Attached files

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EX-12.1 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - James River Coal COjrcc_10k-ex1201.htm
EX-23.1 - CONSENT - James River Coal COjrcc_10k-ex2301.htm
EX-23.2 - CONSENT - James River Coal COjrcc_10k-ex2302.htm
EX-31.1 - CERTIFICATION - James River Coal COjrcc_10k-ex3101.htm
EX-32.1 - CERTIFICATION - James River Coal COjrcc_10k-ex3201.htm
EX-31.2 - CERTIFICATION - James River Coal COjrcc_10k-ex3102.htm
EX-32.2 - CERTIFICATION - James River Coal COjrcc_10k-ex3202.htm
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 SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

FORM 10-K

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


For the fiscal year ended
Commission File Number
December 31, 2010
000-51129

 
JAMES RIVER COAL COMPANY
(Exact name of registrant as specified in its charter)
 
Virginia
 
54-1602012
(State or other jurisdiction
 
(I.R.S. Employer
of incorporation or organization)
 
Identification No.)
    
   
901 E. Byrd Street, Suite 1600
   
Richmond, Virginia
 
23219
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code:  (804) 780-3000

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share
 
Series A Participating Cumulative Preferred
 
Stock Purchase Rights
Name of each exchange on which registered:
The Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
 
None
 
Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes    o             No    ý
Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes    o             No    ý
 
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    ý             No    o

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    o             No    o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
     ý

 
 

 
 
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o
Accelerated filer  ý
Non-accelerated filer
oSmaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes    o             No    ý

The aggregate market value of the common stock held by non-affiliates of the registrant, based upon the closing sale price of Common Stock, par value $0.01 per share, on June 30, 2010 as reported on the Nasdaq Global Market, was approximately $316,862,000 (affiliates being, for these purposes only, directors, executive officers and holders of more than 10% of the registrant’s Common Stock).

The number of shares of the registrant’s Common Stock, par value $.01 per share, outstanding as of February 15, 2011 was 27,779,351.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the registrant’s 2011 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission (the “SEC”), are incorporated by reference into Part III of this Annual Report on Form 10-K.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 

 

JAMES RIVER COAL COMPANY

TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
 
PART I
 
Item 1.
Business
2
Item 1A.
Risk Factors
16
Item 1B.
Unresolved Staff Comments
32
Item 2.
Properties
32
Item 3.
Legal Proceedings
33
Item 4.
[Removed and Reserved]
33
     
PART II
     
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
34
Item 6.
Selected Financial Data
35
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
34
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
53
Item 8.
Financial Statements and Supplementary Data
53
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
53
Item 9A.
Controls and Procedures
53
Item 9B.
Other Information
56
     
PART III
     
Item 10.
Directors, Executive Officers and Corporate Governance
59
Item 11.
Executive Compensation
59
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters
59
Item 13.
Certain Relationships and Related Transactions, and Director Independence
59
Item 14.
Principal Accountant Fees and Services
59
     
PART IV
     
Item 15.
Exhibits, Financial Statement Schedules
60

 

 


 
i

 

PART I
 
Available Information

The Company’s website address is http://www.jamesrivercoal.com.  The Company makes available free of charge through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after filing or furnishing the material to the Securities and Exchange Commission (the “SEC”).   However, our website and any contents thereof should not be considered to be incorporated by reference into this document. You may read and copy documents the Company files at the SEC’s public reference room at 100 F Street, NE, Washington, D.C., 20549.   Please call the SEC at 1-800-SEC-0330 for information on the public reference room.   The SEC maintains a website that contains annual, quarterly and current reports, proxy statements and other information that issuers (including the Company) file electronically with the SEC.   The SEC’s website is http://www.sec.gov.

In Part III of this Form 10-K, we incorporate certain information by reference from our Proxy Statement for the 2011 Annual Meeting of Shareholders.  The Company expects to file the Proxy Statement with the SEC on or about April 30, 2011, and will make it available on the Company website as soon as reasonably practicable.  Please refer to the Proxy Statement when it is available.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
1

 

Item 1.     Business

General Business

Overview

We mine, process and sell bituminous, steam- and industrial-grade coal through six operating subsidiaries (“mining complexes”) located throughout eastern Kentucky and in southern Indiana.  As of December 31, 2010, our six mining complexes included 18 underground mines, 9 surface mines and 10 preparation plants, five of which have integrated rail loadout facilities and three of which use a common loadout facility at a separate location.  As of December 31, 2010, we believe that we controlled approximately 271.3 million tons of proven and probable coal reserves.  At current production levels, we believe these reserves would support greater than 30 years of production.

In 2010, we produced 8.8 million tons of coal (including 0.1 million tons of coal produced in our mines that are operated by contract mine operators) and we purchased another 0.1 million tons for resale.  Of the 8.8 million tons produced from Company mines, approximately 65% came from underground mines, while the remaining 35 % came from surface mines.  In 2010, we generated revenues of $701.1 million and had net income of $78.2 million.  Approximately 88% of our 2010 revenues were generated from coal sales to electric utility companies and the remainder came from coal sales to industrial and other companies.  In 2010, South Carolina Public Service Authority, Georgia Power Company and Indianapolis Power and Light were our largest customers, representing approximately 39%, 32% and 11% of our revenues, respectively.   No other customer accounted for more than 10% of our revenues.

The coal that we sell is obtained from three sources:  our Company-operated mines, mines that are operated by independent contract mine operators, and other third parties from whom we purchase coal for resale.  Contract mining and coal purchased from other third parties provide flexibility to increase or decrease production based on market conditions.  The table below reflects the amount and percentage of coal obtained from those sources in 2010:

 
 
 
Tons (000s)
 
Percentage of total
 coal obtained by the
Company
Coal produced from Company-operated mines
8,705
 
97.7%
Coal obtained from mines operated by independent contractors
77
 
0.9%
Coal purchased from third parties
128
 
1.4%
 
8,910
 
   100%
 
On March 6, 2011, we signed a definitive agreement (the “Purchase Agreement”) to purchase International Resource Partners LP (“IRP”) and its subsidiary companies for $475 million in an all-cash transaction.  We have secured $375 million in committed bridge financing from Deutsche Bank AG Cayman Islands Branch (“Deutsche Bank”) and UBS Loan Finance LLC (“UBS”), which in addition to existing cash balances, is expected to be sufficient to finance the purchase price to IRP.  Rather than borrow under the committed financing, we may seek to issue common stock, convertible notes, senior notes or other securities in one or more public or private offerings in connection with the proposed acquisition.  There can be no assurance that we will undertake or complete any such financing transaction.
 
