Attached files
file | filename |
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8-K - 8-K - ARCH RESOURCES, INC. | c64914e8vk.htm |
EX-23.2 - EX-23.2 - ARCH RESOURCES, INC. | c64914exv23w2.htm |
EX-23.3 - EX-23.3 - ARCH RESOURCES, INC. | c64914exv23w3.htm |
EX-99.1 - EX-99.1 - ARCH RESOURCES, INC. | c64914exv99w1.htm |
EX-99.3 - EX-99.3 - ARCH RESOURCES, INC. | c64914exv99w3.htm |
EX-23.1 - EX-23.1 - ARCH RESOURCES, INC. | c64914exv23w1.htm |
Exhibit 99.2
Page | ||
International Coal Group, Inc. Financial Statements (Unaudited) |
||
Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010
|
F-1 | |
Condensed Consolidated Statements of Operations for the three months ended
March 31, 2011 and 2010
|
F-2 | |
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2011 and 2010
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F-3 | |
Notes to Condensed Consolidated Financial Statements
|
F-4 |
INTERNATIONAL
COAL GROUP, INC. AND SUBSIDIARIES
March 31, |
December 31, |
|||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
(dollars in thousands, except per share amounts) | ||||||||
ASSETS
|
||||||||
CURRENT ASSETS:
|
||||||||
Cash and cash equivalents
|
$ | 186,566 | $ | 215,276 | ||||
Accounts receivable, net of allowances of $1,334 and $1,005
|
111,210 | 82,557 | ||||||
Inventories, net
|
80,724 | 70,029 | ||||||
Deferred income taxes
|
1,420 | 13,563 | ||||||
Prepaid insurance
|
6,827 | 8,500 | ||||||
Income taxes receivable
|
682 | 129 | ||||||
Prepaid expenses and other
|
13,932 | 10,543 | ||||||
Total current assets
|
401,361 | 400,597 | ||||||
PROPERTY, PLANT, EQUIPMENT AND MINE DEVELOPMENT, net
|
1,051,064 | 1,040,118 | ||||||
DEBT ISSUANCE COSTS, net
|
8,937 | 11,998 | ||||||
ADVANCE ROYALTIES, net
|
21,639 | 16,037 | ||||||
OTHER NON-CURRENT ASSETS
|
12,008 | 10,947 | ||||||
Total assets
|
$ | 1,495,009 | $ | 1,479,697 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
CURRENT LIABILITIES:
|
||||||||
Accounts payable
|
$ | 80,294 | $ | 78,899 | ||||
Short-term debt
|
1,598 | 2,797 | ||||||
Current portion of long-term debt and capital lease
|
103,527 | 17,928 | ||||||
Current portion of reclamation and mine closure costs
|
8,364 | 8,414 | ||||||
Current portion of employee benefits
|
3,831 | 3,831 | ||||||
Accrued expenses and other
|
47,582 | 61,092 | ||||||
Total current liabilities
|
245,196 | 172,961 | ||||||
LONG-TERM DEBT AND CAPITAL LEASE
|
228,437 | 308,422 | ||||||
RECLAMATION AND MINE CLOSURE COSTS
|
71,541 | 70,730 | ||||||
EMPLOYEE BENEFITS
|
84,129 | 81,868 | ||||||
DEFERRED INCOME TAXES
|
46,515 | 60,452 | ||||||
BELOW-MARKET COAL SUPPLY AGREEMENTS
|
25,934 | 26,823 | ||||||
OTHER NON-CURRENT LIABILITIES
|
43,921 | 4,176 | ||||||
Total liabilities
|
745,673 | 725,432 | ||||||
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, 204,210,833 and
204,155,827 shares issued and outstanding, respectively, as
of March 31, 2011 and 203,870,564 and
203,824,372 shares issued and outstanding, respectively, as
of December 31, 2010
|
2,042 | 2,038 | ||||||
Treasury stock
|
(309 | ) | (216 | ) | ||||
Additional paid-in capital
|
852,812 | 851,440 | ||||||
Accumulated other comprehensive loss
|
(3,353 | ) | (3,459 | ) | ||||
Retained deficit
|
(101,920 | ) | (95,602 | ) | ||||
Total International Coal Group, Inc. stockholders equity
|
749,272 | 754,201 | ||||||
Noncontrolling interest
|
64 | 64 | ||||||
Total stockholders equity
|
749,336 | 754,265 | ||||||
Total liabilities and stockholders equity
|
$ | 1,495,009 | $ | 1,479,697 | ||||
See notes to condensed consolidated financial statements.
F-1
INTERNATIONAL
COAL GROUP, INC. AND SUBSIDIARIES
Three Months Ended |
||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
(dollars in thousands, except per share amounts) | ||||||||
REVENUES:
|
||||||||
Coal sales revenues
|
$ | 283,711 | $ | 270,490 | ||||
Freight and handling revenues
|
7,152 | 9,377 | ||||||
Other revenues
|
11,126 | 8,727 | ||||||
Total revenues
|
301,989 | 288,594 | ||||||
COSTS AND EXPENSES:
|
||||||||
Cost of coal sales
|
217,964 | 220,065 | ||||||
Freight and handling costs
|
7,152 | 9,377 | ||||||
Cost of other revenues
|
7,342 | 7,181 | ||||||
Depreciation, depletion and amortization
|
25,656 | 26,397 | ||||||
Selling, general and administrative
|
51,152 | 8,585 | ||||||
Gain on sale of assets, net
|
(6,723 | ) | (3,481 | ) | ||||
Total costs and expenses
|
302,543 | 268,124 | ||||||
Income (loss) from operations
|
(554 | ) | 20,470 | |||||
INTEREST AND OTHER EXPENSE:
|
||||||||
Loss on extinguishment of debt
|
| (21,987 | ) | |||||
Interest expense, net
|
(8,110 | ) | (13,300 | ) | ||||
Total interest and other expense
|
(8,110 | ) | (35,287 | ) | ||||
Loss before income taxes
|
(8,664 | ) | (14,817 | ) | ||||
INCOME TAX BENEFIT
|
2,357 | 5,965 | ||||||
Net loss
|
(6,307 | ) | (8,852 | ) | ||||
Net income attributable to noncontrolling interest
|
(11 | ) | | |||||
Net loss attributable to International Coal Group, Inc.
|
$ | (6,318 | ) | $ | (8,852 | ) | ||
Earnings per share:
|
||||||||
Basic
|
$ | (0.03 | ) | $ | (0.05 | ) | ||
Diluted
|
$ | (0.03 | ) | $ | (0.05 | ) | ||
Weighted-average common shares outstanding:
|
||||||||
Basic
|
202,699,052 | 181,382,766 | ||||||
Diluted
|
202,699,052 | 181,382,766 |
See notes to condensed consolidated financial statements.
