Edgar Filing: International Coal Group, Inc.

frm10-q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2009

¨	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 August 1, 2009—154,152,600.

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	41
Item 4.	Controls and Procedures	42
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 4.	Submission of Matters to a Vote of Security Holders	48
Item 6.	Exhibits	49

PART I

Item 1.

Condensed Consolidated Financial Statements

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except per share amounts)

	June 30, 2009			December 31, 2008
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	66,315		$	63,930
Accounts receivable, net of allowances of $1,406 and $1,516		84,739			75,321
Inventories, net		81,600			58,788
Deferred income taxes		17,666			17,649
Prepaid insurance		6,027			13,380
Income taxes receivable		11			8,030
Prepaid expenses and other		9,602			10,893
Total current assets		265,960			247,991

PROPERTY, PLANT, EQUIPMENT AND MINE DEVELOPMENT, net		1,044,939			1,069,297
DEBT ISSUANCE COSTS, net		9,714			10,462
ADVANCE ROYALTIES, net		18,037			17,462
OTHER NON-CURRENT ASSETS		5,613			5,435
Total assets	$	1,344,263		$	1,350,647

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	55,878		$	75,810
Short-term debt		1,163			4,741
Current portion of long-term debt and capital lease		17,769			15,319
Current portion of reclamation and mine closure costs		10,976			11,139
Current portion of employee benefits		3,359			3,359
Accrued expenses and other		82,646			87,704
Total current liabilities		171,791			198,072

LONG-TERM DEBT AND CAPITAL LEASE		424,353			417,551
RECLAMATION AND MINE CLOSURE COSTS		67,899			68,107
EMPLOYEE BENEFITS		66,781			61,194
DEFERRED INCOME TAXES		53,110			49,403
BELOW-MARKET COAL SUPPLY AGREEMENTS		31,032			43,888
OTHER NON-CURRENT LIABILITIES		6,695			6,195
Total liabilities		821,661			844,410

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, 154,155,550 and 154,148,229 shares issued and outstanding, respectively, as of June 30, 2009 and 153,322,245 shares issued and outstanding, as of December 31, 2008		1,541			1,533
Treasury stock		(14	)		—
Additional paid-in capital		659,222			656,997
Accumulated other comprehensive loss		(5,071	)		(5,157	)
Retained deficit		(133,096	)		(147,171	)
Total International Coal Group, Inc. stockholders’ equity		522,582			506,202
Noncontrolling interest		20			35
Total stockholders’ equity		522,602			506,237
Total liabilities and stockholders’ equity	$	1,344,263		$	1,350,647

See notes to condensed consolidated financial statements.

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(Dollars in thousands, except per share amounts)

	Three months ended June 30,						Six months ended June 30,
	2009			2008			2009			2008
REVENUES:
Coal sales revenues	$	254,677		$	253,109		$	528,493		$	479,713
Freight and handling revenues		6,041			11,870			14,675			23,153
Other revenues		17,079			12,906			39,595			26,944
Total revenues		277,797			277,885			582,763			529,810
COSTS AND EXPENSES:
Cost of coal sales		207,324			217,590			439,289			426,394
Freight and handling costs		6,041			11,870			14,675			23,153
Cost of other revenues		6,630			9,222			15,966			18,157
Depreciation, depletion and amortization		26,035			24,694			52,298			46,651
Selling, general and administrative		8,670			10,129			19,281			18,655
Gain on sale of assets, net		(3,108	)		(26,081	)		(3,186	)		(26,292	)
Total costs and expenses		251,592			247,424			538,323			506,718
Income from operations		26,205			30,461			44,440			23,092
INTEREST EXPENSE, net		(13,214	)		(8,793	)		(26,232	)		(21,364	)
Income before income taxes		12,991			21,668			18,208			1,728
INCOME TAX (EXPENSE) BENEFIT		(2,613	)		(7,900	)		(4,108	)		134
Net income		10,378			13,768			14,100			1,862
Net (income) loss attributable to noncontrolling interest		4			2			(25	)		(5	)
Net income attributable to International Coal Group, Inc.	$	10,382		$	13,770		$	14,075		$	1,857

Earnings per share:
Basic	$	0.07		$	0.09		$	0.09		$	0.01
Diluted	$	0.07		$	0.08		$	0.09		$	0.01
Weighted-average common shares outstanding:
Basic		152,832,797			152,550,960			152,803,420			152,499,812
Diluted		154,672,255			167,912,909			153,983,725			167,551,824

See notes to condensed consolidated financial statements.

