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  • 10-Q (May 6, 2011)
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  • 10-Q (May 6, 2010)
  • 10-Q (Dec 18, 2009)
  • 10-Q (Nov 6, 2009)

 
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International Coal Group 10-Q 2009

Documents found in this filing:

  1. 10-Q/A
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Graphic
  6. Graphic
frm-10qa.htm
 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q/A
(Amendment No. 1)

(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

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. 001-32679

International Coal Group, Inc.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
 
20-2641185
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)

300 Corporate Centre Drive
Scott Depot, West Virginia
 
25560
(Address of Principal Executive Offices)
 
(Zip Code)

(304) 760-2400
(Registrant’s Telephone Number, Including Area Code)

N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)>

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   
Yes  ¨       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.

Large accelerated filer x Accelerated filer ¨  Non-accelerated filer ¨  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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.       Yes   ¨       No   ¨

APPLICABLE ONLY TO CORPORATE ISSUERS:

Number of shares of the Registrant’s Common Stock, $0.01 par value, outstanding as of November 1, 2009—154,154,964. 
 
 
 

 

EXPLANATORY NOTE

We are filing this Form 10-Q/A Amendment No. 1 (this “Amendment”) to amend and restate certain information that was included in our original Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009 (the “Third Quarter 2009 Form 10-Q”) as described below. For the convenience of the reader, this Amendment sets forth the entire Third Quarter 2009 Form 10-Q. However, this Amendment amends and restates only Item 1 of Part I of the Third Quarter 2009 Form 10-Q. The other Items are not being amended. Except as described in this Explanatory Note, this Amendment does not modify or update the disclosures in our Third Quarter 2009 Form 10-Q. Therefore, this Amendment does not reflect any other events that occurred after the original November 6, 2009 filing date of the Third Quarter 2009 Form 10-Q. Forward-looking statements in this Amendment have also not been updated from the Third Quarter 2009 Form 10-Q that we filed on November 6, 2009. For updated information, please see the reports that we have filed with the SEC for subsequent periods. In addition, in connection with the filing of this Amendment and pursuant to Rules 12b-15 and 13a-14 under the Exchange Act, we are including with this Amendment currently dated certifications.

Subsequent to the issuance of our consolidated financial statements for the period ended September 30, 2009, we identified an error in the application of ASC Subtopic 715-20-65-1, Transition Related to FASB Statement No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, and FSP FAS 158-1, on our employee benefits liability. We had not previously recorded the unfunded status of our black lung obligation as a liability in our statement of financial position or recognized changes in the funded status of the obligation in the year in which the changes occurred through comprehensive income. As a result of this error, as of September 30, 2009, we overstated our employee benefits liability by approximately $4.3 million and accumulated other comprehensive loss by approximately $2.7 million and understated our deferred tax liability by approximately $1.6 million. We do not believe these errors are material to the consolidated financial statements. See Note 15 accompanying our condensed consolidated financial statements for further information regarding adjustment of the applicable financial statement line items.


 
 

 

TABLE OF CONTENTS
 
 
 
 
 
Page
 
 
PART I—FINANCIAL INFORMATION
 
 
Item 1.
 
Condensed Consolidated Financial Statements
 
3
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
22
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
40
Item 4.
 
Controls and Procedures
 
41
 
 
PART II—OTHER INFORMATION
 
 
Item 1.
 
Legal Proceedings
 
41
Item 1A.
 
Risk Factors
 
41
Item 6.
 
Exhibits
 
44

2

 
 

 


PART I

Condensed Consolidated Financial Statements

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except per share amounts)

   
September 30,
2009
   
December 31,
2008
 
ASSETS
  
         
CURRENT ASSETS:
  
             
Cash and cash equivalents
  
$
97,660
   
$
63,930
 
Accounts receivable, net of allowances of $222 and $1,516
  
 
80,005
     
75,321
 
Inventories, net
  
 
78,576
     
58,788
 
Deferred income taxes
  
 
16,817
     
17,649
 
Prepaid insurance
  
 
3,020
     
13,380
 
Income taxes receivable
  
 
11
     
8,030
 
Prepaid expenses and other
  
 
8,834
     
10,893
 
Total current assets
  
 
284,923
     
247,991
 
                 
PROPERTY, PLANT, EQUIPMENT AND MINE DEVELOPMENT, net
  
 
1,039,934
     
1,069,297
 
DEBT ISSUANCE COSTS, net
  
 
9,576
     
10,462
 
ADVANCE ROYALTIES, net
  
 
18,061
     
17,462
 
OTHER NON-CURRENT ASSETS
  
 
6,701
     
5,435
 
Total assets
  
$
1,359,195
   
$
1,350,647
 
 
  
             
LIABILITIES AND STOCKHOLDERS’ EQUITY
  
             
CURRENT LIABILITIES:
  
             
Accounts payable
  
$
56,665
   
$
75,810
 
Short-term debt
   
269
     
4,741
 
Current portion of long-term debt and capital lease
  
 
17,998
     
15,319
 
Current portion of reclamation and mine closure costs
  
 
10,118
     
11,139
 
Current portion of employee benefits
  
 
3,359
     
3,359
 
Accrued expenses and other
  
 
72,026
     
87,704
 
Total current liabilities
  
 
160,435
     
198,072
 
                 
LONG-TERM DEBT AND CAPITAL LEASE
  
 
426,223
     
417,551
 
RECLAMATION AND MINE CLOSURE COSTS
  
 
69,812
     
68,107
 
EMPLOYEE BENEFITS
  
 
65,216
     
56,563
 
DEFERRED INCOME TAXES
  
 
58,129
     
51,154
 
BELOW-MARKET COAL SUPPLY AGREEMENTS
  
 
30,589
     
43,888
 
OTHER NON-CURRENT LIABILITIES
  
 
4,001
     
6,195
 
Total liabilities
  
 
814,405
     
841,530
 
                 
COMMITMENTS AND CONTINGENCIES
  
 
  
     
  
 
                 
STOCKHOLDERS’ EQUITY:
  
             
Preferred stock – par value $0.01, 200,000,000 shares authorized, none issued
  
 
—  
     
—  
 
Common stock – par value $0.01, 2,000,000,000 shares authorized, 154,159,183 and 154,151,862 shares issued and outstanding, respectively, as of September 30, 2009 and 153,322,245 shares issued and outstanding, as of December 31, 2008
  
 
1,542
     
1,533
 
Treasury stock
   
(14
)
   
—  
 
Additional paid-in capital
  
 
659,955
     
656,997
 
Accumulated other comprehensive loss
  
 
(2,331
)
   
(2,277
)
Retained deficit
  
 
(114,380
)
   
(147,171
)
Total International Coal Group, Inc. stockholders’ equity
  
 
544,772
     
509,082
 
Noncontrolling interest
  
 
18
     
35
 
Total stockholders’ equity
  
 
544,790
     
509,117
 
Total liabilities and stockholders’ equity
  
$
1,359,195
   
$
1,350,647
 
 
  
             

See notes to condensed consolidated financial statements.