F-2
INTERNATIONAL
COAL GROUP, INC. AND SUBSIDIARIES
Three Months Ended |
||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
(dollars in thousands) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net loss
|
$ | (6,307 | ) | $ | (8,852 | ) | ||
Adjustments to reconcile net loss to net cash from operating
activities:
|
||||||||
Depreciation, depletion and amortization
|
25,656 | 26,397 | ||||||
Loss on extinguishment of debt
|
| 21,987 | ||||||
Amortization and write-off of deferred finance costs and debt
discount
|
1,458 | 3,158 | ||||||
Amortization of accumulated employee benefit obligations
|
172 | (7 | ) | |||||
Compensation expense on share based awards
|
1,218 | 984 | ||||||
Gain on sale of assets, net
|
(6,723 | ) | (3,481 | ) | ||||
Provision for bad debt
|
329 | (79 | ) | |||||
Deferred income taxes
|
(1,860 | ) | (7,583 | ) | ||||
Changes in Assets and Liabilities:
|
||||||||
Accounts receivable
|
(18,813 | ) | (24,463 | ) | ||||
Inventories
|
(10,695 | ) | 3,914 | |||||
Prepaid expenses and other
|
(2,269 | ) | 856 | |||||
Other non-current assets
|
(4,530 | ) | 761 | |||||
Accounts payable
|
912 | 5,425 | ||||||
Accrued expenses and other
|
(13,510 | ) | (16,133 | ) | ||||
Reclamation and mine closure costs
|
761 | (339 | ) | |||||
Other liabilities
|
42,067 | 2,890 | ||||||
Net cash from operating activities
|
7,866 | 5,435 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Proceeds from the sale of assets
|
245 | 1,000 | ||||||
Additions to property, plant, equipment and mine development
|
(31,106 | ) | (20,635 | ) | ||||
Withdrawals of restricted cash
|
394 | 8,854 | ||||||
Distribution to joint venture
|
(11 | ) | | |||||
Net cash from investing activities
|
(30,478 | ) | (10,781 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Repayments on short-term debt
|
(1,199 | ) | (833 | ) | ||||
Repayments on long-term debt and capital lease
|
(4,964 | ) | (4,928 | ) | ||||
Proceeds from convertible notes offering
|
| 115,000 | ||||||
Proceeds from senior notes offering
|
| 198,596 | ||||||
Proceeds from common stock offering
|
| 102,453 | ||||||
Repurchases of senior notes
|
| (181,612 | ) | |||||
Purchases of treasury stock
|
(93 | ) | (11 | ) | ||||
Proceeds from stock options exercised
|
158 | | ||||||
Debt issuance costs
|
| (14,243 | ) | |||||
Net cash from financing activities
|
(6,098 | ) | 214,422 | |||||
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
(28,710 | ) | 209,076 | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
215,276 | 92,641 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
$ | 186,566 | $ | 301,717 | ||||
Supplemental information:
|
||||||||
Cash paid for interest (net of amount capitalized)
|
$ | 12,203 | $ | 21,837 | ||||
Cash received for income taxes
|
$ | | $ | 1,076 | ||||
Supplemental disclosure of non-cash items:
|
||||||||
Issuance of common stock in exchange for convertible notes
|
$ | | $ | 25,712 | ||||
Purchases of property, plant, equipment and mine development
through accounts payable
|
$ | 16,364 | $ | 10,817 | ||||
Purchases of property, plant, equipment and mine development
through financing arrangements
|
$ | 9,619 | $ | 2,538 | ||||
See notes to condensed consolidated financial statements.
F-3
INTERNATIONAL
COAL GROUP, INC. AND SUBSIDIARIES
March 31, 2011
(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 March 31, 2011 and for the three months
ended March 31, 2011 and 2010, 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,
2010 has been derived from the Companys audited
consolidated balance sheet. These statements should be read in
conjunction with the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2010. The results of
operations for the three months ended March 31, 2011 are
not necessarily indicative of the results to be expected for
future quarters or for the year ending December 31, 2011.
(2) | Summary of Significant Accounting Policies and General |
In October 2009, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update
2009-13,
Revenue Recognition (ASU
2009-13).
ASU 2009-13
provides amendments to the criteria in Accounting Standards
Codification Subtopic
605-24 for
separating consideration in multiple-deliverable revenue
arrangements. It establishes a hierarchy of selling prices to
determine the selling price of each specific deliverable, which
includes vendor-specific objective evidence if available,
third-party evidence if vendor-specific objective evidence is
not available or estimated selling price if neither of the first
two are available. ASU
2009-13 also
eliminates the residual method for allocating revenue between
the elements of an arrangement and requires that arrangement
consideration be allocated at the inception of the arrangement
and expands the disclosure requirements regarding a
vendors multiple-deliverable revenue arrangement. ASU
2009-13 is
effective for fiscal years beginning on or after June 15,
2010. Adoption of ASU
2009-13 did
not have a material impact on the Companys financial
position, results of operations or cash flows.
(3) | Inventories |
Inventories consisted of the following:
March 31, |
December 31, |
|||||||
2011 | 2010 | |||||||
Coal
|
$ | 44,860 | $ | 37,126 | ||||
Parts and supplies
|
38,213 | 35,288 | ||||||
Reserve for obsolescence parts and supplies
|
(2,349 | ) | (2,385 | ) | ||||
Inventories, net
|
$ | 80,724 | $ | 70,029 | ||||
F-4
INTERNATIONAL
COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
(4) | Property, Plant, Equipment and Mine Development |
Property, plant, equipment and mine development are summarized
by major classification as follows:
March 31, |
December 31, |
|||||||
2011 | 2010 | |||||||
Plant and equipment
|
$ | 668,361 | $ | 655,014 | ||||
Coal lands and mineral rights
|
586,827 | 586,618 | ||||||
Mine development
|
256,909 | 242,699 | ||||||
Land and land improvements
|
25,613 | 24,781 | ||||||
Coalbed methane well development costs
|
14,697 | 14,697 | ||||||
1,552,407 | 1,523,809 | |||||||
Less accumulated depreciation, depletion and amortization
|
(501,343 | ) | (483,691 | ) | ||||
Property, plant, equipment and mine development, net
|
$ | 1,051,064 | $ | 1,040,118 | ||||
Depreciation, depletion and amortization expense related to
property, plant, equipment and mine development for the three
months ended March 31, 2011 and 2010 was $26,510 and
$27,250, respectively.