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

	Six months ended June 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	14,100		$	1,862
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, depletion and amortization		52,298			46,651
Amortization of deferred finance costs and debt discount		3,378			3,001
Provision for bad debt		(110	)		(522	)
Compensation expense on equity instruments		2,233			2,377
Gain on sale of assets, net		(3,186	)		(26,292	)
Deferred income taxes		3,632			(285	)
Amortization of accumulated postretirement benefit obligation		144			215
Changes in assets and liabilities:
Accounts receivable		(9,308	)		(29,664	)
Inventories		(22,812	)		(3,277	)
Prepaid expenses and other		16,663			1,156
Other non-current assets		(630	)		823
Accounts payable		(10,784	)		298
Accrued expenses and other		(5,058	)		17,802
Reclamation and mine closure costs		176			(1,125	)
Other liabilities		(1,634	)		1,990
Net cash from operating activities		39,102			15,010
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of assets		3,066			4,179
Additions to property, plant, equipment and mine development		(35,750	)		(55,379	)
Cash paid related to acquisitions and net assets acquired		—			(558	)
Withdrawals (deposits) of restricted cash		(163	)		14
Net cash from investing activities		(32,847	)		(51,744	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on short-term debt		(3,578	)		—
Borrowings on long-term debt and capital lease		9,086			—
Repayments on long-term debt and capital lease		(8,755	)		(2,147	)
Purchases of treasury stock		(14	)		—
Debt issuance costs		(609	)		(183	)
Net cash from financing activities		(3,870	)		(2,330	)
NET CHANGE IN CASH AND CASH EQUIVALENTS		2,385			(39,064	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		63,930			107,150
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	66,315		$	68,086

Supplemental information:
Cash paid for interest (net of amount capitalized)	$	22,402		$	17,630
Cash received for income taxes, net	$	7,588		$	—
Supplemental disclosure of non-cash items:
Purchases of property, plant, equipment and mine development through accounts payable	$	3,794		$	2,383
Purchases of property, plant, equipment and mine development through financing arrangements	$	6,900		$	5,840
Assets acquired through assumption of liabilities	$	—		$	17,464
Assets acquired through the exchange of coal reserves	$	—		$	21,633

See notes to condensed consolidated financial statements.

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 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 June 30, 2009 and for the three and six months ended June 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 for the fiscal year ended December 31, 2008. The results of operations for the three and six months ended June 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 Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures on fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Adoption of SFAS No. 157 did not have a material impact on the Company’s financial position, results of operations or cash flows.

In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS No. 157-2, Effective Date of FASB Statement No. 157 (“FSP FAS No. 157-2”). FSP FAS No. 157-2 permits delayed adoption of SFAS No. 157 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. Adoption of FSP FAS No. 157-2 did not have a material impact on the Company’s financial position, results of operations or cash flows.

In October 2008, the FASB issued FSP FAS No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (“FSP FAS No. 157-3”). FSP FAS No. 157-3 clarified the application of SFAS No. 157 in an inactive market. It demonstrated how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP FAS No. 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. Adoption of FSP FAS No. 157-3 did not have a material impact on the Company’s financial position, results of operations or cash flows.

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2009

(Dollars in thousands, except per share amounts)

In April 2009, the FASB issued FSP FAS No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS No. 157-4”). FSP FAS No. 157-4 provides additional 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. FSP FAS No. 157-4 also provides additional guidance on circumstances that may indicate that a transaction is not orderly. FSP FAS No. 157-4 is effective for interim and annual periods ending after June 15, 2009. Adoption of FSP FAS No. 157-4 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 FSP APB 14-1, Accounting for Convertible Debt Instruments That May be Settled in Cash Upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”). FSP APB 14-1 requires 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 over the period during which the debt is expected to be outstanding as additional non-cash interest expense. FSP APB 14-1 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 FSP APB 14-1 was as follows:

	December 31, 2008
	As Previously Reported			Adjustment			As Adjusted
Property, plant, equipment and mine development	$	1,068,146		$	1,151		$	1,069,297
Debt issuance costs, net		10,635			(173	)		10,462
Total assets		1,349,669			978			1,350,647