3

 
 

 

 

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share amounts)
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
REVENUES:
               
  
             
Coal sales revenues
 
$
246,788
   
$
282,250
 
  
$
775,281
   
$
761,963
 
Freight and handling revenues
   
5,777
     
12,339
 
  
 
20,452
     
35,492
 
Other revenues
   
44,057
     
14,610
 
  
 
83,652
     
41,554
 
Total revenues
   
296,622
     
309,199
 
  
 
879,385
     
839,009
 
COSTS AND EXPENSES:
               
  
             
Cost of coal sales
   
208,083
     
240,204
 
  
 
647,372
     
666,598
 
Freight and handling costs<BTB><TABLE><CAPTION>
   
5,777
     
12,339
 
  
 
20,452
     
35,492
 
Cost of other revenues
   
12,724
     
9,690
 
  
 
28,690
     
27,847
 
Depreciation, depletion and amortization
   
26,996
     
24,227
 
  
 
79,294
     
70,878
 
Selling, general and administrative
   
5,351
     
8,396
 
  
 
24,632
     
27,051
 
(Gain) loss on sale of assets, net
   
2
     
(6,383
)
  
 
(3,184
)
   
(32,675
)
Total costs and expenses
   
258,933
     
288,473
 
  
 
797,256
     
795,191
 
Income from operations
   
37,689
     
20,726
 
  
 
82,129
     
43,818
 
INTEREST EXPENSE, net
   
(13,409
)
   
(9,455
)
  
 
(39,641
)
   
(30,819
)
Income before income taxes
   
24,280
     
11,271
 
  
 
42,488
     
12,999
 
INCOME TAX EXPENSE
   
(5,566
)
   
(1,949
  
 
(9,674
)
   
(1,815
Net income
   
18,714
     
9,322
     
32,814
     
11,184
 
Net (income) loss attributable to noncontrolling interest
   
2
     
2
 
  
 
(23
)
   
(3
)
Net income attributable to International Coal Group, Inc.
 
$
18,716
   
$
9,324
 
  
$
32,791
   
$
11,181
 
                 
  
             
Earnings per share:
               
  
             
Basic
 
$
0.12
   
$
0.06
 
  
$
0.21
   
$
0.07
 
Diluted
 
$
0.12
   
$
0.06
 
  
$
0.21
   
$
0.07
 
Weighted-average common shares outstanding:
               
  
             
Basic
   
152,998,598
     
152,761,955
 
  
 
152,869,195
     
152,587,831
 
Diluted
   
155,214,868
     
153,025,680
 
  
 
154,289,039
     
152,745,474
 

See notes to condensed consolidated financial statements.
 
4

 
 

 

 
INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
 
   
Nine months ended
September 30,
 
   
2009
   
2008
 
CASH FLOWS FROM OPERATING ACTIVITIES:
  
             
Net income
  
$
32,814
   
$
11,184
 
Adjustments to reconcile net income to net cash from operating activities:
  
             
Depreciation, depletion and amortization
  
 
79,294
     
70,878
 
Amortization of deferred finance costs and debt discount
  
 
5,183
     
4,559
 
Provision for bad debt
   
(1,294
)
   
(522
)
Compensation expense on equity instruments
  
 
2,967
     
3,216
 
Gain on sale of assets, net
  
 
(3,184
)
   
(32,675
)
Deferred income taxes
  
 
8,416
     
1,680
 
Amortization of accumulated employee benefit obligations
  
 
(78
   
(387
)
Changes in assets and liabilities:
  
             
Accounts receivable
  
 
(3,390
)
   
(33,337
)
Inventories
  
 
(19,788
)
   
(7,172
)
Prepaid expenses and other
  
 
20,438
     
3,007
 
Other non-current assets
  
 
246
     
1,969
 
Accounts payable
  
 
(14,779
)
   
5,625
 
Accrued expenses and other
  
 
(15,798
)
   
13,492
 
Reclamation and mine closure costs
  
 
1,231
     
(1,961
)
Other liabilities
  
 
(1,238
   
4,912
 
Net cash from operating activities
  
 
91,040
     
44,468
 
CASH FLOWS FROM INVESTING ACTIVITIES:
  
             
Proceeds from the sale of assets
  
 
3,218
     
8,688
 
Additions to property, plant, equipment and mine development
  
 
(48,695
)
   
(93,632
)
Cash paid related to acquisitions and net assets acquired
   
—  
     
(603
)
(Deposits) withdrawals of restricted cash
  
 
(1,535
)
   
18
 
Net cash from investing activities
  
 
(47,012
)
   
(85,529
)
CASH FLOWS FROM FINANCING ACTIVITIES:
  
             
Repayments on short-term debt
  
 
(4,472
)
   
—  
 
Borrowings on long-term debt and capital lease
   
9,086
     
—  
 
Repayments on long-term debt and capital lease
  
 
(13,682
)
   
(3,828
)
Purchases of treasury stock
   
(14
)
   
—  
 
Proceeds from stock options exercised
   
—  
     
149
 
Debt issuance costs
  
 
(1,216
)
   
(188
)
Net cash from financing activities
  
 
(10,298
)
   
(3,867
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
  
 
33,730
     
(44,928
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
  
 
63,930
     
107,150
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
  
$
97,660
   
$
62,222
 
 
  
             
Supplemental information:
  
             
Cash paid for interest (net of amount capitalized)
  
$
43,292
   
$
35,859
 
Cash received for income taxes, net
  
$
7,164
   
$
—  
 
Supplemental disclosure of non-cash items:
  
             
Purchases of property, plant, equipment and mine development through accounts payable
  
$
8,576
   
$
13,481
 
Purchases of property, plant, equipment and mine development through financing arrangements
 
$
12,866
   
$
17,294
 
Assets acquired through assumption of liabilities
 
$
—  
   
$
17,464
 
Assets acquired through the exchange of coal reserves
  
$
—  
   
$
22,608
 

See notes to condensed consolidated financial statements.
 
5

 
 

 

 
INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2009
(Dollars in thousands, except per share amounts)

(1) Basis of Presentation

The accompanying interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and include the accounts of International Coal Group, Inc. and its subsidiaries (the “Company”) and its controlled affiliates. Significant intercompany transactions, profits and balances have been eliminated in consolidation. The Company accounts for its undivided interest in coalbed methane wells using the proportionate consolidation method, whereby its share of assets, liabilities, revenues and expenses are included in the appropriate classification in the financial statements.

The accompanying interim condensed consolidated financial statements as of September 30, 2009 and for the three and nine months ended September 30, 2009 and 2008, and the notes thereto, are unaudited. However, in the opinion of management, these financial statements reflect all normal, recurring adjustments necessary for a fair presentation of the results of the periods presented. The balance sheet information as of December 31, 2008 has been derived from the Company’s audited consolidated balance sheet. These statements should be read in conjunction with the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2008. The results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for future quarters or for the year ending December 31, 2009.

(2) Summary of Significant Accounting Policies and General

Fair Value Measurements>—In September 2006, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 clarified the definition of fair value, established a framework for measuring fair value and expanded the disclosures on fair value measurements. Additionally, ASC 820 permitted delayed adoption for certain non-financial assets and liabilities, which are not recognized at fair value on a recurring basis, until fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008. ASC 820 demonstrated how the fair value of a financial asset is determined when the market for that financial asset is inactive, provided guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability and provided guidance on circumstances that may indicate that a transaction is not orderly. ASC 820 is effective for fiscal years beginning after November 15, 2007. Adoption of ASC 820 did not have a material impact on the Company’s financial position, results of operations or cash flows.