(5) | Capital Restructuring |
In March 2010, the Company completed public offerings of
24,444,365 shares of its common stock, par value $0.01 per
share (the Common Stock), at a public offering price
of $4.47 per share, $115,000 aggregate principal amount of
4.00% Convertible Senior Notes due 2017 (the 2017
Convertible Notes) and $200,000 aggregate principal amount
of 9.125% Senior Secured Second-Priority Notes due 2018
(the 2018 Senior Notes) pursuant to a shelf
registration statement deemed effective by the Securities and
Exchange Commission on January 15, 2010.
During 2010, the Company used $169,458 of the net proceeds from
the Common Stock and 2017 Convertible Notes offerings to finance
the repurchase of $138,771 aggregate principal amount of its
9.00% Convertible Senior Notes due 2012 (the 2012
Convertible Notes). The Company used $188,960 of the net
proceeds from the 2018 Senior Notes offering to finance the
repurchase of $175,000 aggregate principal amount of its
10.25% Senior Notes due 2014 (the 2014 Senior
Notes). The remaining proceeds were used for general
corporate purposes. Additionally, the Company entered into a
series of agreements to exchange a portion of its outstanding
2012 Convertible Notes for shares of common stock in December
2009. One exchange agreement, as amended, provided for closing
of additional exchanges in January 2010. The Company recorded a
loss on extinguishment of debt of $21,987 during the three
months ended March 31, 2010 related to these debt
repurchases and exchanges.
Additionally, in February 2010, the Company secured a new
four-year $125,000 asset-based loan facility (the ABL Loan
Facility) to replace its prior revolving credit facility
which was set to expire in June 2011. The ABL Loan Facility
provides additional borrowing capacity, contains minimal
financial covenants and matures in February 2014. The ABL Loan
Facility has been used primarily for issuing letters of credit
that collateralize the Companys reclamation bonds.
F-5
INTERNATIONAL
COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
(6) | Debt |
Long-Term
Debt and Capital Lease
Long-term debt and capital lease consisted of the following:
March 31, |
December 31, |
|||||||
2011 | 2010 | |||||||
9.125% Senior Notes, due 2018, net of debt discount of
$1,276 and $1,308, respectively
|
$ | 198,724 | $ | 198,692 | ||||
4.00% Convertible Senior Notes, due 2017, net of debt
discount of $30,958 and $31,882, respectively
|
84,042 | 83,118 | ||||||
Equipment notes
|
47,790 | 42,730 | ||||||
9.00% Convertible Senior Notes, due 2012, net of debt
discount of $24 and $28, respectively
|
707 | 703 | ||||||
Capital lease and other
|
701 | 1,107 | ||||||
Total
|
331,964 | 326,350 | ||||||
Less current portion
|
(103,527 | ) | (17,928 | ) | ||||
Long-term debt and capital lease
|
$ | 228,437 | $ | 308,422 | ||||
9.125% Senior Notes due 2018 The
obligations under the 2018 Senior Notes are fully and
unconditionally guaranteed, jointly and severally, by all of the
Companys wholly-owned domestic subsidiaries other than
subsidiaries that are designated as unrestricted subsidiaries.
The 2018 Senior Notes and the guarantees are secured by a
second-priority lien on, and security interest in, substantially
all of the Companys and the guarantors assets,
junior to first-priority liens that secure the Companys
ABL Loan Facility and certain other permitted liens under the
indenture that governs the notes. Interest on the 2018 Senior
Notes is payable semi-annually in arrears on
April 1st and October 1st of each year.
Prior to April 1, 2014, the Company may redeem all or a
part of the 2018 Senior Notes at a price equal to 100% of the
principal amount plus an applicable make-whole
premium and accrued and unpaid interest to the redemption date.
The Company may redeem the 2018 Senior Notes, in whole or in
part, beginning on April 1, 2014. The initial redemption
price will be 104.563% of their aggregate principal amount, plus
accrued and unpaid interest. The redemption price declines to
102.281% and 100.000% of their aggregate principal amount, plus
accrued and unpaid interest, on April 1, 2015 and
April 1, 2016 and thereafter, respectively. In addition, at
any time and from time to time prior to April 1, 2013, the
Company may redeem up to 35% of the 2018 Senior Notes at a
redemption price equal to 109.125% of its principal amount plus
accrued and unpaid interest using proceeds from sales of certain
kinds of the Companys capital stock. Upon the occurrence
of a change of control or the sale of the Companys assets,
it may be required to repurchase some or all of the notes.
The indenture governing the 2018 Senior Notes contains covenants
that limit the Companys ability to, among other things,
incur additional indebtedness, issue preferred stock, pay
dividends, repurchase, repay or redeem its capital stock, make
certain investments, sell assets and incur liens. As of
March 31, 2011, the Company was in compliance with its
covenants under the indenture.
4.00% Convertible Senior Notes due 2017
The 2017 Convertible Notes are the Companys senior
unsecured obligations and are guaranteed jointly and severally
on a senior unsecured basis by all of the Companys
material future and current domestic subsidiaries or that
guarantee the ABL Loan Facility on a senior basis. The 2017
Convertible Notes and the related guarantees rank equal in right
of payment to all of the Companys and the guarantors
respective existing and future unsecured senior indebtedness.
Interest is payable semi-annually in arrears on
April 1st and October 1st of each year.
F-6
INTERNATIONAL
COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
The 2017 Convertible Notes are convertible into the
Companys common stock at an initial conversion price,
subject to adjustment, of $5.81 per share (approximating
172.0874 shares per one thousand dollar principal amount of
the 2017 Convertible Notes). Holders may convert their notes at
their option prior to January 1, 2017 only under the
following circumstances: (i) during any calendar quarter
after the calendar quarter ending September 30, 2010 (and
only during that quarter), if the closing sale price of the
Companys 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 of such notes in effect on
the last trading day of the immediately preceding calendar
quarter; (ii) during the five consecutive business days
immediately after any five consecutive trading day period, or
the note measurement period, in which the trading price per note
for each trading day of that note measurement period was equal
to or less than 97% of the product of the closing sale price of
shares of the Companys common stock and the applicable
conversion rate for such trading day; and (iii) upon the
occurrence of specified corporate transactions. In addition, the
notes will be convertible irrespective of the foregoing
circumstances from, and including, January 1, 2017 to, and
including, the business day immediately preceding April 1,
2017. Upon conversion, the Company will have the right to
deliver cash, shares of its common stock or a combination
thereof, at the Companys election. If the Company elects
to settle any excess conversion value of the 2017 Convertible
Notes in cash, the holder will receive, for each one thousand
dollar principal amount, the conversion rate multiplied by a
20-day
average closing price of the common stock as set forth in the
indenture beginning on the third trading day after the 2017
Convertible Notes are surrendered. At any time on or prior to
the 23rd business day immediately preceding the maturity
date, the Company may irrevocably elect to deliver solely shares
of its common stock in respect of the Companys conversion
obligation or pay cash up to the aggregate principal amount of
the notes to be converted and deliver shares of its common
stock, cash or a combination thereof in respect of the
remainder, if any, of the conversion obligation. It is the
Companys current intention to settle the principal amount
of any notes converted in cash. The conversion rate, and thus
the conversion price, will be subject to adjustment. A holder
that surrenders notes for conversion in connection with a
make-whole fundamental change that occurs before the
maturity date may in certain circumstances be entitled to an
increased conversion rate. For a discussion of the effects of
the 2017 Convertible Notes on earnings per share, see
Note 11.