Long-term debt and capital lease		434,920			(17,369	)		417,551
Deferred tax liability		42,468			6,935			49,403
Total liabilities		854,844			(10,434	)		844,410

Additional paid-in capital		643,480			13,517			656,997
Retained deficit		(145,066	)		(2,105	)		(147,171	)
Total International Coal Group, Inc. stockholders’ equity		494,790			11,412			506,202
Total liabilities and stockholders’ equity		1,349,669			978			1,350,647

	Three months ended June 30, 2008									Six months ended June 30, 2008
	As Previously Reported			Adjustment			As Adjusted			As Previously Reported			Adjustment			As Adjusted
Interest expense, net	$	(8,201	)	$	(592	)	$	(8,793	)	$	(20,182	)	$	(1,182	)	$	(21,364	)
Income tax (expense) benefit		(8,124	)		224			(7,900	)		(313	)		447			134
Net income attributable to International Coal Group, Inc.		14,138			(368	)		13,770			2,592			(735	)		1,857
Earnings per share:
Basic	$	0.09		$	—		$	0.09		$	0.02		$	(0.01	)	$	0.01
Diluted	$	0.08		$	—		$	0.08		$	0.02		$	(0.01	)	$	0.01

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2009

(Dollars in thousands, except per share amounts)

Business Combinations—In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS No. 141(R)”). SFAS No. 141(R) will significantly change the accounting for business combinations. Under SFAS No. 141(R), 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. SFAS No. 141(R) 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. SFAS No. 141(R) also includes a substantial number of new disclosure requirements. SFAS No. 141(R) 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 SFAS No. 141(R) will impact the accounting for the Company’s future business combinations, as well as for tax uncertainties and valuation allowances from prior acquisitions.

Noncontrolling Interests—In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS No. 160”). SFAS No. 160 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. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Adoption of SFAS No. 160 impacted the presentation of noncontrolling interest in the Company’s balance sheet and statements of operations and cash flows. The impact of the changes in presentation was not material.

Derivative Instruments—In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 requires additional disclosures for derivative instruments and hedging activities that include how and why an entity uses derivatives, how these instruments and the related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, and related interpretations and how derivative instruments and related hedged items affect the entity’s financial position, results of operations and cash flows. SFAS No. 161 is effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008. Adoption of SFAS No. 161 did not impact the footnotes accompanying the Company’s consolidated financial statements.

Share-Based Payments—In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1 clarifies that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008. Adoption of FSP EITF 03-6-1 did not have a material impact on the Company’s financial position, results of operations or cash flows.

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2009

(Dollars in thousands, except per share amounts)

Financial Instruments—In June 2008, the FASB ratified EITF 07-5, Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-5”). EITF 07-5 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. Adoption of EITF 07-5 did not have a material impact on the Company’s financial position, results of operations or cash flows.

Impairments—In April 2009, the FASB issued FSP FAS No. 115-2 and FAS No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP FAS No. 115-2 and FAS No. 124-2”). FSP FAS No. 115-2 and FAS No. 124-2 modifies the other-than-temporary impairment guidance for debt securities through increased consistency in the timing of impairment recognition and enhanced disclosures related to the credit and noncredit components of impaired debt securities that are not expected to be sold. In addition, increased disclosures are required for both debt and equity securities regarding expected cash flows, credit losses and an aging of securities with unrealized losses. FSP FAS No. 115-2 and FAS No. 124-2 is effective for interim and annual reporting periods that end after June 15, 2009. Adoption of FSP FAS No. 115-2 and FAS No. 124-2 did not impact the Company’s financial position, results of operations or cash flows.

Fair Value Instruments—In April 2009, the FASB issued FSP FAS No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS No. 107-1 and APB 28-1”). FSP FAS No. 107-1 and APB 28-1 requires fair value disclosures for financial instruments that are not reflected in the condensed consolidated balance sheets at fair value to be disclosed on a quarterly basis, providing quantitative and qualitative information about fair value estimates. FSP FAS No. 107-1 and APB 28-1 is effective for interim reporting periods ending after June 15, 2009. Adoption of FSP FAS No. 107-1 and APB 28-1 did not impact the Company’s financial position, results of operations or cash flows; however, adoption did result in additional information being included in the footnotes accompanying the Company’s consolidated financial statements. See Note 9.