The Purchase Agreement contains customary representations, warranties, covenants and conditions, as well as indemnification provisions subject to specified limitations.  The closing of the proposed acquisition is subject to the termination or expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, certain third party consents and other customary closing conditions.  The proposed acquisition is expected to close in the first half of 2011.
 
IRP mines, processes and sells metallurgical and steam coal through its mining complexes in Southern West Virginia and Eastern Kentucky.  IRP, through its wholly owned subsidiary Logan & Kanawha, also conducts coal brokering and trading operations.   Including brokered coal, IRP had revenues of $490.3 million for the year ended December 31, 2010.  IRP had approximately 86 million tons of proven and probable coal reserves as of December 31, 2010.
 
Mining Methods
 
Our Company-operated and contractor mines produce coal using different mining methods.  These methods are room and pillar underground mining and contour and point removal surface mining. These methods are described in more detail below.
 
Room and Pillar.  In the underground room and pillar method of mining, continuous mining machines cut five to nine entries into the coal seam and connect them by driving crosscuts, leaving a series of rectangular pillars, or columns of coal, to help support the mine roof and control the flow of air.  Generally, openings are driven 20 feet wide and the pillars are 40 to 100 feet wide.  As mining advances, a grid-like pattern of entries and pillars is formed.  When mining advances to the end of a panel, or section of the mine, retreat mining may begin.  In retreat mining, as much coal as is feasible is mined from the pillars that were created in advancing the panel, allowing the roof to cave.
 
The coal face is cut with continuous mining machines and the coal is transported from the continuous mining machine to the mine conveyor belts using a continuous haulage system, shuttle cars or ram cars.  The mine conveyor system consists of a series of conveyor belts, which transport the coal from the active face areas to the surface.  Once on the surface, the coal is transported to the preparation plants where it is processed to remove any impurities.  The coal is then transported to the clean coal stockpiles or silos from which it is loaded for shipment to our customers.  Reserve recovery, a measure of the percentage of the total coal in place that is ultimately produced, using this method of mining typically depends on the shape of the reserve, the amount of low-cover areas, and the geological characteristics of the reserve body.

 
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Surface Mining.  Surface mining is used when coal is found close to the surface.  This method involves the removal of overburden (earth and rock covering the coal) with heavy earth-moving equipment and explosives, loading out the coal, replacing the overburden and topsoil after the coal has been excavated and reestablishing vegetation and plant life and making other improvements that have local community and environmental benefit. Overburden is typically removed at our mines by either hydraulic shovels or front-end loaders which place the overburden into large trucks.
 
In the Central Appalachia Region (CAPP), we use the contour and highwall surface mining methods.  Contour and highwall mining is used where removal of all the overburden overlying a coal seam is either uneconomical or impossible due to property control or other issues.  With contour mining, a contour cut is taken along the outcrop of the seam and the coal is removed from the exposed pit.  Highwall mining can then take place where the seam is exposed in the highwall.  A highwall miner resembles an underground continuous miner.  The highwall miner cuts entries into the coal seam up to 10 feet wide and up to 900 feet deep.  The coal is transported to the surface through the augers and loaded into trucks using a loader.  The contour area is then reclaimed by returning overburden to the pit and restoring the mountainside to its approximate original contour.
 
As of December 31, 2010, we had 9 Company-operated surface mines, two of which had a contract highwall miner operated in connection with the surface operations.

Underground Mine Characteristics

Underground mines are characterized as either “drift” mines or “below drainage” mines.  Drift mines are mines that are developed into the coal seam at a point where the seam intersects the surface.  The area where the seam intersects the surface is commonly known as the “outcrop.”  Multiple entries are developed into the coal seam and are used as airways for mine ventilation, passageways for miners and supplies, and entries for conveyor belts that transport coal from the active production areas of the mine to the surface.

In below drainage mines, the coal seam does not intersect the surface in the vicinity of the mining area.  Therefore, the coal seam must be accessed through excavated passageways from the surface.  These passageways typically consist of vertical shafts and angled slopes.  The shafts are constructed with diameters ranging from 12 to 24 feet and are used as airways for mine ventilation and passageways for miners and supplies via elevators.  The slopes, when used to house conveyor belts to transport the mined coal from the active production areas of the mine to the surface, are typically driven at an angle of less than 17 degrees from the horizontal.  In addition, the slopes provide passageways for miners and supplies, and airways for mine ventilation.

As of December 31, 2010, we had 16 Company-operated underground mines and 2 contract underground mines in operation for a total of 18 mines, of which 15 were drift mines and the remaining three were below-drainage mines.

Mining Operations

Our coal production is conducted through five mining complexes in the Central Appalachia Region and one mining complex in the Midwest Region.  We generally do not own the land on which we conduct our mining operations.  Rather, our coal reserves are controlled pursuant to leases from third party landowners.  We believe that greater than 95% and 90% of our coal reserves in the Central Appalachia Region and Midwest Region, respectively, are controlled pursuant to leases from third party landowners.  These leases typically convey mining rights to the coal producer in exchange for a per ton fee or royalty payment of a percentage of the gross sales price to the lessor.  The average royalties for coal reserves from our producing properties were approximately 8.8% and 4.3% of produced coal revenue for the year ended December 31, 2010, in the Central Appalachia Region and the Midwest Region, respectively.

All of our operations are located on or near public highways and receive electrical power from commercially available sources.  Existing facilities and equipment are maintained in good working condition and are continuously updated through capital expenditure investments.