The 2017 Convertible Notes became convertible at the option of
holders beginning April 1, 2011 because the closing sale
price of the Companys common stock on the New York Stock
Exchange exceeded $7.55 (130% of the conversion price of $5.81
per share) for each of 20 or more trading days in the period of
30 consecutive trading days ending on March 31, 2011. As a
result, the Company has included the 2017 Convertible Notes in
the current portion of long-term debt in its consolidated
balance sheet as of March 31, 2011. Additionally, the
Company has included debt issuance costs related to the 2017
Convertible Notes totaling $2,554 as a current asset in prepaid
expenses and other in its consolidated balance sheet as of
March 31, 2011. The Company will reassess the
convertibility of the 2017 Convertible Notes, and the related
balance sheet classification, on a quarterly basis. In the event
that a holder exercises the right to convert its 2017
Convertible Notes, the Company will write-off a ratable portion
of the associated debt issuance costs. In the event that a
holder elects to convert its Convertible Note, the Company
expects to fund any cash settlement of any such conversion from
cash on hand.
As of March 31, 2011 and December 31, 2010, the equity
component of the 2017 Convertible Notes was $20,786 and is
included in additional paid-in capital. Interest expense
resulting from amortization of the debt discount was $923 and
$147 for the three months ended March 31, 2011 and 2010,
respectively. Interest expense on the principal amount of the
2017 Convertible Notes was $1,150 and $192 for the three months
ended March 31, 2011 and 2010, respectively. The Company
has determined its non-convertible borrowing rate would have
been 10.1% at issuance.
9.00% Convertible Senior Notes due 2012
The 2012 Convertible Notes are the Companys senior
unsecured obligations and are guaranteed on a senior unsecured
basis by the Companys material current and future domestic
subsidiaries. The 2012 Convertible Notes and the related
guarantees rank equal in right of payment to all of the
Companys 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.
F-7
INTERNATIONAL
COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
The principal amount of the 2012 Convertible Notes is payable in
cash and amounts above the principal amount, if any, will be
convertible into shares of the Companys common stock or,
at the Companys option, cash. The 2012 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 2012 Convertible Notes). The 2012 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 Companys 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 Companys 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 2012 Convertible Notes
indenture, the Company may be required to repurchase the 2012
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. If the Company elects to settle any
excess conversion value of the 2012 Convertible Notes in cash,
the holder will receive, for each one thousand dollar principal
amount, the conversion rate multiplied by a
20-day
average closing price of the common stock as set forth in the
indenture beginning on the third trading day after the 2012
Convertible Notes are surrendered. In addition, if conversion
occurs in connection with certain changes in control, the
Company may be required to deliver additional shares of the
Companys common stock (a make-whole premium)
by increasing the conversion rate with respect to such notes.
For a discussion of the effects of the 2012 Convertible Notes on
earnings per share, see Note 11.
The 2012 Convertible Notes became convertible at the option of
holders beginning April 1, 2011 because the closing sale
price of the Companys common stock on the New York Stock
Exchange exceeded $7.93 (130% of the conversion price of $6.10
per share) for each of 20 or more trading days in the period of
30 consecutive trading days ending on March 31, 2011. As a
result, the Company has included the 2012 Convertible Notes in
the current portion of long-term debt in its consolidated
balance sheet as of March 31, 2011. Additionally, the
Company has included debt issuance costs related to the 2012
Convertible Notes totaling $8 as a current asset in prepaid
expenses and other in its consolidated balance sheet as of
March 31, 2011. The Company will reassess the
convertibility of the 2012 Convertible Notes, and the related
balance sheet classification, on a quarterly basis. In the event
that a holder exercises the right to convert its 2012
Convertible Notes, the Company will write-off a ratable portion
of the associated debt issuance costs. In the event that a
holder elects to convert its Convertible Note, the Company
expects to fund any cash settlement of any such conversion from
cash on hand.
As of March 31, 2011 and December 31, 2010, the equity
component of the 2012 Convertible Notes was $44 and is included
in additional paid-in capital. Interest expense resulting from
amortization of the debt discount was $4 and $705 for the three
months ended March 31, 2011 and 2010, respectively.
Interest expense on the principal amount of the 2012 Convertible
Notes was $16 and $3,200 for the three months ended
March 31, 2011 and 2010, respectively. The Company has
determined its non-convertible borrowing rate would have been
11.7% at issuance.
Asset-Based Loan Facility The ABL Loan
Facility is a $125,000 senior secured facility with a four-year
term, all of which is available for loans or the issuance of
letters of credit. Subject to certain conditions, at any time
prior to maturity, the Company will be able to elect to increase
the size of the ABL Loan Facility, up to a maximum of $200,000.
Availability under the ABL Loan Facility is determined using a
borrowing base calculation. The ABL Loan Facility is guaranteed
by all of the Companys current and future wholly-owned
subsidiaries and secured by a first priority security interest
on all of the Companys and each of the Companys
guarantors existing and after-acquired real and personal
property, including all outstanding equity interests of the
Companys wholly-owned subsidiaries. The ABL Loan Facility
has a maturity date of February 22, 2014. As of
March 31, 2011, the Company
F-8
INTERNATIONAL
COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
had a borrowing capacity of $125,000 under the ABL Loan Facility
with no borrowings outstanding, letters of credit totaling
$85,775 outstanding and $39,225 available for future borrowing,
and was in compliance with its financial covenants under the ABL
Loan Facility. The ABL Loan Facility was amended on May 6,
2010 for minor technical corrections.
Equipment Notes The equipment notes, having
various maturity dates extending to February 2016, are
collateralized by mining equipment. As of March 31, 2011,
the Company had amounts outstanding with terms ranging from 36
to 60 months and a weighted-average interest rate of 7.16%.
As of March 31, 2011, the Company had a borrowing capacity
of $12,985 available under a $50,000 revolving equipment credit
facility for terms from 36 to 60 months at interest rates
ranging from 5.35% to 6.15%.
Capital Lease and Other The Company leases
certain mining equipment under a capital lease. The Company
imputed interest on its capital lease using a rate of 10.44%.
Short-Term
Debt
The Company finances the majority of its annual insurance
premiums with the related obligation included in short-term
debt. The weighted-average interest rate applicable to the notes
was 2.01% at March 31, 2011. As of March 31, 2011 and
December 31, 2010, the Company had $1,598 and $2,797,
respectively, outstanding related to insurance financing.