Subsequent Events—In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS No. 165”). SFAS No. 165 establishes principles and requirements for events that occur after the balance sheet date, but before the issuance of the financial statements. SFAS No. 165 requires disclosure of the date through which subsequent events have been evaluated and disclosure of certain non-recognized subsequent events. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009. Adoption of SFAS No. 165 did not have a material impact on the Company’s financial position, results of operations or cash flows.

Variable Interest Entities—In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”). SFAS No. 167 amends certain requirements of FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. SFAS No. 167 is effective as of the first fiscal year beginning after November 15, 2009. The Company does not believe that adoption of SFAS No. 167 will materially impact its financial position, results of operations or cash flows.

FASB Codification—In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles– a replacement of FASB Statement No. 162 (“SFAS No. 168”). SFAS No. 168 makes the FASB Accounting Standards Codification the single source of authoritative U.S. accounting and reporting standards, but it does not change U.S. generally accepted accounting principles. SFAS No. 168 is effective for interim and annual periods ending after September 15, 2009. Adoption of SFAS No. 168 will not impact the Company’s financial condition, results of operations or cash flows.

FASB Interpretation No. 46(R)

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 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 $1,626, $100 and $140, respectively, for the three months ended June 30, 2009 and $3,548, $230 and $268, respectively, for the six months ended June 30, 2009.

Aments to

(3) Inventories

Inventories consisted of the following:

	June 30, 2009			December 31, 2008
Coal	$	45,070		$	28,436
Parts and supplies		38,507			32,159
Reserve for obsolescence–parts and supplies		(1,977	)		(1,807	)
Total	$	81,600		$	58,788

(4) Property, Plant, Equipment and Mine Development

Property, plant, equipment and mine development are summarized by major classification as follows:

	June 30, 2009			December 31, 2008
Coal lands and mineral rights	$	588,098		$	586,512
Plant and equipment		587,416			571,083
Mine development		188,103			181,876
Land and land improvements		25,406			24,119
Coalbed methane well development costs		14,888			14,889
		1,403,911			1,378,479
Less accumulated depreciation, depletion and amortization		(358,972	)		(309,182	)
Net property, plant, equipment and mine development	$	1,044,939		$	1,069,297

Depreciation, depletion and amortization expense related to property, plant, equipment and mine development for the three months ended June 30, 2009 and 2008 was $28,422 and $25,629, respectively. Depreciation, depletion and amortization expense related to property, plant, equipment and mine development for the six months ended June 30, 2009 and 2008 was $57,433 and $52,107, respectively.

On June 23, 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 three and six months ended June 30, 2008.

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 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:

	June 30, 2009			December 31, 2008
9.00% Convertible Senior Notes, due 2012, net of debt discount of $15,347 and $17,369, respectively	$	209,653		$	207,631
10.25% Senior Notes, due 2014		175,000			175,000
Equipment notes		52,473			43,378
Capital lease and other		4,996			6,861
Total		442,122			432,870
Less current portion		(17,769	)		(15,319	)
Long-term debt and capital lease	$	424,353		$	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 June 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

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2009

(Dollars in thousands, except per share amounts)

the Convertible Notes as a current liability 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 FSP APB 14-1 (see Note 2). FSP APB 14-1 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 June 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 $1,020 and $911 for the three months ended June 30, 2009 and 2008, respectively, and $2,022 and $1,804 for the six months ended June 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 June 30, 2009 and 2008 and $10,126 for each of the six month periods ended June 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 February 2009, the Company executed an amendment to the Credit Facility that affected certain 2009 debt covenants. The amendment modified the maximum permitted leverage and minimum interest coverage ratios. The amendment also decreased the maximum capital spending and added a minimum liquidity requirement. Debt covenants for years subsequent to 2009 were not affected by the amendment. As of June 30, 2009, the Company had no borrowings outstanding and letters of credit totaling $73,551 outstanding, leaving $26,449 available for future borrowing capacity. 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 2.25% to 3.00% or LIBOR plus an applicable margin of 3.25% to 4.00%, based on the Company’s leverage ratio as of June 30, 2009. As of June 30, 2009, the Company was in compliance with its financial covenants under the Credit Facility. The Company believes, based on currently available information, that it will be able to meet the financial covenants in the Credit Facility through the end of 2009. Current market volatility, surrounding coal prices in particular, has made it extraordinarily difficult to forecast results for 2010 and beyond. Accordingly, the potential exists that the Company may not remain in compliance with certain covenants in 2010. The Company will seek a waiver or amendment from its lenders or pursue other alternatives for any period it believes it will not be in compliance.