 
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The following table provides summary information on our mining complexes as of December 31, 2010:


   
Number and Type of Mines
         
Quality of Shipments for the
 year ended 2010
 
 
 
 
Mining Complex
 
Underground
   
Surface (S)
 and
Highwall
(HW)
   
Total
   
Tons
 Shipped
 (000’s)
   
Average
Sulfur
 Content
 (%)
   
Average
Ash
Content
(%)
   
Average
BTU
Content
 
Central Appalachia
                                         
Bell County Coal Corporation
  2      -       2       340       1.6       7.1       13,209  
Bledsoe Coal Corporation
  4      -       4       1,326       1.2       7.9       13,021  
Blue Diamond Coal Corporation
  3      1S       4       1,446       1.0       8.3       13,020  
Leeco, Inc.
  1    
2S /1HW(1)
      3       1,218       0.9       9.5       12,878  
McCoy Elkhorn Coal Corporation
  6    
1S /1HW(1)
      7       1,779       1.5       8.4       12,798  
                                                         
Midwest
                                                       
Triad Mining, Inc
  2      5S       7       2,810       3.2       8.8       11,242  
                                                         
(1)  Highwall Miner operated in conjunction with surface mining.

The following summarizes additional information concerning each of our six mining complexes:

Bell County.  The Bell County complex is located in Bell County in eastern Kentucky.  We use room and pillar mining and mine the Jellico and Garmeada seams of coal.  Coal is processed at our preparation plant and loaded into railcars via an integrated four-hour unit train loadout that is serviced by both the CSX and Norfolk Southern railroads.  As of December 31, 2010, we employed 127 mining and support personnel at this complex.

Bledsoe.  The Bledsoe complex is located in Leslie and Harlan counties in eastern Kentucky.  We use room and pillar mining and mine the Hazard #4 and #4 Rider seams of coal at this complex.  Coal is processed at one of two preparation plants and loaded into railcars at a separate location via a four-hour unit train loadout on the CSX railroad.  As of December 31, 2010, we employed 357 mining and support personnel at this complex.

Blue Diamond.  The Blue Diamond complex is located in Leslie, Perry and Letcher counties in eastern Kentucky.  We use room and pillar mining for our underground mines and we use the contour method for our surface mine.  We mine the Hazard #4 and Elkhorn #3 seams of coal at this complex.  Coal is processed at our preparation plant, and loaded into railcars via an integrated four-hour unit train loadout on the CSX railroad.  As of December 31, 2010, we employed 303 mining and support personnel at this complex.

Leeco.  The Leeco complex is located in Knott and Perry counties in eastern Kentucky.  Our underground mine uses room and pillar mining and our surface mines use the contour and highwall mining methods.  We mine the Amburgy seam of coal and the Hazard #4, #5, #6, #7, #8 and #9 seams at this complex.  Coal is processed at our preparation plant and loaded into railcars via an integrated four-hour unit train loadout on the CSX railroad.  As of December 31, 2010, we employed 255 mining and support personnel at this complex.

McCoy Elkhorn.  The McCoy Elkhorn complex is located in Pike and Floyd counties in eastern Kentucky.  Our underground mines use room and pillar mining and our surface mine uses the contour and highwall mining methods.  Two of the underground mines and the highwall miner at the McCoy Elkhorn complex are operated by contractors.  We mine the Millard, Alma, Elkhorn #2 and Elkhorn #3 seams at this complex.  Coal is processed at our two preparation plants and loaded into railcars via integrated four-hour unit train loadouts on the CSX railroad.  As of December 31, 2010, we employed 362 mining and support personnel at this complex.

 
4

 


Triad.  The Triad complex is located in Pike and Knox counties in southern Indiana.  We use room and pillar mining to mine the Springfield seam of coal, and use the surface mine  method to mine multiple seams, including the Danville, Millersburg, Hymera, Bucktown and Springfield seams.  Coal is processed at one of three active preparation plants and loaded into trucks for delivery to the customer or by rail at our Switz City loadout.  The Switz City loadout is serviced by Indiana Railroad and the Indiana Southern Railroad.  As of December 31, 2010, we employed approximately 292 mining and support personnel at this complex.
 
 
Contract mining represented less than 1.0% of our coal production in the year ended December 31, 2010. Each mining complex monitors its contract mining operations and provides geological and engineering assistance to the contract mine operators.  The contract mine operators generally provide their own equipment and operate the mines using their employees.  Independent contract mine operators are paid a fixed rate for each ton of saleable product.  We are primarily responsible for the reclamation activities involved with all contractor-operated mines.  Contractors that operate surface mines, however, typically are contractually obligated to perform, on our behalf, the reclamation activities associated with the mines they operate.  Our relationships with contract mine operators typically can be cancelled by either party without penalty by giving between 30 and 60 days notice.

Reserves

We have an ongoing mineral development drilling and exploration program on our coal properties.  The purpose of the drilling and exploration program is to assist us with planning our mining activities and to better assess our coal reserves.  In April 2004, we asked Marshall Miller & Associates, Inc. (“MM&A”) to prepare a detailed study of our reserves in Central Appalachia as of March 31, 2004 based on all of our geologic information, including our updated drilling and mining data.  For the Triad properties, MM&A also prepared a detailed study of Triad’s reserves as of February 1, 2005 for the reserves obtained in the acquisition of Triad and as of April 11, 2006 for certain additional reserves acquired in the second quarter of 2006.   We have used MM&A’s March 31, 2004 study as the basis for our current internal estimate of our Central Appalachia reserves and MM&A’s February 1, 2005 and April 11, 2006 studies as the basis for our current internal estimate of our Midwest reserves (collectively the “MM&A studies”).  However, MM&A has not conducted a coal reserve study on our December 31, 2010 estimate.

The coal reserve studies conducted by MM&A were planned and performed to obtain reasonable assurance of our subject demonstrated (proven plus probable) reserves.  In connection with the studies, MM&A prepared reserve maps and had certified professional geologists develop estimates based on data supplied by us and using standards accepted by government and industry.