(7) | Income Taxes |
The effective income tax rates applied to the three months ended
March 31, 2011 and 2010 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 March 31, 2011
increased to 27% from an effective income tax rate of 4% applied
to the three months ended March 31, 2010, primarily
attributable to an increase in forecasted annual pre-tax book
income and a decrease in forecasted income tax deductions for
depletion of mineral rights due to the impact of bonus
depreciation.
Discrete items that only impacted the three months ended
March 31, 2010 were excluded from the estimated annual
effective tax rate applied to that period. The net tax benefit
related to the discrete items of $6,268 was comprised of tax
benefits of $6,288 for the loss on the repurchase of 2014 Senior
Notes, $638 for the loss on exchanges of 2012 Convertible Notes
and $171 for other miscellaneous discrete items, as well as tax
expense of $829 related to the Health Care Reform and Education
Reconciliations Act taxation of Medicare Part D. There were
no significant discrete items excluded from the estimated annual
effective rate for the three months ended March 31, 2011.
(8) | Employee Stock Awards |
The Companys Amended and Restated 2005 Equity and
Performance Incentive Plan (the Plan) permits the
granting of stock options, restricted shares, stock appreciation
rights, restricted share units, performance shares or
performance units to its employees for up to
18,000,000 shares of common stock. Option awards are
generally granted with an exercise price equal to the market
price of the Companys stock at the date of grant and have
10-year
contractual terms. The option and restricted stock awards
generally vest in equal annual installments of 25% over a
four-year period. The Company recognizes expense related to the
awards on a straight-line basis over the vesting period of each
separately vesting portion of the awards as if the awards were,
in substance, multiple awards. The Company issues new shares
upon the exercise of option awards.
F-9
INTERNATIONAL
COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
The Black-Scholes option pricing model was used to calculate the
estimated fair value of the options granted. The estimated
grant-date fair value of the options granted during the three
months ended March 31, 2011 and 2010 was calculated using
the following assumptions:
March 31, | ||||||||
2011 | 2010 | |||||||
Expected term (in years)
|
5-7.5 | 5-7.5 | ||||||
Expected volatility
|
65.2% - 67.4 | % | 50.8% - 67.4 | % | ||||
Weighted-average expected volatility
|
65.3 | % | 67.4 | % | ||||
Risk-free rate
|
1.9% - 2.9 | % | 2.4% - 3.1 | % | ||||
Expected dividends
|
| |
The Company estimated forfeiture rates of 5.50% for both the
three months ended March 31, 2011 and 2010.
The Company estimates volatility using both historical and
market data. The expected option term is based on historical
data and exercise behavior. The risk-free interest rates are
based on the rates of zero coupon U.S. Treasury bonds with
similar maturities on the date of grant. The estimated
forfeiture rates were determined based on historical forfeitures
and turnover of the Companys employees eligible under the
plan.
Share based employee compensation expense of $758 and $612, net
of tax of $460 and $372, related to stock awards outstanding was
included in earnings for the three months ended March 31,
2011 and 2010, respectively.
A summary of the Companys outstanding options as of
March 31, 2011, and changes during the three months ended
March 31, 2011, is as follows:
Weighted- |
||||||||||||||||
Average |
||||||||||||||||
Weighted- |
Remaining |
|||||||||||||||
Average |
Contractual |
Aggregate |
||||||||||||||
Exercise |
Term |
Intrinsic |
||||||||||||||
Options
|
Shares | Price | (years) | Value | ||||||||||||
Outstanding at January 1, 2011
|
5,739,583 | $ | 4.91 | |||||||||||||
Granted
|
663,873 | 9.10 | ||||||||||||||
Exercised
|
(33,489 | ) | 4.73 | |||||||||||||
Forfeited
|
(3,037 | ) | 8.62 | |||||||||||||
Expired
|
(2,852 | ) | 5.47 | |||||||||||||
Outstanding at March 31, 2011
|
6,364,078 | 5.35 | 7.32 | $ | 37,907 | |||||||||||
Vested or expected to vest at March 31, 2011
|
6,019,519 | 5.42 | 7.26 | 35,410 | ||||||||||||
Exercisable at March 31, 2011
|
2,865,775 | 6.91 | 5.94 | 12,588 | ||||||||||||
The weighted-average grant-date fair value of options granted
during the three months ended March 31, 2011 and 2010 was
$5.62 and $2.60, respectively. The total intrinsic value of
options exercised during the three months ended March 31,
2011 was $162. There were no options exercised during the three
months ended March 31, 2010.
F-10
INTERNATIONAL
COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
A summary of the status of the Companys nonvested
restricted stock awards as of March 31, 2011, and changes
during the three months ended March 31, 2011, is as follows:
Weighted- |
||||||||
Average Grant- |
||||||||
Date |
||||||||
Nonvested Shares
|
Shares | Fair Value | ||||||
Nonvested at January 1, 2011
|
1,145,006 | $ | 3.17 | |||||
Granted
|
307,301 | 9.11 | ||||||
Vested
|
(40,017 | ) | 6.40 | |||||
Forfeited
|
(2,136 | ) | 8.64 | |||||
Nonvested at March 31, 2011
|
1,410,154 | 4.37 | ||||||
The weighted-average grant-date fair value of restricted stock
granted during the three months ended March 31, 2011 and
2010 was $9.11 and $4.11, respectively. The total fair value of
restricted stock vested during the three months ended
March 31, 2011 and 2010 was $256 and $261, respectively.
A summary of the Companys nonvested restricted share unit
awards as of March 31, 2011, and changes during the three
months ended March 31, 2011, is as follows:
Weighted- |
||||||||
Average Grant- |
||||||||
Date |
||||||||
Restricted Share
Units
|
Shares | Fair Value | ||||||
Nonvested at January 1, 2011
|
| $ | | |||||
Granted
|
38,507 | 9.09 | ||||||
Vested
|
(38,507 | ) | 9.09 | |||||
Forfeited
|
| | ||||||
Nonvested at March 31, 2011
|
| | ||||||
The weighted-average grant-date fair value of restricted share
units granted during the three months ended March 31, 2011
and 2010 was $9.09 and $4.11, respectively. The total fair value
of restricted share units vested during both of the three months
ended March 31, 2011 and 2010 was $350.
As of March 31, 2011, there was $10,834 of unrecognized
compensation cost related to non-vested share based awards that
is expected to be recognized over a weighted-average period of
3.3 years.