Equipment notes—The equipment notes, having various maturity dates extending to February 2014, are collateralized by mining equipment. As of June 30, 2009, the Company had amounts outstanding with terms ranging from 36 to 60 months and a weighted-average interest rate of 7.30%. At June 30, 2009, additional funds are available under the Company’s revolving equipment credit facility for terms up to 60 months with a current interest rate of 6.90%.

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%. Additionally, the Company has an insurance policy with a coverage period of 17 months that it financed over 15 months at an interest rate of 5.42%.

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2009

(Dollars in thousands, except per share amounts)

Short-Term Debt

The Company finances the majority of its insurance premiums, a portion of which is included in short-term debt. As of June 30, 2009, the weighted-average interest rate applicable to the notes was 5.04%. As of June 30, 2009 and December 31, 2008, the Company had $1,163 and $4,741, respectively, outstanding related to the financing of insurance premiums.

(6) Income Taxes

The effective income tax rates for the three and six months ended June 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 June 30, 2009 decreased to 18% from 36% for the three months ended June 30, 2008. The decrease was primarily a result of the effect of income tax deductions for depletion of mineral rights on reduced quarterly earnings. The effective income tax rate for the six months ended June 30, 2009 increased to 20% from an 8% tax benefit for the six months ended June 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

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

	Three months ended June 30,				Six months ended June 30,
	2009		2008		2009		2008
Net periodic benefit cost:
Service cost	$	834	$	652	$	1,668	$	1,304
Interest cost		438		406		874		813
Amortization of net loss		71		108		144		215
Benefit cost	$	1,343	$	1,166	$	2,686	$	2,332

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

(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.

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2009

(Dollars in thousands, except per share amounts)

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

	Three months ended June 30,				Six months ended June 30,
	2009		2008		2009		2008
Net income attributable to International Coal Group, Inc.	$	10,382	$	13,770	$	14,075	$	1,857

Weighted-average common shares outstanding—basic		152,832,797		152,550,960		152,803,420		152,499,812
Incremental shares arising from:
Stock options		253,801		154,763		268		—
Restricted shares		1,392,231		203,967		1,122,381		48,793
Restricted stock units		193,496		—		57,656		—
Convertible notes		—		15,003,219		—		15,003,219
Weighted-average common shares outstanding—diluted		154,672,255		167,912,909		153,983,725		167,551,824

Earnings Per Share:
Basic	$	0.07	$	0.09	$	0.09	$	0.01
Diluted	$	0.07	$	0.08	$	0.09	$	0.01

Options to purchase 2,777,822 and 2,797,022 shares of common stock outstanding at June 30, 2009 have been excluded from the computation of diluted net income per share for the three and six months ended June 30, 2009 because their effect would have been anti-dilutive. Options to purchase 1,069,292 and 1,096,292 shares of common stock outstanding at June 30, 2008 have been excluded from the computation of diluted net income per share for the three and six months ended June 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 convertible into 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 $6.10 per share. Accordingly, there were no potentially dilutive shares at June 30, 2009.

(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.

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.

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2009

(Dollars in thousands, except per share amounts)

Long-term Debt—At June 30, 2009 and December 31, 2008, the Company had $225,000 aggregate principal amount of 9.00% Convertible Notes outstanding. The fair value of the Convertible Notes was approximately $185,423 and $114,683 as of June 30, 2009 and December 31, 2008, respectively. At June 30, 2009 and December 31, 2008, the Company had $175,000 aggregate principal amount of 10.25% Senior Notes outstanding. The fair value of the Senior Notes was approximately $123,375 and $131,250 as of June 30, 2009 and December 31, 2008, respectively. The fair value of the Convertible Notes and Senior Notes were based upon their respective values in active markets.