After reviewing the maps and information we supplied, MM&A prepared an independent mapping and estimate of our demonstrated reserves using methodology outlined in U.S. Geological Survey Circular 891 and SEC Industry Guide 7.  MM&A developed reserve estimation criteria to assure that the basic geologic characteristics of the reserves (e.g., minimum coal thickness and wash recovery, interval between deep mineable seams, mineable area tonnage for economic extraction, etc.) are in reasonable conformity with present and recent mine operation capabilities on our various properties.

We continue to have an ongoing mineral development drilling and exploration program on our coal properties.  Any future negative changes in our reserves could have a material adverse impact on our depreciation, depletion and amortization expense.  A material adverse impact could also lead to a charge for impairment of the value of our coal property assets.

As of December 31, 2010, we estimated that we controlled approximately 230.4 million tons of proven and probable coal reserves in Central Appalachia and 40.9 million tons of proven and probable coal reserves in the Midwest.

 
5

 


Reserves for these purposes are defined by SEC Industry Guide 7 as that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination.  The reserve estimates have been prepared using industry-standard methodology to provide reasonable assurance that the reserves are recoverable, considering technical, economic and legal limitations.  Although the MM&A studies found our reserves to be reasonable (notwithstanding unforeseen geological, market, labor or regulatory issues that may affect the operations), the MM&A studies did not include an economic feasibility study of our reserves.  In accordance with standard industry practice, we have performed our own economic feasibility analysis for our reserves.  It is not generally considered to be practical, however, nor is it standard industry practice, to perform a feasibility study for a company’s entire reserve portfolio.  In addition, MM&A did not independently verify our control of our properties, and has relied solely on property information supplied by us.  Reserve acreage, average seam thickness, average seam density and average mine and wash recovery percentages were verified by MM&A to prepare a reserve tonnage estimate for each reserve.  There are numerous uncertainties inherent in estimating quantities and values of economically recoverable coal reserves as discussed in “Critical Accounting Estimates – Coal Reserves”.

The following table provides information on our mining complexes reserves (the quality information is based on the MM&A studies):  

     
Approximate Overall
Reserve Quality
(2), (3)
Mining Complex
Proven & Probable
 Reserves As of
December 31,
2010 (1),(4)
Estimated
 Years of
Reserve Life
Based on 2010
 Production Levels
Ash
 Content
 (%) 
Sulfur
Content
    (%)    
Heat Value
(Btu/lb.)
Central Appalachia
(millions of tons)
       
Bell County
9.4
32.7
5.1
1.0
13,500
           
Bledsoe
55.5
43.0
7.8
1.2
13,000
           
Blue Diamond
76.7
49.3
4.7
1.1
13,700
           
Leeco
51.6
41.6
7.0
1.2
13,200
           
McCoy Elkhorn
37.2
21.1
5.7
1.6
13,300
           
  Total/Average
230.4
37.6
6.3
1.3
13,300
           
Midwest
         
Triad
40.9
14.4
8.8
3.2
12,000
           

(1)
Proven reserves have the highest degree of geologic assurance and are reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings, or drill holes; (b) grade and/or quality are computed from the results of detailed sampling and (c) the sites for inspections, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established.  Probable reserves have a moderate degree of geologic assurance and are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced.  The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.  This reserve information reflects recoverable tonnage on an as-received basis with 5.5% moisture.

 
6

 


(2)
Ash and sulfur content is expressed as the percent by weight of those constituents in the coal sample compared to the total weight of the sample being tested.  Heat value is expressed as Btu per pound in the coal based on laboratory testing of coal samples.  The samples are typically obtained from exploratory core borings placed at strategic locations within the coal reserve area.  Approximately 82% of the reserve tons have representative samples (degree of representation varies from area to area) and 18% of the reserve tons have no site-specific samples (and are therefore not included in the overall quality estimate).  The samples are sent to accredited laboratories for testing under protocols established by the American Society of Testing and Materials (ASTM).  The estimated overall quality values are derived by a multiple step process, including: (a) for each mine or reserve area, an arithmetic average quality (dry basis) was prepared to represent the coal tons within the area, based on samples from the area; (b) the overall quality of reserves for each mine complex was determined by performing a tonnage-weighted average of the average quality of all mine and reserve areas within the division; and (c) the resulting dry basis overall quality was converted to wet product basis to reflect its anticipated moisture content at the time of sale.  The actual quality of the shipped coal may vary from these estimates due to factors such as: (a) the particle size of the coal fed to the plant; (b) the specific gravity of the float media in use at the preparation plant; (c) the type of plant circuit(s); (d) the efficiency of the plant circuit(s); (e) the moisture content of the final product; and (f) customer requirements.

(3)
For the CAPP region, represents reserve quality information for our mining complexes as of March 31, 2004.  For the Midwest region, represents weighted average reserve quality information as of February 1, 2005 and April 11, 2006, for the reserves obtained on the acquisition of the Triad mining complex and for a lease entered into during 2006, respectively.  The reserve quality information is based on the MM&A studies.

(4)
Represents the Company’s estimate of reserves at December 31, 2010 based on additional information or reserves obtained from exploration and acquisition activities, production activities or discovery of new geologic information.  We calculated the adjustments to the reserves in the same manner, and based on the same assumptions and qualifications, as used in the MM&A studies described above, but these December 31, 2010 estimates have not been reviewed by MM&A.


Processing and Transportation

Coal from each of our mine complexes is transported by conveyor belt or by truck to one of our ten preparation plants or directly to one of our load-outs, all of which are in close proximity to our mining operations.  These preparation plants remove impurities from the run-of-mine coal (the raw coal that comes directly from the mine) and offer the flexibility to blend various coals and coal qualities to meet specific customer needs.  We regularly upgrade and maintain all of our preparation plants to achieve a high level of coal cleaning efficiency and maintain the necessary capacity.

In Central Appalachia, substantially all of our coal is shipped by train and sold f.o.b. the railcar at the point of loading; transportation costs are normally borne by the customer.  In addition to our well-positioned unit train loadout facilities on the CSX Corporation railroad, our Bell County mining complex has dual service provided by the CSX and Norfolk Southern Corporation railroads in Bell County, Kentucky.