Convertible Debt>—In May 2008, the FASB issued ASC Subtopic 470-20, Debt with Conversion and Other Options (“ASC 470-20”). ASC 470-20 required the liability and equity components of convertible debt instruments that may be settled in cash upon conversion to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. To allocate the proceeds from a convertible debt offering in this manner, a company determines the carrying amount of the liability component, which is based on the fair value of a similar liability, excluding any embedded conversion options. The resulting debt discount is amortized as additional non-cash interest expense over the period during which the debt is expected to be outstanding. ASC 470-20 was effective for financial statements for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and has been applied retrospectively for all periods presented. The Company has determined its non-convertible borrowing rate would have been 11.7% at issuance. The effect of adoption of ASC 470-20 was as follows:

6

 
 

 

 
INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2009
(Dollars in thousands, except per share amounts)

   
Three months ended
September 30, 2008
 
Nine months ended
September 30, 2008
 
 
Consolidated Statement of Operations
 
As Previously
Reported
   
   
Adjustment
   
As
 Adjusted
 
As Previously
Reported
   
    
Adjustment
   
As
 Adjusted
 
Interest expense, net
 
$
(8,837
)
 
$
(618
)
 
$
(9,455
$
(29,019
)
 
$
(1,800
)
 
$
(30,819
)
Income tax expense
   
(2,183
)
   
234
     
(1,949
 
(2,496
)
   
681
     
(1,815
)
Net income attributable to International Coal Group, Inc.
   
9,708
     
(384
)
   
9,324
   
12,300
     
(1,119
)
   
11,181
 
Earnings per share:
                                             
     Basic and diluted
 
$
0.06
   
$
—  
   
$
0.06
 
$
0.08
   
$
(0.01
)
 
$
0.07
 


   
Nine months ended
September 30, 2008
 
Consolidated Statement of Cash Flows
 
As Previously
Reported
   
Adjustment
   
As
Adjusted
 
Net loss
 
$
12,303
(1)
 
$
(1,119
)
 
$
11,184
 
Amortization of deferred finance costs and debt discount
   
2,123
     
2,436
     
4,559
 
Deferred income taxes
   
2,360
     
(680
)
   
1,680
 
                         
Additions to property, plant, equipment and mine development
   
(92,995
)
   
(637
)
   
(93,632
)

(1)  
Amount reflects immaterial adjustment of $3 related to the Company’s retrospective adoption of ASC Topic 810.

Business Combinations>—In December 2007, the FASB issued ASC Topic 805, Business Combinations (“ASC 805”). ASC 805 will significantly change the accounting for business combinations. Under ASC 805, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. ASC 805 will change the accounting treatment for certain specific acquisition-related items including: (i) expensing acquisition-related costs as incurred, (ii) valuing noncontrolling interests at fair value at the acquisition date and (iii) expensing restructuring costs associated with an acquired business. ASC 805 also includes a substantial number of new disclosure requirements. ASC 805 is to be applied to any business combination for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Adoption of ASC 805 will impact the accounting for the Company’s future business combinations, as well as for tax uncertainties and valuation allowances from prior acquisitions.

7

 
 

 

 
INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2009
(Dollars in thousands, except per share amounts)
 
Noncontrolling Interests>—In December 2007, the FASB issued ASC Topic 810, Consolidation (“ASC 810”). ASC 810 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary (minority interest) is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and separate from the parent company’s equity. Among other requirements, this statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of operations, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. ASC 810 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Adoption of ASC 810 impacted the presentation of noncontrolling interest in the Company’s balance sheets and statements of operations and cash flows. The impact of the changes in presentation was not material.





8

 
 

 

 
INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2009
(Dollars in thousands, except per share amounts)





Corporate Vacation Policy>—In June 2009, the Company changed its policy related to when employees are credited with vacation time. Under the original policy, employees earned their vacation in the year prior to vesting, and were vested with 100% of their annual vacation time on January 1st of each year. Under the revised policy, employees are vested in their vacation time ratably throughout the year as it is earned. If the Company continued to account for vacation under the old policy, it would have recognized additional cost of coal sales, cost of other revenues and selling, general and administrative expenses of $1,775, $102 and $113, respectively, for the three months ended September 30, 2009 and $5,323, $332 and $381, respectively, for the nine months ended September 30, 2009.

9


 
 

 

 
INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2009
(Dollars in thousands, except per share amounts)

(3) Inventories

Inventories consisted of the following:

   
September 30,
2009
   
December 31,
2008
 
Coal
  
$
46,322
   
$
28,436
 
Parts and supplies
  
 
34,305
     
32,159
 
Reserve for obsolescence–parts and supplies
  
 
(2,051
)
   
(1,807
)
Total
  
$
78,576
   
$
58,788
 
 
 (4) Property, Plant, Equipment and Mine Development

Property, plant, equipment and mine development are summarized by major classification as follows:
 
   
September 30,
2009
   
December 31,
2008
 
Coal lands and mineral rights
  
$
586,508
   
$
586,512
 
Plant and equipment
  
 
604,719
     
571,083
 
Mine development
  
 
193,576
     
181,876
 
Land and land improvements
  
 
24,569
     
24,119
 
Coalbed methane well development costs
  
 
14,889
     
14,889
 
 
  
 
1,424,261
     
1,378,479
 
Less accumulated depreciation, depletion and amortization
  
 
(384,327
)
   
(309,182
)
Net property, plant, equipment and mine development
  
$
1,039,934
   
$
1,069,297
 

Depreciation, depletion and amortization expense related to property, plant, equipment and mine development was $27,431 and $25,852 for the three months ended September 30, 2009 and 2008, respectively, and $84,864 and $77,959 for the nine months ended September 30, 2009 and 2008, respectively.

In June 2008, the Company exchanged coal reserves with a third-party. In addition to reserves, the Company received $3,000 in cash. As a result, the Company recognized a pre-tax gain of $24,633 based upon the fair value of the underlying assets received in the exchange, which is included in gain on sale of assets in its statement of operations for the nine months ended September 30, 2008. Additionally, in September 2008, the Company exchanged certain property resulting in the recognition of a $975 pre-tax gain based upon the fair value of the underlying assets given up in the exchange. The gain is included in gain on sale of assets in the Company’s statement of operations for the three and nine months ended September 30, 2008.