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

(10) Commitments and Contingencies

Guarantees and Financial Instruments with Off-balance Sheet Risk—In the normal course of business, the Company is a party to certain guarantees and financial instruments with off-balance sheet risk, such as bank letters of credit and performance or surety bonds. No liabilities related to these arrangements are reflected in the Company’s condensed consolidated balance sheets. Management does not expect any material losses to result from these guarantees or off-balance sheet financial instruments. The Company has outstanding surety bonds with third parties totaling approximately $119,046 as of June 30, 2009 to secure reclamation and other performance commitments. As of June 30, 2009, the Company has bank letters of credit outstanding of $73,551 under its revolving credit facility.

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 the contracts. Purchase price allocated to the Company’s above-market coal supply agreement was capitalized and is being reduced as related cash payments are received. Value was allocated to coal supply agreements based on discounted cash flows attributable to the difference between the above- or below-market contract price and the prevailing market price at the date of acquisition. The net book value of the Company’s above-market coal supply agreement was $3,322 and $3,447 at June 30, 2009 and December 31, 2008, respectively. This amount is recorded in other assets in the Company’s consolidated balance sheets. The net book value of the below-market coal supply agreements was $31,032 and $43,888 at June 30, 2009 and December 31, 2008, respectively. Amortization income on the below-market coal supply agreements was $2,386 and $934 for the three months ended June 30, 2009 and 2008, respectively, and $5,135 and $5,455 for the six months ended June 30, 2009 and 2008, respectively. Amortization income is included in depreciation, depletion and amortization expense. During the three months ended June 30, 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 three and six months ended June 30, 2009. Based on expected shipments related to the remaining below-market contracts, the Company expects to record annual amortization income on the below-market coal supply agreements in each of the next five years as reflected in the table below.

	Below-market contracts
2009 (remainder of year)	$	1,565
2010		3,232
2011		3,232
2012		3,232
2013		3,232

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 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 have 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 trial court overruled those plaintiffs’ objections to the settlement, and, although the West Virginia Supreme Court of Appeals refused to stay the effectiveness of the settlement, the plaintiffs’ petition for appeal to the West Virginia Supreme Court of Appeals was recently presented to the court. The court deferred its decision as to whether it will hear the appeal, pending its ruling on an unrelated case that shares similar issues. That case was decided on June 23, 2009, but the court has taken no further action on the plaintiffs' appeal in this case. 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.

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 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 “ACOE”) 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 ACOE 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 ACOE suspended the Section 404 permit on December 26, 2007 in order to evaluate the issues raised by the plaintiffs. The ACOE 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. The EPA’s heightened scrutiny will likely render the process of obtaining ACOE permits for coal mining activities in Appalachia more difficult.

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 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. No hearing date has been set.

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.

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 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 six months ended June 30, 2009 and 2008 and segment assets as of June 30, 2009 and 2008 were as follows:

Three months ended June 30, 2009:

	Central Appalachian		Northern Appalachian		Illinois Basin		Ancillary			Consolidated
Revenue	$	187,589	$	52,279	$	19,465	$	18,464		$	277,797
Adjusted EBITDA		47,166		5,301		3,762		(3,989	)		52,240
Depreciation, depletion and amortization		17,250		5,246		1,953		1,586			26,035
Capital expenditures		4,724		5,991		4,032		1,138			15,885
Total assets		743,917		180,111		46,838		373,397			1,344,263

Three months ended June 30, 2008:

	Central Appalachian		Northern Appalachian		Illinois Basin		Ancillary			Consolidated
Revenue	$	174,434	$	64,645	$	18,645	$	20,161		$	277,885
Adjusted EBITDA		46,567		9,730		3,895		(5,037	)		55,155
Depreciation, depletion and amortization		15,719		5,434		1,949		1,592			24,694
Capital expenditures		23,193		9,389		171		2,298			35,051
Total assets		722,007		180,646		36,890		408,288			1,347,831
Goodwill		—		—		—		30,237			30,237

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2009

(Dollars in thousands, except per share amounts)

Revenue in the Ancillary category consists primarily of $12,720 and $10,393 relating to the Company’s brokered coal sales and $4,018 and $5,717 relating to contract highwall mining activities for the three months ended June 30, 2009 and 2008, respectively. Capital expenditures include non-cash amounts of $10,693 and $12,964 for the three months ended June 30, 2009 and 2008, respectively. Capital expenditures do not include $11,744 paid during the three months ended June 30, 2009 related to capital expenditures accrued in prior periods.