In the Midwest, coal is shipped primarily by train and by truck to our customers.  The trucked coal is primarily sold f.o.b delivery point with transportation costs borne by either the customer or us.  Coal delivered by train and barge is sold f.o.b. at the point of loading, with transportation costs normally borne by the customer.  Our Triad mining complex has rail service provided by Indiana Railroad and Indiana Southern Railroad.

Our mining complexes are supported by personnel located in London and Lexington, Kentucky who provide engineering and permitting assistance, project management, land management and lease administration, coal quality control and quality reporting, accounting and purchasing support, and railroad transportation scheduling services.
 
Customers and Coal Contracts
 
As is customary in the coal industry, we regularly enter into long-term contracts (which we define as contracts with terms of one year or longer) with many of our customers.  These arrangements allow customers to secure a supply for their future needs and provide us with greater predictability of sales volume and sales prices.  In 2010, we generated approximately 85% of our total revenues from long-term contracts to sell coal to electric utilities.  For the year ended December 31, 2010, South Carolina Public Service Authority (39%), Georgia Power Company (32%) and Indianapolis Power and Light (11%) were our largest customers by revenues.  No other customer accounted for more than 10% of revenues.
 

 
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In 2010, we sold approximately 6.1 million tons of coal in the CAPP region at an average selling price of $95.77 per ton.  In the CAPP region, we currently have approximately 5.1 million and 0.4 million tons contracted to be sold in 2011 and 2012, respectively, at average selling prices in excess of our 2010 average selling price.  Current market prices for coal in the CAPP region are substantially below our average 2010 sales price.  If the market does not strengthen, our sales price for future tons sold will be adversely impacted.
 
In 2010, we sold approximately 2.8 million tons of coal in the Midwest region at an average selling price of $41.30 per ton.  In the Midwest region, we currently have approximately 2.6 million and 1.6 million tons contracted to be sold in 2011 and 2012, respectively, at average selling prices in excess of our 2010 average selling price.
 
The terms of our contracts result from a bidding and negotiation process with our customers.  Consequently, the terms of these contracts often vary significantly in many respects.  Our long-term supply contracts typically contain one or more of the following pricing mechanisms:
 
 
·
Fixed price contracts;

 
·
Annually negotiated prices that reflect market conditions at the time; or

 
·
Base-price-plus-escalation methods that allow for periodic price adjustments based on fixed percentages or, in certain limited cases, pass-through of actual cost changes.

A limited number of our contracts have features of several contract types, such as provisions that allow for renegotiation of prices on a limited basis within a base-price-plus-escalation agreement.  Such re-opener provisions allow both the customer and us an opportunity to adjust prices to a level close to the current market conditions.  Each contract is negotiated separately, and the triggers for re-opener provisions differ from contract to contract.  Some of our existing contracts with re-opener provisions adjust the contract price to the market price at the time the re-opener provision is triggered.  Re-opener provisions could result in early termination of a contract or a reduction in the volume to be purchased if the parties were to fail to agree on price.
 
Our long-term supply contracts also typically contain force majeure provisions allowing for the suspension of performance by the customer or us for the duration of specified events beyond the control of the affected party, including labor disputes.  Some contracts may terminate upon continuance of an event of force majeure for an extended period, which is generally three to six months.  Contracts also typically specify minimum and maximum quality specifications regarding the coal to be delivered.  Failure to meet these conditions could result in substantial price reductions or termination of the contract, at the election of the customer.  Although the volume to be delivered under a long-term contract is stipulated, we, or the customer, may vary the timing of delivery within specified limits.
 
The terms of our long-term coal supply contracts also vary significantly in other respects, including: coal quantity parameters, flexibility and adjustment mechanisms, permitted sources of supply, treatment of environmental constraints, options to extend, suspension, termination and assignment provisions, and provisions regarding the allocation between the parties of the cost of complying with future government regulations.

Competition

The U.S. coal industry is highly competitive, with numerous producers in all coal producing regions.  We compete against various large producers and hundreds of small producers.  According to the U.S. Department of Energy, the largest producer produced approximately 17.6% (based on tonnage produced) of the total United States production in 2009, the latest year for which government statistics are available.  The U.S. Department of Energy also reported 1,406 active coal mines in the United States in 2009.  Demand for our coal by our principal customers is affected by:

 
·
the price of competing coal and alternative fuel supplies, including nuclear, natural gas, oil and renewable energy sources, such as hydroelectric power;

 
·
coal quality;

 
·
transportation costs from the mine to the customer; and
 

 
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·
the reliability of supply.
 
Continued demand for our coal and the prices that we obtain are affected by demand for electricity, environmental and government regulation, technological developments and the availability and price of competing coal and alternative fuel supplies.

Employees

At December 31, 2010, we had 1,746 employees.  None of our employees are currently represented by collective bargaining agreements.  Relations with our employees are generally good.

Government Regulation  
 
The coal mining industry is subject to extensive regulation by federal, state and local authorities on matters such as:
 
 
·
employee health and safety;
 
 
·
permitting and licensing requirements;
 
 
·
air quality standards;
 
 
·
water quality standards;
 
 
·
plant, wildlife and wetland protection;
 
 
·
blasting operations;
 
 
·
the management and disposal of hazardous and non-hazardous materials generated by mining operations;
 
 
·
the storage of petroleum products and other hazardous substances;
 
 
·
reclamation and restoration of properties after mining operations are completed;
 
 
·
discharge of materials into the environment, including air emissions and wastewater discharge;
 
 
·
surface subsidence from underground mining; and
 
 
·
the effects of mining operations on groundwater quality and availability.
 
Complying with these requirements, including the terms of our permits, has had, and will continue to have, a significant effect on our costs of operations. We could incur substantial costs, including clean up costs, fines, civil or criminal sanctions and third party claims for personal injury or property damage as a result of violations of or liabilities under these laws and regulations.
 