The Plan provides recipients the ability to satisfy tax
obligations upon vesting of shares of restricted stock by having
the Company withhold a portion of the shares otherwise
deliverable to the recipients. During the three months ended
March 31, 2011 and 2010, the Company withheld
8,814 shares and 2,627 shares of common stock,
respectively, from employees in connection with tax withholding
obligations. The value of the common stock that was withheld was
based upon the closing price of the common stock on the
applicable vesting dates. Such shares were included in treasury
stock in the Companys consolidated balance sheet.
F-11
INTERNATIONAL
COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
(9) | 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 months ended March 31, 2011 and 2010.
Three Months Ended |
||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net periodic benefit cost:
|
||||||||
Service cost
|
$ | 1,091 | $ | 831 | ||||
Interest cost
|
648 | 432 | ||||||
Amortization of actuarial loss and prior service cost
|
250 | 28 | ||||||
Benefit cost
|
$ | 1,989 | $ | 1,291 | ||||
The plan is unfunded; therefore, no contributions were made by
the Company for the three months ended March 31, 2011 and
2010.
Black
Lung Benefits
The following table details the components of the net periodic
benefit cost for black lung benefits for the three months ended
March 31, 2011 and 2010.
Three Months Ended |
||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net periodic benefit cost:
|
||||||||
Service cost
|
$ | 629 | $ | 611 | ||||
Interest cost
|
362 | 389 | ||||||
Amortization of actuarial gain
|
(78 | ) | (35 | ) | ||||
Benefit cost
|
$ | 913 | $ | 965 | ||||
The plan is unfunded; therefore, no contributions were made by
the Company for the three months ended March 31, 2011 and
2010.
In March 2010, the Patient Protection and Affordable Care Act
(PPACA) and the Health Care and Education
Reconciliation Act (HCERA or, collectively with
PPACA, the Health Care Reform Act) were enacted into
law. The Health Care Reform Act is a comprehensive health care
reform act that, among other things, amended previous
legislation related to coal workers pneumoconiosis (black
lung), providing an automatic extension of awarded lifetime
benefits to surviving spouses and providing changes to the legal
criteria used to assess and award claims. These new provisions
of the Health Care Reform Act may increase the number of future
claims that are awarded benefits. The Company does not have
sufficient claims experience since the Health Care Reform Act
was passed to estimate the impact on its March 31, 2011
black lung liability of the potential increase in the number of
future claims that are awarded benefits. An increase in benefits
awarded could have a material impact on the Companys
financial position, results of operations or cash flows.
F-12
INTERNATIONAL
COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
(10) | Other Comprehensive Loss |
Other comprehensive loss for the three months ended
March 31, 2011 and 2010 was as follows:
Three Months Ended |
||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net loss attributable to International Coal Group, Inc.
|
$ | (6,318 | ) | $ | (8,852 | ) | ||
Amortization of postretirement benefit obligation, net of tax of
$95 and $21 for the three months ended March 31, 2011 and
2010, respectively
|
155 | 7 | ||||||
Amortization of black lung obligation, net of tax of $29 and $13
for the three months ended March 31, 2011 and 2010,
respectively
|
(49 | ) | (22 | ) | ||||
Comprehensive loss
|
$ | (6,212 | ) | $ | (8,867 | ) | ||
(11) | Earnings Per Share |
Basic earnings per share is computed by dividing net income or
loss 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
months ended March 31, 2011 and 2010 are as follows:
Three Months Ended |
||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net loss attributable to International Coal Group, Inc.
|
$ | (6,318 | ) | $ | (8,852 | ) | ||
Weighted-average common shares outstanding basic
|
202,699,052 | 181,382,766 | ||||||
Incremental shares arising from:
|
||||||||
Stock options
|
| | ||||||
Restricted stock
|
| | ||||||
Restricted share units
|
| | ||||||
Convertible notes
|
| | ||||||
Weighted-average common shares outstanding diluted
|
202,699,052 | 181,382,766 | ||||||
Earnings Per Share:
|
||||||||
Basic
|
$ | (0.03 | ) | $ | (0.05 | ) | ||
Diluted
|
$ | (0.03 | ) | $ | (0.05 | ) |
Options to purchase 6,364,078 shares of common stock and
1,410,154 shares of restricted common stock outstanding at
March 31, 2011 have been excluded from the computation of
diluted earnings per share for the three months ended
March 31, 2011 because their effect would have been
anti-dilutive. Options to purchase 5,839,160 shares of
common stock and 1,439,521 shares of restricted common
stock outstanding at March 31,
F-13
INTERNATIONAL
COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
2010 have been excluded from the computation of diluted earnings
per share for the three months ended March 31, 2010 because
their effect would have been anti-dilutive.
Upon conversion, the Company currently intends to settle the
principal amount of the 2017 Convertible Notes in cash and
amounts above the principal amount, if any, will be settled with
shares of the Companys common stock or, at the
Companys option, cash. The principal amount of the 2012
Convertible Notes is payable in cash and amounts above the
principal amount, if any, will be settled with shares of the
Companys common stock or, at the Companys option,
cash.
(12) | Fair Value of Financial Instruments |
The estimated fair values of the Companys 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.
Cash and Cash Equivalents, Accounts Receivable, Accounts
Payable, Short-Term Debt and Other Current
Liabilities The carrying amounts approximate the
fair value due to the short maturity of these instruments.
Long-term Debt The fair value of the
convertible notes and senior notes were based upon their
respective values in active markets or the Companys best
estimate using market information. The fair value of the
aggregate principal amounts outstanding as of March 31,
2011 and December 31, 2010 are as follows:
March 31, 2011 | December 31, 2010 | |||||||||||||||
Principal |
Principal |
|||||||||||||||
Outstanding | Fair Value | Outstanding | Fair Value | |||||||||||||
9.125% Senior Notes, due 2018
|
$ | 200,000 | $ | 227,000 | $ | 200,000 | $ | 216,000 | ||||||||
4.00% Convertible Senior Notes, due 2017
|
115,000 | 242,018 | 115,000 | 175,168 | ||||||||||||
9.00% Convertible Senior Notes, due 2012
|
731 | 1,378 | 731 | 987 |
The carrying value of the Companys capital lease
obligation and other debt approximate fair value at
March 31, 2011 and December 31, 2010.
(13) | Commitments and Contingencies |
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
Companys 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 has
not accrued any liability for the remaining claims pending
F-14
INTERNATIONAL
COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
because it believes that it has good factual and legal defenses
to the asserted claims and that, while it is possible that
liability may be determined against the Company, it is not
reasonably probable, and an estimate of damages, if the Company
were to be found liable, cannot be made at this time. 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. The Company intends to
vigorously defend itself against the remaining complaints. The
court has scheduled the matter for trial beginning on
April 16, 2012.