10

 
 

 

 
INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2009
(Dollars in thousands, except per share amounts)

(5) Debt

Long-Term Debt and Capital Lease

Long-term debt and capital lease consisted of the following:

   
September 30,
2009
   
December 31,
2008
 
9.00% Convertible Senior Notes, due 2012, net of debt discount of $14,287 and $17,369, respectively
  
$
210,713
   
$
207,631
 
10.25% Senior Notes, due 2014
  
 
175,000
     
175,000
 
Equipment notes
   
54,566
     
43,378
 
Capital lease and other
  
 
3,942
     
6,861
 
Total
  
 
444,221
     
432,870
 
Less current portion
  
 
(17,998
)
   
(15,319
)
Long-term debt and capital lease
  
$
426,223
   
$
417,551
 

Convertible senior notes>—In 2007, the Company completed a private offering of $225,000 aggregate principal amount of 9.00% Convertible Senior Notes (the “Convertible Notes”) due 2012. The Convertible Notes are the Company’s senior unsecured obligations and are guaranteed on a senior unsecured basis by the Company’s material current and future domestic subsidiaries. The Convertible Notes and the related guarantees rank equal in right of payment to all of the Company’s and the guarantors’ respective existing and future unsecured senior indebtedness. Interest is payable semi-annually in arrears on February 1st and August 1st of each year. The Company assesses the convertibility of the Convertible Notes on an ongoing basis. The Convertible Notes were not convertible as of September 30, 2009.

The principal amount of the Convertible Notes is payable in cash and amounts above the principal amount, if any, will be convertible into shares of the Company’s common stock or, at the Company’s option, cash. The Convertible Notes are convertible at an initial conversion price, subject to adjustment, of $6.10 per share (approximating 163.8136 shares per one thousand dollar principal amount of the Convertible Notes). The Convertible Notes are convertible upon the occurrence of certain events, including (i) prior to February 12, 2012 during any calendar quarter after September 30, 2007, if the closing sale price per share of the Company’s common stock for each of 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the conversion price in effect on the last trading day of the immediately preceding calendar quarter; (ii) prior to February 12, 2012 during the five consecutive business days immediately after any five consecutive trading day period in which the average trading price for the notes on each day during such five trading-day period was equal to or less than 97% of the closing sale price of the Company’s common stock on such day multiplied by the then current conversion rate; (iii) upon the occurrence of specified corporate transactions; and (iv) at any time from, and including February 1, 2012 until the close of business on the second business day immediately preceding August 1, 2012. In addition, upon events defined as a “fundamental change” under the Convertible Notes indenture, the Company may be required to repurchase the Convertible Notes at a repurchase price in cash equal to 100% of the principal amount of the notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. As such, in the event the Convertible Notes become convertible, the Company would be required to classify the entire amount outstanding of the Convertible Notes as a current liability

11

 
 

 

 
INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2009
(Dollars in thousands, except per share amounts)

in the following quarter. In the event that a significant number of the holders of the Convertible Notes were to convert their notes prior to maturity, the Company may not have enough available funds at any particular time to make the required repayments. Under these circumstances, the Company would look to WL Ross & Co. LLC (“WLR”), its banking group and other potential lenders to obtain short-term funding until such time that it could secure necessary financing on a long-term basis. The availability of any such financing would depend upon the circumstances at the time, including the terms of any such financing, and other factors. In addition, if conversion occurs in connection with certain changes in control, the Company may be required to deliver additional shares of the Company’s common stock (a “make-whole” premium) by increasing the conversion rate with respect to such notes. For a discussion of the effects of the Convertible Notes on earnings per share, see Note 8.

Effective January 1, 2009, the Company adopted ASC 470-20 (see Note 2). ASC 470-20 requires disclosure of the carrying amount of the equity component of the related convertible debt, as well as the interest expense resulting from amortization of the debt discount and interest expense recognized on the principal amount of the debt. As of September 30, 2009 and December 31, 2008, the equity component of the convertible debt was $13,517 and is included in additional paid-in capital. Interest expense resulting from amortization of the debt discount was $1,060 and $946 for the three months ended September 30, 2009 and 2008, respectively, and $3,082 and $2,750 for the nine months ended September 30, 2009 and 2008, respectively. Interest expense on the principal amount of the Convertible Notes was $5,063 for each of the three month periods ended September 30, 2009 and 2008 and $15,189 for each of the nine month periods ended September 30, 2009 and 2008.

Credit facility>—The Company has a $100,000 revolving credit facility (the “Credit Facility”) which matures on June 23, 2011. A maximum of $80,000 may be used for letters of credit. In September 2009, the Company executed an amendment to the Credit Facility that affected certain debt covenants. The amendment modified the maximum permitted leverage and minimum interest coverage ratios for 2010 and thereafter. The amendment also decreased the maximum capital spending and added a minimum liquidity requirement for 2010. Pursuant to the amendment, interest on the borrowings under the Credit Facility is payable, at the Company’s option, at either the base rate plus an applicable margin of 2.75% to 3.50% or LIBOR plus an applicable margin of 3.75% to 4.50%, based on the Company’s leverage ratio. As of September 30, 2009, the Company had no borrowings outstanding and letters of credit totaling $73,551 outstanding, leaving $26,449 available for future borrowing capacity, and was in compliance with its financial covenants under the Credit Facility.



Short-Term Debt

The Company finances the majority of its insurance premiums, a portion of which is included in short-term debt. As of September 30, 2009, the interest rate applicable to the note was 5.60%. As of September 30, 2009 and December 31, 2008, the Company had $269 and $4,741, respectively, outstanding related to the financing of insurance premiums.

12

 
 

 
 

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2009
(Dollars in thousands, except per share amounts)
 
 (6) Income Taxes

The effective income tax rates for the three and nine months ended September 30, 2009 and 2008 were calculated using estimated annual effective rates based on projected earnings for the respective years, exclusive of discrete items. The effective income tax rate for the three months ended September 30, 2009 increased to 24% from 17% for the three months ended September 30, 2008. The increase was primarily a result of the effect of income tax deductions for depletion of mineral rights on increased quarterly earnings. The effective income tax rate for the nine months ended September 30, 2009 increased to 22% from 14% for the nine months ended September 30, 2008. The increase was primarily a result of the effect of income tax deductions for depletion of mineral rights on increased projected earnings, combined with an increase in other non-deductible expenses and miscellaneous items.

(7) Employee Benefits

Postretirement Benefits

The following table details the components of the net periodic benefit cost for postretirement benefits other than pensions for the three and nine months ended September 30, 2009 and 2008.

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Net periodic benefit cost:
                       
Service cost
  $ 833     $ 651     $ 2,501     $ 1,955  
Interest cost
    437       407       1,311       1,220  
Amortization of actuarial loss
    72       107       216       322  
Benefit cost
  $ 1,342     $ 1,165     $ 4,028     $ 3,497  

The plan is unfunded, therefore, no contributions were made by the Company for the three and nine months ended September 30, 2009 and 2008.

Black Lung Benefits

The following table details the components of the net periodic benefit cost for black lung benefits for the three and nine months ended September 30, 2009 and 2008.

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Net periodic benefit cost:
                       
Service cost
  $ 693     $ 511     $ 2,079     $ 1,534  
Interest cost
    395       402       1,184       1,208  
Amortization of actuarial gain
    (98 )       (236 )       (294 )       (710 )  
Benefit cost
  $ 990     $ 677     $ 2,969     $ 2,032  

The plan is unfunded, therefore, no contributions were made by the Company for the three and nine months ended September 30, 2009 and 2008.