In addition, the utility industry, which is the most significant end-user of coal, is subject to extensive regulation regarding the environmental impact of its power generation activities, which could affect demand for our coal. The possibility exists that new legislation or regulations may be adopted which would have a significant impact on our mining operations or our customers’ ability to use coal and may require us or our customers to change operations significantly or incur substantial costs.

 
9

 

Numerous governmental permits and approvals are required for mining operations. In connection with obtaining these permits and approvals, we are, or may be, required to prepare and present to federal, state or local authorities data pertaining to the effect or impact that any proposed exploration for or production of coal may have upon the environment, the public, historical artifacts and structures, and our employees’ health and safety. The requirements imposed by such authorities may be costly and time-consuming and may delay commencement or continuation of exploration or production operations. Future legislation and administrative regulations may emphasize the protection of the environment and health and safety and, as a consequence, our activities may be more closely regulated. Such legislation and regulations, as well as future interpretations of existing laws, may require substantial increases in our equipment and operating costs and delays, interruptions or a termination of operations, the extent of which cannot be predicted.
 
While it is not possible to quantify the costs of compliance with all applicable federal and state laws, those costs have been and are expected to continue to be significant. We estimate that we will make expenditures of approximately $8.5 million and $3.5 million for environmental control facilities and complying with safety regulations in 2011 and 2012, respectively. These costs are in addition to reclamation and mine closing costs and the costs of treating mine water discharge, when necessary. Compliance with these laws has substantially increased the cost of coal mining, but is, in general, a cost common to all domestic coal producers.
 
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted on July 21, 2010. Section 503 of the Dodd-Frank Act contains new reporting requirements regarding coal or other mine safety.  We are currently evaluating the provisions of the Dodd-Frank Act and the potential impact that it may have on our operations.
 
Mine Health and Safety Laws
 
Stringent health and safety standards were imposed by federal legislation when the Federal Coal Mine Safety and Health Act of 1969 was adopted. The Federal Mine Safety and Health Act of 1977, which significantly expanded the enforcement of safety and health standards of the Federal  Coal Mine Safety and Health Act of 1969, imposes safety and health standards on all mining operations. Regulations are comprehensive and affect numerous aspects of mining operations, including training of mine personnel, mining procedures, blasting, the equipment used in mining operations and other matters. The Federal Mine Safety and Health Administration monitors compliance with these federal laws and regulations and can impose under recently enacted regulations maximum penalties of up to $220,000 for certain violations, as well as closure of the mine. In addition, certain portions of the Federal Coal Mine Safety and Health Act of 1969 and the Federal Mine Safety and Health Act of 1977, the Black Lung Benefits Revenue Act of 1977 and the Black Lung Benefits Reform Act of 1977, as amended in 1981, require payments of benefits to disabled coal miners with black lung disease and to certain survivors of miners who die from black lung disease.
 
In Kentucky, the Kentucky Mine Safety Review Commission,  an independent agency, assesses penalties against anyone, including owners or part owners (defined as anyone owning one percent or more shares of publicly traded stock), whose intentional violations or order to violate mine safety laws place miners in imminent danger of serious injury or death. Mine safety training and compliance with state statutes and regulations related to coal mining is monitored by the Kentucky Office of Mine Safety and Licensing. The Commission can impose a penalty of up to $10,000 per violation, as well as suspension or revocation of the mine license. In Indiana, a Mining Board consisting of five members appointed by the Governor is in charge of executing and administering the laws of the state concerning coal mines.  Underground coal mining is regulated by the Indiana Bureau of Mines and Mining Safety.  The Director and inspectors working for the bureau regularly inspect the mines to make sure they are in compliance with federal mining regulations.  They have the authority to close a mine or a portion thereof if a condition of willful neglect exists and to keep it closed until the condition is corrected.
 
Increased scrutiny of coal mining in general and underground coal mining in particular has led to new legislation.  Within the last few years the industry has seen enactment of the federal MINER act and subsequent additional legislation and regulation imposing significant new safety initiatives. Additionally, new requirements for prompt reporting of accidents, including requirements under the Dodd-Frank Act, and increased fines and penalties for violation of these and other regulations have been enacted.  

 
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It is our responsibility to our employees to provide a safe and healthy environment through training, communication, following and improving safety standards and investigating all accidents, incidents and losses to avoid reoccurrence. The combination of federal and state safety and health regulations in the coal mining industry is, perhaps, the most comprehensive system for protection of employee safety and health affecting any industry. Most aspects of mine operations are subject to extensive regulation. This regulation has a significant effect on our operating costs. However, our competitors are subject to the same level of regulation.

Black Lung Legislation
 
Under the federal Black Lung Benefits Act (as amended) (the “Black Lung Act”), each coal mine operator is required to make black lung benefits or contribution payments to:
 
 
·
current and former coal miners who are totally disabled from black lung disease;
 
 
·
certain survivors of a miner who dies from black lung disease or pneumoconiosis; and
 
 
·
a trust fund for the payment of benefits and medical expenses to any claimant whose last mine employment was before January 1, 1970, or where a miner’s last coal employment was on or after January 1, 1970 and no responsible coal mine operator has been identified for claims, or where the responsible coal mine operator has defaulted on the payment of such benefits.
 
Federal black lung benefits rates are periodically adjusted according to the percentage increase of the federal pay rate.
 
In addition to the Black Lung Act, we also are liable under various state statutes for black lung claims. To a certain extent, our federal black lung liabilities are reduced by our state liabilities. Our total (federal and state) black lung benefit liabilities, including the current portions, totaled approximately $45.7 million at December 31, 2010. These obligations were unfunded at December 31, 2010.
 
In January 2001, the United States Department of Labor amended the regulations implementing the federal black lung laws to give greater weight to the opinion of a claimant’s treating physician, expand the definition of black lung disease and limit the amount of medical evidence that can be submitted by claimants and respondents.  The amendments also alter administrative procedures for the adjudication of claims, which, according to the Department of Labor, results in streamlined procedures that are less formal, less adversarial and easier for participants to understand.  These and other changes to the federal black lung regulations could significantly increase our exposure to black lung benefits liabilities.

