for an ARO is required in the period in which it is incurred at its estimated fair value. The associated asset retirement costs are capitalized as part of the carrying amount of the underlying asset and depreciated over the estimated useful life of the asset. The liability is accreted through charges to operating expenses. If the ARO is settled for other than the carrying amount of the liability, we recognize a gain or loss on settlement.

We record all AROs for which we have legal obligations for land reclamation at estimated fair value. Essentially all these AROs relate to our underlying land parcels, including both owned properties and mineral leases. For the three and six month periods ended June 30, we recognized ARO operating costs related to accretion of the liabilities and depreciation of the assets as follows:

 

		Three Months Ended June 30										Six Months Ended June 30
in thousands		2012				2011						2012				2011
ARO Operating Costs
Accretion		$	1,998			$	2,124					$	4,017			$	4,296
Depreciation			1,863				1,853						3,727				3,395
Total		$	3,861			$	3,977					$	7,744			$	7,691

ARO operating costs are reported in cost of goods sold. AROs are reported within other noncurrent liabilities in our accompanying Condensed Consolidated Balance Sheets.

 

Reconciliations of the carrying amounts of our AROs are as follows:

 

		Three Months Ended June 30								Six Months Ended June 30
in thousands		2012				2011				2012				2011
Asset Retirement Obligations
Balance at beginning of period			$155,402				$162,591				$153,979				$162,730
Liabilities incurred			45				278				45				278
Liabilities settled			(798	)			(3,632	)			(1,419	)			(5,964	)
Accretion expense			1,998				2,124				4,017				4,296
Revisions down, net			(6,234	)			(628	)			(6,209	)			(607	)
Balance at end of period			$150,413				$160,733				$150,413				$160,733

Revisions to our asset retirement obligations during 2012 relate primarily to extensions in the estimated settlement dates at numerous sites.