13

 
 

 

 
 INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2009
(Dollars in thousands, except per share amounts)

(8) Earnings Per Share

Basic earnings per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period, excluding restricted common stock subject to continuing vesting requirements. Diluted earnings per share is calculated based on the weighted-average number of common shares outstanding during the period and, when dilutive, potential common shares from the exercise of stock options, restricted common stock subject to continuing vesting requirements, restricted stock units and convertible debt, pursuant to the treasury stock method.

Reconciliations of weighted-average shares outstanding used to compute basic and diluted earnings per share for the three and nine months ended September 30, 2009 and 2008 are as follows:

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Net income attributable to International Coal Group, Inc.
  $ 18,716     $ 9,324     $ 32,791     $ 11,181  
                                 
Weighted-average common shares outstanding—basic
    152,998,598       152,761,955       152,869,195       152,587,831  
Incremental shares arising from:
                               
Stock options
    503,020       172,624       88,861       27,249  
Restricted shares
    1,529,555       91,101       1,246,964       130,394  
Restricted stock units
    183,695             84,019        
Convertible notes
                       
Weighted-average common shares outstanding—diluted
    155,214,868       153,025,680       154,289,039       152,745,474  
                                 
Earnings Per Share:
                               
Basic
  $ 0.12     $ 0.06     $ 0.21     $ 0.07  
Diluted
  $ 0.12     $ 0.06     $ 0.21     $ 0.07  

Options to purchase 2,736,072 and 2,755,272 shares of common stock outstanding at September 30, 2009 have been excluded from the computation of diluted net income per share for the three and nine months, respectively, ended September 30, 2009 because their effect would have been anti-dilutive. Options to purchase 1,076,552 and 1,105,352 shares of common stock outstanding at September 30, 2008 have been excluded from the computation of diluted net income per share for the three and nine months, respectively, ended September 30, 2008 because their effect would have been anti-dilutive.

The principal amount of the Convertible Notes is payable in cash and amounts above the principal amount, if any, will be settled with shares of the Company’s common stock or, at the Company’s option, cash. The volume weighted-average price of the Company’s common stock for the applicable cash settlement averaging period was below the initial conversion price of $6.10 per share. Accordingly, there were no potentially dilutive shares related to the Convertible Notes at September 30, 2009 and 2008.

(9) Fair Value of Financial Instruments

The estimated fair values of the Company’s financial instruments are determined based on relevant market information. These estimates involve uncertainty and cannot be determined with precision. The following methods and assumptions were used to estimate the fair value of each class of financial instrument.


14

 
 

 
 

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2009
(Dollars in thousands, except per share amounts)


The carrying value of the Company’s capital lease obligations and other debt approximate fair value at September 30, 2009 and December 31, 2008.

(10) Commitments and Contingencies


Coal Supply Agreements>—Purchase price allocated to the Company’s below-market coal supply agreements (sales contracts) acquired in acquisitions accounted for as business combinations were capitalized and are being amortized on the basis of coal to be shipped over the term of each respective contract. Value was allocated to these coal supply agreements based on discounted cash flows attributable to the difference between the below-market contract price and the prevailing market price at the date of acquisition. The net book value of the Company’s below-market coal supply agreements was $30,589 and $43,888 at September 30, 2009 and December 31, 2008, respectively. Amortization income on the below-market coal supply agreements was $443 and $1,626 for the three months ended September 30, 2009 and 2008, respectively, and $5,578 and $7,081 for the nine months ended September 30, 2009 and 2008, respectively. Amortization income is included in depreciation, depletion and amortization expense. Based on the expected shipments related to the remaining below-market contracts, the Company expects to record annual amortization income in each of the next five years as reflected in the table below.

   
Below-market
 contracts
 
2009 (remainder of year)
 
$
699
 
2010
   
3,287
 
2011
   
3,287
 
2012
   
3,287
 
2013
   
3,287
 


In June 2009, the Company terminated a below-market coal supply agreement and realized a $7,721 pre-tax non-cash gain. The gain is included in other revenues in the Company’s statement of operations for the nine months ended September 30, 2009.

In July 2009, one of the Company’s customers elected to exercise contractual options that provided for early termination of two related coal supply agreements. The Company received a $27,000 payment for early termination of the agreements and lost margin on pre-termination shipments. The income is included in other revenues in the Company’s statement of operations for the three and nine months ended September 30, 2009.

15

 
 

 
 

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2009
(Dollars in thousands, except per share amounts)

Legal Matters>—On August 23, 2006, a survivor of the Sago mine accident, Randal McCloy, filed a complaint in the Kanawha Circuit Court in Kanawha County, West Virginia. The claims brought by Randal McCloy and his family against the Company and certain of its subsidiaries, and against W.L. Ross & Co., and Wilbur L. Ross, Jr., individually, were dismissed on February 14, 2008, after the parties reached a confidential settlement. Sixteen other complaints have been filed in Kanawha Circuit Court by the representatives of many of the miners who died in the Sago mine accident, and several of these plaintiffs have filed amended complaints to expand the group of defendants in the cases. The complaints allege various causes of action against the Company and its subsidiary, Wolf Run Mining Company, one of its shareholders, W.L. Ross & Co., and Wilbur L. Ross Jr., individually, related to the accident and seek compensatory and punitive damages. In addition, the plaintiffs also allege causes of action against other third parties, including claims against the manufacturer of Omega block seals used to seal the area where the explosion occurred and against the manufacturer of self-contained self-rescuer (“SCSR”) devices worn by the miners at the Sago mine. Some of these third parties have been dismissed from the actions upon settlement. The amended complaints add other of the Company’s subsidiaries to the cases, including ICG, Inc., ICG, LLC and Hunter Ridge Coal Company, unnamed parent, subsidiary and affiliate companies of the Company, W.L. Ross & Co., and Wilbur L. Ross Jr., and other third parties, including a provider of electrical services and a supplier of components used in the SCSR devices. The Company believes that it is appropriately insured for these and other potential claims, and has fully paid its deductible applicable to its insurance policies. In addition to the dismissal of the McCloy claim, the Company has settled and dismissed five other actions. These settlements required the release of the Company, its subsidiaries, W.L. Ross & Co., and Wilbur L. Ross, Jr. Some of the plaintiffs involved in one of the dismissed actions sought permission from the Supreme Court of Appeals of West Virginia to appeal the settlement, alleging that the settlement negotiated by the decedent’s estate should not have been approved by the trial court. The West Virginia Supreme Court of Appeals refused the petition for appeal by order entered September 3, 2009, rendering such settlement final. The Company will vigorously defend itself against the remaining complaints and any appeal of any prior settlements.