The Patient Protection and Affordable Care Act of 2010 (the “Act”) was enacted into law on March 23, 2010 and included a black-lung provision that creates a rebuttable presumption that a miner with at least 15 years of service, with totally disabling pulmonary or respiratory lung impairment and negative radiographic chest x-ray evidence would be disabled due to pneumoconiosis and be eligible for black lung benefits.  The new Act also makes it easier for widows of miners to become eligible for benefits.  The enactment of this new legislation could significantly impact the Company’s future payments for black lung benefits.

In recent years, legislation on black lung reform has been introduced but not enacted in Congress and in the Kentucky legislature.  It is possible that additional legislation will be reintroduced for consideration by Congress.  If any of the proposals included in this or similar legislation is passed, the number of claimants who are awarded benefits could significantly increase.  Any such changes in black lung legislation, if approved, may adversely affect our business, financial condition and results of operations.

Workers’ Compensation
 
We are required to compensate employees for work-related injuries. Our accrued workers’ compensation liabilities, including the current portion, were $64.9 million at December 31, 2010. These obligations are unfunded. Our expense for workers’ compensation was $12.8 million and $12.3 million in 2010 and 2009, respectively.  Both the federal government and the states in which we operate consider changes in workers’ compensation laws from time to time. Such changes, if enacted, could adversely affect us.
 

 
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Environmental Laws and Regulations
 
We are subject to various federal environmental laws and regulatory entities, including:
 
 
·
the Surface Mining Control and Reclamation Act of 1977;
 
 
·
the Clean Air Act;
 
 
·
the Clean Water Act;
 
 
·
the Toxic Substances Control Act;
 
 
·
the Comprehensive Environmental Response, Compensation and Liability Act;
 
 
·
the U.S. Army Corps of Engineers; and
 
 
·
  the Resource Conservation and Recovery Act.
 
We are also subject to state laws of similar scope in each state in which we operate.
 
These environmental laws require reporting, permitting and/or approval of many aspects of coal operations. Both federal and state inspectors regularly visit mines and other facilities to ensure compliance. We have ongoing compliance and permitting programs designed to ensure compliance with such environmental laws.
 
Given the retroactive nature of certain environmental laws, we have incurred and may in the future incur liabilities, including clean-up costs, in connection with properties and facilities currently or previously owned or operated as well as sites to which we or our subsidiaries sent waste materials.
 
Surface Mining Control and Reclamation Act (SMCRA)
 
The SMCRA, and its state counterparts, establish operational, reclamation and closure standards for all aspects of surface mining as well as many aspects of underground mining. The Act requires that comprehensive environmental protection and reclamation standards be met during the course of and following completion of mining activities. Permits for all mining operations must be obtained from the Federal Office of Surface Mining Reclamation and Enforcement or, where state regulatory agencies have adopted federally approved state programs under the Act, the appropriate state regulatory authority.
 
The SMCRA and similar state statutes, among other things, require that mined property be restored in accordance with specified standards and approved reclamation plans. The mine operator must submit a bond or otherwise secure the performance of these reclamation obligations. The earliest a reclamation bond can be fully released is five years after reclamation has been achieved. All states impose on mine operators the responsibility for repairing or compensating for damage occurring on the surface as a result of mine subsidence, a possible consequence of underground mining. In addition, the Abandoned Mine Reclamation Fund, which is part of the SMCRA, imposes a tax on all current mining operations, the proceeds of which are used to restore unreclaimed mines closed before 1977. The maximum tax is $0.315 per ton on surface mined coal and $0.135 per ton on coal produced by underground mining.
 
Under U.S. generally accepted accounting principles, we are required to account for the costs related to the closure of mines and the reclamation of the land upon exhaustion of coal reserves.  The fair value of an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made.  The present value of the estimated asset retirement costs is capitalized as part of the carrying amount of the long-lived asset.  At December 31, 2010, we had accrued $48.4 million related to estimated mine reclamation costs.  The amounts recorded are dependent upon a number of variables, including the estimated future retirement costs, estimated proven reserves, assumptions involving profit margins, inflation rates, and the assumed credit-adjusted interest rates.
 

 
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Our future operating results would be adversely affected if these accruals were determined to be insufficient. These obligations are unfunded. The amount that was expensed for the year ended December 31, 2010 was $3.3 million, while the related cash payment for such liability during the same period was $0.9 million.

We also lease some of our coal reserves to third-party operators. Although specific criteria varies from state to state as to what constitutes an “owner” or “controller” relationship, under the federal SMCRA, responsibility for reclamation or remediation, unabated violations, unpaid civil penalties and unpaid reclamation fees of independent contract mine operators can be imputed to other companies which are deemed, according to the regulations, to have “owned” or “controlled” the contract mine operator. Sanctions against the “owner” or “controller” are quite severe and can include being blocked, nationwide, from receiving new permits, or amendments and revisions to existing permits, and revocation, rescission and/or suspension of any permits that have been issued since the time of the violations or, in the case of civil penalties and reclamation fees, since the time such amounts became due.
 
Clean Air Act
 
The federal Clean Air Act and similar state laws and regulations, which regulate emissions into the air, affect coal mining and processing operations primarily through permitting and/or emissions control requirements. In addition, the Environmental Protection Agency (the “EPA”) has issued certain, and is considering further, regulations relating to fugitive dust and particulate matter emissions that could restrict our ability to develop new mines or require us to modify our operations. The EPA has adopted stringent National Ambient Air Quality Standards for particulate matter, which may require some states to change existing implementation plans for particulate matter. Because coal mining operations and plants burning coal emit particulate matter, our mining operations and utility customers are likely to be directly affected when the revisions to the National Ambient Air Quality Standards are implemented by the states. Regulations under the Clean Air Act may restrict our ability to develop new mines or could require us to modify our existing operations, and may have a material adverse effect on our financial condition and results of operations.
 