Allegheny Energy Supply (Allegheny), the sole
customer of coal produced at the Companys subsidiary Wolf
Run Mining Companys (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 claimed that Wolf Run 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, and that Wolf Run continued to breach the
contract by failing to ship in volumes referenced in the
contract. The Sycamore No. 2 mine was idled after
encountering adverse geologic conditions and abandoned gas wells
that were previously unidentified and unmapped. After extensive
searching for gas wells and rehabilitation of the mine, it was
re-opened in 2007, but with notice to Allegheny that it would
necessarily operate at reduced volumes in order to safely and
effectively avoid the many gas wells within the reserve. The
amended complaint also alleged 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. Allegheny voluntarily dropped the
breach of representation claims later. Allegheny claimed 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. 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 and did not exist at the time Wolf Run and Allegheny
entered into the contract. No new substantive claims were
asserted. The Company answered the second amended complaint on
October 13, 2009, denying all of the new claims. The
Companys counterclaim was dismissed on motion for summary
judgment entered on May 11, 2010. Alleghenys claims
against International Coal Group, Inc. were also dismissed by
summary judgment, but the claims against Wolf Run and Hunter
Ridge were not. The court conducted a non-jury trial of this
matter beginning on January 10, 2011 and concluding on
February 1, 2011. At the trial, Allegheny presented its
evidence for breach of contract and claimed that it is entitled
to past and future damages in the aggregate of between $228,000
and $377,000. Wolf Run and Hunter Ridge presented their defense
of the claims, including evidence with respect to the existence
of force majeure conditions and excuse under the contract and
applicable law. Wolf Run and Hunter Ridge presented evidence
that Alleghenys damages calculations were significantly
inflated because it did not seek to determine cover as of the
time of the breach and in some instances artificially assumed
future non-delivery or did not take into account the apparent
requirement to supply coal in the future. On May 2, 2011,
the trial court entered a Memorandum and Verdict determining
that Wolf Run had breached the coal supply contract and that the
performance shortfall was not excused by force majeure. The
trial court awarded total damages and interest in the amount of
$104,104. The Company expects to pursue motions for
reconsideration and other post-verdict motions in the trial
court, after which the Company expects to appeal to the
Pennsylvania appellate court, if necessary. No appeal bond is
necessary while post-verdict motions are pending with the trial
court, but an appeal bond equal to the damages assessed many
have to be posted in the future. The verdict is not expected to
adversely impact the merger transaction with Arch Coal, Inc.
Although the verdict provides damages of $104,104, the Company
has accrued $40,000 as of March 31, 2011 because the
Company believes that it has meritorious factual and legal bases
for reversal or revision of substantial
F-15
INTERNATIONAL
COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
portions of the trial court decision. The ultimate resolution of
this matter could result in an outcome which may be materially
different than what the Company has accrued.
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 seeking unspecified damages. 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 Companys November 2005 reorganization and
December 2005 public offering of common stock. In addition, the
complaint challenges other of the Companys 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 has not accrued any
liability for the claims pending because it believes that it has
good factual and legal defenses to the asserted claims and that
an estimate of damages, if the Company were to be found liable,
cannot be made at this time. The Company intends to vigorously
defend the action.
On June 11, 2010, the West Virginia Department of
Environmental Protection (WVDEP) filed suit against
ICG Eastern, LLC (ICG Eastern) alleging violations
of the West Virginia Water Pollution Control/National Pollutant
Discharge Elimination System (WVNPDES) and Surface
Mine Permits for ICG Easterns Birch River surface mine.
The WVDEP alleges that ICG Eastern has failed to fully comply
with the effluent limits for aluminum, manganese, pH, iron and
selenium contained in its WVNPDES permit. The complaint further
alleges that violations of the WVNPDES permit effluent limits
have caused violations of water quality standards for the same
parameters in the streams receiving the discharges from this
mine. The WVDEP also alleges that violations of the effluent
limits in the WVNPDES permits are also violations of the
regulations governing surface mining in West Virginia. ICG
Eastern and the WVDEP executed a settlement agreement that will
require ICG Eastern to pay a monetary penalty of $229 and accept
the imposition of a compliance schedule related to selenium and
other water quality parameters. The settlement agreement was
submitted to the Webster County Circuit Court on
December 30, 2010, was made available for public comment by
the WVDEP and was thereafter entered by the court on
April 18, 2011. The settlement agreement resolves all of
the WVDEPs claims in the suit, with the exception of
certain alleged selenium effluent limit violations beginning
after April 5, 2010 that are currently the subject of both
administrative appeal board and state circuit court stays. The
WVDEP has reserved its claims as to these alleged violations for
its further consideration. The Company has fully reserved the
expected liability for this case.
The Sierra Club et al, on March 23, 2011, filed a complaint
against ICG Eastern in the United States District Court for the
Northern District of West Virginia alleging violations of the
Federal Water Pollution Control Act (the Clean Water
Act) and the Surface Mining Control and Reclamation Act at
ICG Easterns Birch River surface mine. Specifically, the
complaint alleges that ICG Eastern is discharging selenium in
concentrations that violate ICG Easterns WVNPDES Permit
and that the WVDEP has failed to diligently prosecute the
violations. ICG Eastern filed a motion to dismiss on
April 25, 2011, arguing that the Webster County Circuit
Courts approval of the settlement agreement between it and
the WVDEP precludes the action in federal court. The motion to
dismiss is pending before the court.
The Sierra Club, on December 3, 2010, filed a Notice of
Intent (NOI) to sue ICG Hazard, LLC
(Hazard) alleging violations of the Clean Water Act
and the Surface Mining Control and Reclamation Act of 1977 at
Hazards Thunder Ridge surface mine. The NOI, which was
supplemented by a revised filing on February 24, 2011,
claims that Hazard is discharging selenium and contributing to
conductivity levels in the receiving streams in violation of
state and federal regulations. The Company disputes that
allegation and intends to vigorously defend against any lawsuit
that may result.
On December 3, 2010, the Kentucky Energy and Environment
Cabinet (Cabinet) filed suit against ICG Hazard,
LLC, ICG Knott County, LLC, ICG East Kentucky, LLC and Powell
Mountain Energy, LLC (collectively, KY Operations)
alleging that the KY Operations failed to comply with the terms
and conditions of the Kentucky
F-16
INTERNATIONAL
COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Pollutant Discharge Elimination System (KPDES)
permits issued by the Cabinets Division of Water to the KY
Operations. Among the claims lodged by the Cabinet were
allegations that contract water monitoring laboratories retained
by the KY Operations did not adhere to the practices and
procedures required for conducting KPDES monitoring, the
contract laboratories failed to properly document and maintain
records of the monitoring and the KY Operations submitted
quarterly Discharge Monitoring Reports that sometimes contained
inaccurate, incomplete and erroneous information. The KY
Operations and the Cabinet entered a proposed Consent Judgment
contemporaneously with the filing of the complaint that, if
approved by the Franklin County (KY) Circuit Court, will require
the KY Operations to pay a monetary penalty of $350, to prepare
and implement a Corrective Action Plan that corrects the
deficiencies in the respective KPDES monitoring programs, to
identify the responsible corporate officers for each KPDES
permit and to provide specific detailed information in support
of the Discharge Monitoring Reports to be filed for the fourth
quarter 2010 and first quarter 2011. Final resolution of this
matter is pending approval by the Court. On February 11,
2011, the Court entered an order allowing certain anti-mining
groups to intervene in the action to contest the validity of the
Consent Judgment. The hearing on the entry of the Consent
Judgment is scheduled to be held on June 14, 2011. The
Company has fully reserved the proposed penalty.