Allegheny Energy Supply (“Allegheny”), the sole customer of coal produced at the Company’s subsidiary Wolf Run Mining Company’s (“Wolf Run”) Sycamore No. 2 mine, filed a lawsuit against Wolf Run, Hunter Ridge Holdings, Inc. (“Hunter Ridge”), and the Company in state court in Allegheny County, Pennsylvania on December 28, 2006, and amended its complaint on April 23, 2007. Allegheny claims that the Company breached a coal supply contract when it declared force majeure under the contract upon idling the Sycamore No. 2 mine in the third quarter of 2006. The Sycamore No. 2 mine was idled after encountering adverse geologic conditions and abandoned gas wells that were previously unidentified and unmapped. The amended complaint also alleges that the production stoppages constitute a breach of the guarantee agreement by Hunter Ridge and breach of certain representations made upon entering into the contract in early 2005, a claim that Allegheny has since voluntarily dropped. Allegheny claims that it will incur costs in excess of $100,000 to purchase replacement coal over the life of the contract. The Company, Wolf Run and Hunter Ridge answered the amended complaint on August 13, 2007, disputing all of the remaining claims. On November 3, 2008, the Company, Wolf Run and Hunter Ridge filed an amended answer and counterclaim against the plaintiffs seeking to void the coal supply agreement due to, among other things, fraudulent inducement and conspiracy. The counterclaim alleges further that Allegheny breached a confidentiality agreement with Hunter Ridge, which prohibited the solicitation of its employees. After the coal supply agreement was executed, Allegheny hired the then-president of Anker Coal Group, Inc. (now Hunter Ridge) who engaged in negotiations on behalf of Wolf Run and Hunter Ridge. In addition to seeking a declaratory judgment that the coal supply agreement and guaranty be deemed void and unenforceable and rescission of the contracts, the counterclaim also seeks compensatory and punitive damages. On September 23, 2009, Allegheny filed a second amended complaint alleging several alternative theories of liability in its effort to extend contractual liability to the Company, which was not a party to the original contract. No new substantive claims were asserted. The Company answered the second amended complaint on October 13, 2009, denying all of the new claims. In late September 2009, Allegheny suspended deliveries from the Sycamore No. 2 mine, claiming excessive inventory at its Harrison station. The Sycamore No. 2 mine remains on idle status with no indication from the customer as to when shipments will resume.

16

 
 

 

 
INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2009
(Dollars in thousands, except per share amounts)
  
On December 6, 2007, the Kentucky Waterways Alliance, Inc., and The Sierra Club sued the U.S. Army Corps of Engineers (the “Corps”) in the United States District Court for the Western District of Kentucky, Louisville Division, asserting that a permit to construct five valley fills was issued unlawfully to the Company’s Hazard subsidiary for its Thunder Ridge Surface mine. The suit alleges that the Corps failed to comply with the requirements of both Section 404 of the Clean Water Act and the National Environmental Policy Act. Hazard intervened in the suit to protect the Company’s interests. The Corps suspended the Section 404 permit on December 26, 2007 in order to evaluate the issues raised by the plaintiffs. The Corps completed its evaluation on March 25, 2009, and on March 27, 2009, reinstated Hazard’s permit. Pursuant to earlier agreements with the plaintiffs in the litigation, the Company provided thirty (30) days notice to plaintiffs’ counsel of Hazard’s intent to proceed with activities authorized under the permit. After such notice, the plaintiffs agreed to amend the earlier agreement to allow Hazard partial use of the reinstated permit, including construction of an additional valley fill. Subsequently, the parties agreed to pursue resolution of the case in accordance with a scheduling order entered by the court. Pursuant to that order, the plaintiffs filed an amended complaint on July 10, 2009. The amended complaint modifies the plaintiffs’ allegations to apply to the reissued permit, rather than the original permit. The action will proceed in accordance with the scheduling order through November 2009, after which the court is expected to render a decision. If the court ultimately finds that the permit is unlawful, production could be materially affected at the Thunder Ridge Surface mine.

On January 7, 2008, Saratoga Advantage Trust (“Saratoga”) filed a class action lawsuit in the U.S. District Court for the Southern District of West Virginia against the Company and certain of its officers and directors. The complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, based on alleged false and misleading statements in the registration statements filed in connection with the Company’s November 2005 reorganization and December 2005 public offering of common stock. In addition, the complaint challenges other of the Company’s public statements regarding its operating condition and safety record. On July 6, 2009, Saratoga filed an amended complaint asserting essentially the same claims but seeking to add an individual co-plaintiff. The Company has filed a motion to dismiss the amended complaint. The Company intends to vigorously defend the action.

On July 3, 2007, Taylor Environmental Advocacy Membership, Inc. (“T.E.A.M.”) filed a petition to appeal the issuance of ICG Tygart Valley, LLC’s (“Tygart Valley”) Surface Mine Permit U-2004-06 against the West Virginia Department of Environmental Protection (the “WVDEP”) in an action before the West Virginia Surface Mine Board (the “Board”). On December 10, 2007, the Board remanded the permit to the WVDEP for revision to certain provisions related to pre-mining water monitoring and cumulative hydrologic impacts. The WVDEP issued a modification on April 1, 2008 addressing those issues. T.E.A.M. filed an appeal of the WVDEP’s approval of the permit modification on April 30, 2008. On October 7, 2008, the Board issued an order remanding the permit to the WVDEP requiring Tygart Valley to address a technical issue related to projected post-mining water quality. Tygart Valley prepared and submitted a permit modification to alleviate the Board’s concerns. The revision was approved by the WVDEP on May 27, 2009, reinstating the Tygart permit. As expected, T.E.A.M. appealed the reinstatement. A hearing has been set for December 8, 2009.

In addition, from time to time, the Company is involved in legal proceedings arising in the ordinary course of business. These proceedings include assessments of penalties for citations and orders asserted by MSHA and other regulatory agencies, none of which are expected by management to, individually or in the aggregate, have a material adverse effect on the Company. In the opinion of management, the Company has recorded adequate reserves for liabilities arising in the ordinary course and it is management’s belief there is no individual case or group of related cases pending that is likely to have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

17

 
 

 
 

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2009
(Dollars in thousands, except per share amounts)

(11) Related Party Transactions and Balances

Under an Advisory Services Agreement dated as of October 1, 2004 between the Company and WLR, WLR has agreed to provide advisory services to the Company (consisting of consulting and advisory services in connection with strategic and financial planning, investment management and administration and other matters relating to the business and operation of the Company of a type customarily provided by sponsors of U.S. private equity firms to companies in which they have substantial investments, including any consulting or advisory services which the Board of Directors reasonably requests). WLR is paid a quarterly fee of $500 and reimbursed for any reasonable out-of-pocket expenses (including expenses of third-party advisors retained by WLR). The agreement is for a period of seven years; however, it may be terminated upon the occurrence of certain events.

(12) Segment Information

The Company extracts, processes and markets steam and metallurgical coal from deep and surface mines for sale to electric utilities and industrial customers, primarily in the eastern United States. The Company operates only in the United States with mines in the Central Appalachian, Northern Appalachian and Illinois Basin regions. The Company has three reportable business segments: Central Appalachian, Northern Appalachian and Illinois Basin. The Company’s Central Appalachian operations are located in southern West Virginia, eastern Kentucky and western Virginia and include eight mining complexes. The Company’s Northern Appalachian operations are located in northern West Virginia and Maryland and include four mining complexes. The Company’s Illinois Basin operations include one mining complex. The Company also has an Ancillary category, which includes the Company’s brokered coal functions, corporate overhead, contract highwall mining services and land activities.