Six months ended June 30, 2009:

	Central Appalachian		Northern Appalachian		Illinois Basin		Ancillary			Consolidated
Revenue	$	377,151	$	118,446	$	40,471	$	46,695		$	582,763
Adjusted EBITDA		76,599		15,453		6,633		(1,947	)		96,738
Depreciation, depletion and amortization		34,840		10,821		3,663		2,974			52,298
Capital expenditures		13,924		11,182		5,288		3,108			33,502
Total assets		743,917		180,111		46,838		373,397			1,344,263

Six months ended June 30, 2008:

	Central Appalachian		Northern Appalachian		Illinois Basin		Ancillary			Consolidated
Revenue	$	329,504	$	115,334	$	39,285	$	45,687		$	529,810
Adjusted EBITDA		62,145		11,525		6,243		(10,170	)		69,743
Depreciation, depletion and amortization		31,565		7,561		3,762		3,763			46,651
Capital expenditures		38,769		21,708		576		3,542			64,595
Total assets		722,007		180,646		36,890		408,288			1,347,831
Goodwill		—		—		—		30,237			30,237

Revenue in the Ancillary category consists primarily of $23,440 and $27,090 relating to the Company’s brokered coal sales and $10,858 and $9,778 relating to contract highwall mining activities for the six months ended June 30, 2009 and 2008, respectively. Capital expenditures include non-cash amounts of $10,693 and $8,223 for the six months ended June 30, 2009 and 2008, respectively. Capital expenditures do not include $12,942 paid during the six months ended June 30, 2009 related to capital expenditures accrued in prior periods.

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 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 six months ended June 30, 2009 and 2008 is as follows:

	Three months ended June 30,						Six months ended June 30,
	2009			2008			2009		2008
Net income attributable to International Coal Group, Inc.	$	10,382		$	13,770		$	14,075	$	1,857
Depreciation, depletion and amortization		26,035			24,694			52,298		46,651
Interest expense, net		13,214			8,793			26,232		21,364
Income tax expense (benefit)		2,613			7,900			4,108		(134	)
Noncontrolling interest		(4	)		(2	)		25		5
Adjusted EBITDA	$	52,240		$	55,155		$	96,738	$	69,743

(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.

INTERNATIONAL COAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2009

(Dollars in thousands, except per share amounts)

(14) Subsequent Event

On July 14, 2009, one of the Company’s customers elected to exercise contractual options that provided for early termination of two coal supply agreements in exchange for a payment of $18,000. Furthermore, the Company received an additional $9,000 that represents the lost margin on pre-termination shipments that the customer was unable to accept. The Company received the $27,000 payment on July 30, 2009.

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 August 6, 2009, the date of the filing of this Quarterly Report on Form 10-Q.

Item 2.

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 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;

•	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 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.

RESULTS OF CONTINUING OPERATIONS

Three months ended June 30, 2009 compared to the three months ended June 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 June 30, 2009 and 2008 for the indicated categories:

	Three months ended June 30,				Increase (Decrease)
	2009		2008		$ or Tons			%
	(in thousands, except percentages and per ton data)
Coal sales revenues	$	254,677	$	253,109	$	1,568		1	%
Freight and handling revenues		6,041		11,870		(5,829	)	(49	)%
Other revenues		17,079		12,906		4,173		32	%
Total revenues	$	277,797	$	277,885	$	(88	)	*	%

Tons sold		4,180		4,858		(678	)	(14	)%
Coal sales revenue per ton	$	60.92	$	52.10	$	8.82		17	%

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

	Three months ended June 30,				Increase (Decrease)
	2009		2008		$			%
	(in thousands, except percentages)
Central Appalachian	$	175,571	$	166,933	$	8,638		5	%
Northern Appalachian		48,685		59,776		(11,091	)	(19	)%
Illinois Basin		17,701		16,195		1,506		9	%
Ancillary		12,720		10,205		2,515		25	%
Total coal sales revenues	$	254,677	$	253,109	$	1,568		1	%

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

	Three months ended June 30,				Increase (Decrease)
	2009		2008		Tons		%
	(in thousands, except percentages)
Central Appalachian		2,480		3,004	(524	)	(17	)%
Northern Appalachian		947		1,075	(128