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 the Mine Safety and Health Administration 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 managements belief there
is no individual case or group of related cases pending that is
likely to have a material adverse effect on the Companys
financial condition, results of operations or cash flows.
(14) | 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.
(15) | 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 Companys Central
Appalachian operations are located in southern West Virginia,
eastern Kentucky and western Virginia and include eight mining
complexes. The Companys Northern Appalachian operations
are located in northern West Virginia and Maryland and include
four mining complexes. The Companys Illinois Basin
operations include one mining complex. The Company also has an
Ancillary category, which includes the Companys corporate
overhead, equipment and parts sales, contract highwall mining
services and land activities.
F-17
INTERNATIONAL
COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Reportable segment results from continuing operations for the
three months ended March 31, 2011 and 2010 and segment
assets as of March 31, 2011 and 2010 were as follows:
Central |
Northern |
Illinois |
||||||||||||||||||
Three months ended March 31, 2011: | Appalachian | Appalachian | Basin | Ancillary | Consolidated | |||||||||||||||
Revenue
|
$ | 183,393 | $ | 85,029 | $ | 27,441 | $ | 6,126 | $ | 301,989 | ||||||||||
Adjusted EBITDA
|
44,326 | 25,131 | 7,274 | (11,629 | ) | 65,102 | ||||||||||||||
Depreciation, depletion and amortization
|
16,681 | 5,420 | 2,403 | 1,152 | 25,656 | |||||||||||||||
Capital expenditures
|
19,060 | 15,555 | 4,929 | 1,664 | 41,208 | |||||||||||||||
Total assets
|
710,065 | 240,958 | 72,304 | 471,682 | 1,495,009 |
Central |
Northern |
Illinois |
||||||||||||||||||
Three months ended March 31, 2010: | Appalachian | Appalachian | Basin | Ancillary | Consolidated | |||||||||||||||
Revenue
|
$ | 184,765 | $ | 65,367 | $ | 26,092 | $ | 12,370 | $ | 288,594 | ||||||||||
Adjusted EBITDA
|
39,436 | 7,946 | 4,747 | (5,262 | ) | 46,867 | ||||||||||||||
Depreciation, depletion and amortization
|
17,552 | 5,269 | 2,548 | 1,028 | 26,397 | |||||||||||||||
Capital expenditures
|
9,538 | 3,510 | 3,400 | 126 | 16,574 | |||||||||||||||
Total assets
|
727,649 | 188,324 | 55,918 | 612,692 | 1,584,583 |
Revenue in the Ancillary category consists primarily of $4,897
and $3,499 relating to contract highwall mining activities for
the three months ended March 31, 2011 and 2010,
respectively, and $7,624 relating to brokered coal sales for the
three months ended March 31, 2010. There were no brokered
coal sales for the three months ended March 31, 2011.
Capital expenditures include non-cash amounts of $25,983 and
$13,355 for the three months ended March 31, 2011 and 2010,
respectively. Capital expenditures do not include $15,881 and
$17,416 paid during the three months ended March 31, 2011
and 2010, respectively, related to capital expenditures accrued
in prior periods.
Adjusted EBITDA represents earnings before deducting interest,
income taxes, depreciation, depletion, amortization, the legal
reserve for the Allegheny lawsuit, loss on extinguishment of
debt and noncontrolling interest. Adjusted EBITDA is presented
because it is an important supplemental measure of the
Companys performance used by the Companys chief
operating decision maker.
Reconciliation of net loss attributable to International Coal
Group, Inc. to Adjusted EBITDA for the three months ended
March 31, 2011 and 2010 is as follows:
Three Months Ended |
||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net loss attributable to International Coal Group, Inc.
|
$ | (6,318 | ) | $ | (8,852 | ) | ||
Depreciation, depletion and amortization
|
25,656 | 26,397 | ||||||
Interest expense, net
|
8,110 | 13,300 | ||||||
Income tax benefit
|
(2,357 | ) | (5,965 | ) | ||||
Legal reserve for the Allegheny lawsuit
|
40,000 | | ||||||
Loss on extinguishment of debt
|
| 21,987 | ||||||
Noncontrolling interest
|
11 | | ||||||
Adjusted EBITDA
|
$ | 65,102 | $ | 46,867 | ||||
F-18
INTERNATIONAL
COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
(16) | Supplementary Guarantor Information |
International Coal Group, Inc. (the Parent Company)
issued its 2012 Convertible Notes in July 2007 and issued its
2018 Senior Notes and 2017 Convertible Notes (together with the
2012 Convertible Notes and the 2018 Senior Notes, the
Notes) in March 2010.
The Parent Company has no independent assets or operations other
than those related to the issuance, administration and repayment
of the Notes. All subsidiaries of the Parent Company (the
Guarantors), except for a minor non-guarantor joint
venture, have fully and unconditionally guaranteed the 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 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 Companys and
Guarantors future subordinated indebtedness. Obligations
under the ABL Loan Facility are secured on a first-priority
basis and obligations under the 2018 Senior Notes are secured on
a second-priority basis by substantially all of the assets of
the Parent Company and the Guarantors. As a result, the 2012
Convertible Notes and 2017 Convertible Notes are effectively
subordinated to amounts borrowed under the ABL Loan Facility and
the 2018 Senior Notes. Other than for corporate-related purposes
or interest payments required by the Notes, the ABL Loan
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 Parent Companys subsidiaries
assets are restricted assets.
The Parent Company and Guarantors are subject to certain
covenants under the indenture for the 2018 Senior Notes. Under
these covenants, the Parent Company and Guarantors are, among
other things, 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.
(17) | Subsequent Events |
On May 2, 2011, the Company and Arch Coal, Inc.
(Arch) entered into a definitive Agreement and Plan
of Merger (the Agreement) under which Arch will
acquire all of the outstanding shares of the Companys
Common Stock for $14.60 per share, in an all-cash transaction
valued at $3,400,000. The Agreement is subject to customary
closing conditions and is expected to close in the second
quarter of 2011.
F-19