Reportable segment results from continuing operations for the three and nine months ended September 30, 2009 and 2008 and segment assets as of September 30, 2009 and 2008 were as follows:

Three months ended September 30, 2009:
 
   
Central
Appalachian
   
Northern
Appalachian
   
Illinois
Basin
   
Ancillary
   
Consolidated
 
Revenue
 
$
197,567
   
$
52,403
   
$
22,099
   
$
24,553
   
$
296,622
 
Adjusted EBITDA
   
53,654
     
5,795
     
5,170
     
66
     
64,685
 
Depreciation, depletion and amortization
   
18,171
     
5,100
     
2,221
     
1,504
     
26,996
 
Capital expenditures
   
10,995
     
4,700
     
6,953
     
1,045
     
23,693
 
Total assets
   
724,037
     
181,497
     
48,644
     
405,017
     
1,359,195
 

Three months ended September 30, 2008:
 
   
Central
Appalachian
   
Northern
Appalachian
   
Illinois
Basin
   
Ancillary
   
Consolidated
 
Revenue
 
$
207,452
   
$
57,589
   
$
21,114
   
$
23,044
   
$
309,199
 
Adjusted EBITDA
   
36,779
     
3,796
     
3,924
     
454
     
44,953
 
Depreciation, depletion and amortization
   
16,004
     
5,078
     
1,658
     
1,487
     
24,227
 
Capital expenditures
   
32,937
     
9,456
     
2,898
     
1,270
     
46,561
 
Total assets
   
744,202
     
186,389
     
35,831
     
401,769
     
1,368,191
 
Goodwill
   
     
     
     
30,237
     
30,237
 

18

 
 

 

 
INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2009
(Dollars in thousands, except per share amounts)

Revenue in the Ancillary category consists primarily of $11,054 and $12,423 relating to the Company’s brokered coal sales and $11,810 and $5,799 relating to contract highwall mining and machine sales activities for the three months ended September 30, 2009 and 2008, respectively. Capital expenditures include non-cash amounts of $14,542 and $24,935 for the three months ended September 30, 2009 and 2008, respectively. Capital expenditures do not include $3,794 and $16,673 paid during the three months ended September 30, 2009 and 2008, respectively, related to capital expenditures accrued in prior periods.

Nine months ended September 30, 2009:
 
   
Central
Appalachian
   
Northern
Appalachian
   
Illinois
Basin
   
Ancillary
   
Consolidated
 
Revenue
 
$
574,718
   
$
170,849
   
$
62,570
   
$
71,248
   
$
879,385
 
Adjusted EBITDA
   
130,253
     
21,248
     
11,803
     
(1,881
   
161,423
 
Depreciation, depletion and amortization
   
53,011
     
15,921
     
5,884
     
4,478
     
79,294
 
Capital expenditures
   
24,919
     
15,882
     
12,241
     
4,153
     
57,195
 
Total assets
   
724,037
     
181,497
     
48,644
     
405,017
     
1,359,195
 

Nine months ended September 30, 2008:
 
   
Central
Appalachian
   
Northern
Appalachian
   
Illinois
Basin
   
Ancillary
   
Consolidated
 
Revenue
 
$
536,956
   
$
172,923
   
$
60,399
   
$
68,731
   
$
839,009
 
Adjusted EBITDA
   
98,924
     
15,321
     
10,167
     
(9,716
   
114,696
 
Depreciation, depletion and amortization
   
47,569
     
12,639
     
5,420
     
5,250
     
70,878
 
Capital expenditures
   
71,706
     
31,164
     
3,474
     
4,812
     
111,156
 
Total assets
   
744,202
     
186,389
     
35,831
     
401,769
     
1,368,191
 
Goodwill
   
     
     
     
30,237
     
30,237
 

Revenue in the Ancillary category consists primarily of $34,494 and $39,513 relating to the Company’s brokered coal sales and $22,668 and $15,577 relating to contract highwall mining and machine sales activities for the nine months ended September 30, 2009 and 2008, respectively. Capital expenditures include non-cash amounts of $21,442 and $30,775 for the nine months ended September 30, 2009 and 2008, respectively. Capital expenditures do not include $12,942 and $14,290 paid during the nine months ended September 30, 2009 and 2008, respectively, related to capital expenditures accrued in prior periods.

19

 
 

 
 

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2009
(Dollars in thousands, except per share amounts)
 
Adjusted EBITDA represents earnings before deducting interest, income taxes, depreciation, depletion, amortization and noncontrolling interest. Adjusted EBITDA is presented because it is an important supplemental measure of the Company’s performance used by the Company’s chief operating decision maker.
 
Reconciliation of net income attributable to International Coal Group, Inc. to Adjusted EBITDA for the three and nine months ended September 30, 2009 and 2008 is as follows:

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Net income attributable to International Coal Group, Inc.
  $ 18,716     $ 9,324     $ 32,791     $ 11,181  
Depreciation, depletion and amortization
    26,996       24,227       79,294       70,878  
Interest expense, net
    13,409       9,455       39,641       30,819  
Income tax expense
    5,566       1,949       9,674       1,815  
Noncontrolling interest
    (2 )     (2 )     23       3  
Adjusted EBITDA
  $ 64,685     $ 44,953     $ 161,423     $ 114,696  

(13) Supplementary Guarantor Information

International Coal Group, Inc. (the “Parent Company”) issued $175,000 of Senior Notes (the “Notes”) due 2014 in June 2006 and $225,000 of Convertible Senior Notes (the “Convertible Notes”) due 2012 in July 2007. The Parent Company has no independent assets or operations other than those related to the issuance, administration and repayment of the Notes and the Convertible Notes. All subsidiaries of the Parent Company (the “Guarantors”), except for a minor non-guarantor joint venture, have fully and unconditionally guaranteed the Notes and the Convertible Notes on a joint and several basis. The Guarantors are 100% owned, directly or indirectly, by the Parent Company. Accordingly, condensed consolidating financial information for the Parent Company and the Guarantors is not presented.

The Notes and the Convertible Notes are senior obligations of the Parent Company and are guaranteed on a senior basis by the Guarantors and rank senior in right of payment to the Parent Company’s and Guarantors’ future subordinated indebtedness. Amounts borrowed under the Amended Credit Facility are secured by substantially all of the assets of the Parent Company and the Guarantors on a priority basis, so the Notes and Convertible Notes are effectively subordinated to amounts borrowed under the Amended Credit Facility. Other than for corporate related purposes or interest payments required by the Notes or Convertible Notes, the Amended Credit Facility restricts the Guarantors’ abilities to make loans or pay dividends to the Parent Company in excess of $25,000 per year (or at all upon an event of default) and restricts the ability of the Parent Company to pay dividends. Therefore, all but $25,000 of the subsidiaries’ assets are restricted assets.
 
The Parent Company and Guarantors are subject to certain covenants under the indenture for the Notes. Under these covenants, the Parent Company and Guarantors are subject to limitations on the incurrence of additional indebtedness, payment of dividends and the incurrence of liens, however, the indenture contains no restrictions on the ability of the Guarantors to pay dividends or make payments to the Parent Company.

The obligations of the Guarantors are limited to the maximum amount permitted under bankruptcy law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar Federal or state law respecting fraudulent conveyance or fraudulent transfer.

20

 
 

 

 
INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2009
(Dollars in thousands, except per share amounts)

(14) Subsequent Events

The Company has evaluated events and transactions occurring subsequent to the balance sheet date for items that should potentially be recognized or disclosed in its financial statements. The evaluation was conducted through November 6, 2009, the date of the original filing of the Quarterly Report on Form 10-Q.

(15) Restatement of Previously Issued Financial Statements

   Subsequent to the issuance of its consolidated financial statements for the period ended September 30, 2009, the Company identified an error in the application of ASC Subtopic 715-20-65-1, Transition Related to FASB Statement No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, and FSP FAS 158-1 (“ASC 715-20-65-1”), on its employee benefits liability. The Company had not previously recorded the unfunded status of its black lung obligation as a liability in its statement of financial position or recognized changes in the funded status of the obligation in the year in which the changes occurred through comprehensive income. This error resulted in an overstatement of the employee benefits liability and accumulated other comprehensive loss and an understatement of the deferred tax liability as of September 30, 2009. The Company does not believe these errors are material to the consolidated financial statements.

Consolidated Balance Sheet
 
As Originally Filed
   
Correction for Application of ASC
715-20-65-1
   
As
Restated
 
September 30, 2009
                       
Employee benefits
 
 $
69,553
   
$
(4,337
)
 
$
65,216
 
Deferred income taxes
   
56,489
     
1,640
     
58,129
 
Total liabilities
   
817,102
     
(2,697
)
   
814,405
 
Accumulated other comprehensive loss
   
(5,028
)
   
2,697
     
(2,331
)
Total International Coal Group, Inc. stockholders’ equity
   
542,075
     
2,697
     
544,772
 
Total stockholders’ equity
   
542,093
     
2,697
     
544,790
 

Consolidated Statements of Cash Flow
 
As Originally Filed
   
Correction for Application of ASC
715-20-65-1
   
As
Restated
 
Nine months ended September 30, 2009
                       
Amortization of accumulated postretirement benefit obligation
 
216
   
(294
)
 
(78
)
Other liabilities
   
(1,532
)
   
294
     
(1,238
)
Nine months ended September 30, 2008
                       
Amortization of accumulated postretirement benefit obligation
 
323
   
(710
)
 
(387
)
Other liabilities
   
4,202
     
710
     
4,912
 

21

 
 

 
 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q/A that are not historical facts are forward-looking statements within the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995 and may involve a number of risks and uncertainties. We have used the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project” and similar terms and phrases, including references to assumptions, in this report to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to various risks, uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements. The following factors are among those that may cause actual results to differ materially from our forward-looking statements:

market demand for coal, electricity and steel;
   
availability of qualified workers;
   
future economic or capital market conditions;
   
weather conditions or catastrophic weather-related damage;
   
our production capabilities;
   
consummation of financing, acquisition or disposition transactions and the effect thereof on our business;
   
a significant number of conversions of our Convertible Senior Notes prior to maturity;
   
our plans and objectives for future operations and expansion or consolidation;
   
our relationships with, and other conditions affecting, our customers;
   
availability and costs of key supplies or commodities such as diesel fuel, steel, explosives and tires;
   
availability and costs of capital equipment;
   
prices of fuels which compete with or impact coal usage, such as oil and natural gas;
   
timing of reductions or increases in customer coal inventories;
   
long-term coal supply arrangements;
   
reductions and/or deferrals of purchases by major customers;
   
risks in or related to coal mining operations, including risks related to third-party suppliers and carriers operating at our mines or complexes;
   
unexpected maintenance and equipment failure;
   
environmental, safety and other laws and regulations, including those directly affecting our coal mining and production, and those affecting our customers’ coal usage;
   
ability to obtain and maintain all necessary governmental permits and authorizations;
   
competition among coal and other energy producers in the United States and internationally;
   
railroad, barge, trucking and other transportation availability, performance and costs;
   
employee benefits costs and labor relations issues;
   
replacement of our reserves;
   
our assumptions concerning economically recoverable coal reserve estimates;
   

22

 
 

 



availability and costs of credit, surety bonds and letters of credit;
   
title defects or loss of leasehold interests in our properties which could result in unanticipated costs or inability to mine these properties;
   
future legislation and changes in regulations or governmental policies or changes in interpretations or enforcement thereof, including with respect to safety enhancements and environmental initiatives relating to global warming;
   
impairment of the value of our long-lived and deferred tax assets;
   
our liquidity, including the ability to adhere to financial covenants related to our borrowing arrangements, results of operations and financial condition;
   
adequacy and sufficiency of our internal controls; and
   
legal and administrative proceedings, settlements, investigations and claims and the availability of related insurance coverage.

You should keep in mind that any forward-looking statements made by us in this Quarterly Report on Form 10-Q/A or elsewhere speaks only as of the date on which the statements were made. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us or anticipated results. We have no duty to, and do not intend to, update or revise the forward-looking statements in this report after the date of this report, except as may be required by law. In light of these risks and uncertainties, you should keep in mind that any forward-looking statement made in this report might not occur. When considering these forward-looking statements, you should keep in mind the cautionary statements in this document and in our other SEC filings, including the more detailed discussion of these factors, as well as other factors that could affect our results, contained in Item 3, “Quantitative and Qualitative Disclosures About Market Risk,” as well as in the “Risks Relating to Our Business” section of Item 1A of our 2008 Annual Report on Form 10-K/A.
 
23

 
 

 

 
RESULTS OF CONTINUING OPERATIONS

Three months ended September 30, 2009 compared to the three months ended September 30, 2008

Revenues, coal sales revenues by reportable segment and tons sold by reportable segment

The following table depicts revenues for the three months ended September 30, 2009 and 2008 for the indicated categories:
 
   
Three months ended
September 30,
 
Increase
(Decrease)
   
2009
   
2008
 
$ or Tons
 
%
   
(in thousands, except percentages and per ton data)
 
Coal sales revenues
  
$
246,788
   
$
282,250
 
$
(35,462
(13
)%
Freight and handling revenues
  
 
5,777
     
12,339
   
(6,562
(53
)%
Other revenues
  
 
44,057
     
14,610
   
29,447
 
202
%
Total revenues
  
$
296,622
   
$
309,199
 
(12,577
(4
)%
                           
Tons sold
  
 
4,136
     
4,794
   
(658
(14
)%
Coal sales revenue per ton
  
$
59.67
   
$
58.87
 
$
0.80
 
1

The following table depicts coal sales revenues by reportable segment for the three months ended September 30, 2009 and 2008:

   
Three months ended
September 30,
 
Increase
(Decrease)
   
2009
   
2008
 
$
 
%
   
(in thousands, except percentages)
 
Central Appalachian
  
$
166,552
   
$
198,812
 
$
(32,260
(16
)%
Northern Appalachian
  
 
48,951
     
52,531
   
(3,580
(7
)%
Illinois Basin
  
 
20,230
     
18,530
   
1,700
 
9
%
Ancillary
  
 
11,055
     
12,377
   
(1,322
)
(11
)%
Total coal sales revenues
 
$
246,788
   
$
282,250
 
$
(35,462
(13
)%

The following table depicts tons sold by reportable segment for the three months ended September 30, 2009 and 2008:

   
Three months ended
September 30,
 
Increase
(Decrease)
   
2009
   
2008
 
Tons
 
%
   
(in thousands, except percentages)
 
Central Appalachian