The Clean Air Act also indirectly affects coal mining operations by extensively regulating the air emissions of coal-fired electric power generating plants. Coal contains impurities, such as sulfur, mercury and other constituents, many of which are released into the air when coal is burned. New environmental regulations governing emissions from coal-fired electric generating plants could reduce demand for coal as a fuel source and affect the volume of our sales. For example, the federal Clean Air Act places limits on sulfur dioxide emissions from electric power plants. In order to meet the federal Clean Air Act limits for sulfur dioxide emissions from electric power plants, coal users need to install scrubbers, use sulfur dioxide emission allowances (some of which they may purchase), blend high sulfur coal with low sulfur coal or switch to low sulfur coal or other fuels. The cost of installing scrubbers is significant and emission allowances may become more expensive as their availability declines. Switching to other fuels may require expensive modifications to existing plants.
 
The EPA has also adopted federal rules intended to reduce the interstate transport of fine particulate matter and ozone through reductions in sulfur dioxide and nitrogen oxide emissions from certain sources throughout the eastern United States.  In 2008, these rules were struck down by the U.S. Court of Appeals for the D.C. Circuit and remanded to the EPA for further consideration.   In July 2010, the EPA issued a proposed rule that calls for reductions of sulfur dioxides and nitrogen oxides that drift across state lines beginning in 2012.  New and proposed reductions in emissions of sulfur dioxides, nitrogen oxides, particulate matter or greenhouse gases may require the installation of additional costly control technology or the implementation of other measures, including trading of emission allowances and switching to other fuels.

Congress and several states are now considering legislation, to further control air emissions of multiple pollutants from electric generating facilities and other large emitters. These new and proposed reductions will make it more costly to operate coal-fired plants and could make coal a less attractive fuel alternative in the planning and building of utility power plants in the future. To the extent that any new and proposed requirements affect our customers, this could adversely affect our operations and results.
 

 
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Along with these regulations addressing ambient air quality, a regional haze program initiated by the EPA to protect and to improve visibility at and around national parks, national wilderness areas and international parks restricts the construction of new coal-fired power plants whose operation may impair visibility at and around federally protected areas and may require some existing coal-fired power plants to install additional control measures designed to limit haze-causing emissions.  These requirements could limit the demand for coal in some locations.

The U.S. Department of Justice, on behalf of the EPA, has filed lawsuits against several investor-owned electric utilities and brought an administrative action against one government-owned utility for alleged violations of the Clean Air Act.  We supply coal to some of the currently-affected utilities, and it is possible that other of our customers will be sued.  These lawsuits could require the utilities to pay penalties, install pollution control equipment or undertake other emission reduction measures, any of which could adversely impact their demand for our coal.
 
Any reduction in coal’s share of the capacity for power generation could have a material adverse effect on our business, financial condition and results of operations. The effect such regulations, or other requirements that may be imposed in the future, could have on the coal industry in general and on us in particular cannot be predicted with certainty.
 
We believe we have obtained all necessary permits under the Clean Air Act. We monitor permits required by operations regularly and take appropriate action to extend or obtain permits as needed. Our permitting costs with respect to the Clean Air Act are typically less than $100,000 per year.

 
Framework Convention on Global Climate Change
 
The United States and more than 160 other nations are signatories to the 1992 Framework Convention on Global Climate Change, commonly known as the Kyoto Protocol, which is intended to limit or capture emissions of greenhouse gases, such as carbon dioxide.  In December 1997, the signatories to the convention established a potentially binding set of emissions targets for developed nations.  Although the specific emissions targets vary from country to country, the United States would be required to reduce emissions to 93% of 1990 levels over a five-year budget period from 2008 through 2012.  The U.S. Senate has not ratified the treaty commitments.  The current administration could support the effort to ratify the treaty.  With Russia’s ratification of the Kyoto Protocol in 2004, it became binding on all ratifying countries.  The implementation of the Kyoto Protocol in the United States and other countries, and other emissions limits, such as those adopted by the European Union, could affect demand for coal outside the United States.  If the Kyoto Protocol or other comprehensive legislation or regulations focusing on greenhouse gas emissions is enacted by the United States, it could have the effect of restricting the use of coal.  Other efforts to reduce emissions of greenhouse gases and federal initiatives to encourage the use of natural gas also may affect the use of coal as an energy source.

 
Clean Water Act
 
The federal Clean Water Act and corresponding state laws affect coal mining operations by imposing restrictions on discharges into regulated waters.  Permits requiring regular monitoring and compliance with effluent limitations and reporting requirements govern the discharge of pollutants into regulated waters.  We believe we have obtained or applied for all permits required under the Clean Water Act and corresponding state laws and are in substantial compliance with such permits. However, new requirements under the Clean Water Act and corresponding state laws could cause us to incur significant additional costs that adversely affect our operating results.
 
New requirements under the Clean Water Act (such as the proposal discussed below in the risk factor “We must obtain governmental permits and approvals for mining operations, which can be a costly and time consuming process and result in restrictions on our operations”) and corresponding state laws could cause us to incur significant additional costs that adversely affect our operating results. 

In addition, the U.S. Army Corps of Engineers imposes stream mitigation requirements on surface mining operations. These regulations require that footage of stream loss be replaced through various mitigation processes, if any ephemeral, intermittent, or perennial streams are impacted due to mining operations.  The federal Office of Surface Mining Reclamation and Enforcement has imposed regulatory requirements applicable to excess spoil placement, including the requirement that operators return as much spoil as possible to the excavation created by the mine. These regulations may also cause us to incur significant additional operating costs.
 

 
14

 

Comprehensive Environmental Response, Compensation and Liability Act
 
The Comprehensive Environmental Response, Compensation and Liability Act (commonly known as Superfund) and similar state laws create liabilities for the investigation and remediation of releases of hazardous substances into the environment and for damages to natural resources. Our current and former coal mining operations incur, and will continue to incur, expenditures associated with the investigation and remediation of facilities and environmental conditions, including underground storage tanks, solid and hazardous waste disposal and other matters under these environmental laws. We also must comply with reporting requirements under the Emergency Planning and Community Right-to-Know Act and the Toxic Substances Control Act.
 
The magnitude of the liability and the cost of complying with environmental laws with respect to particular sites cannot be predicted with certainty due to the lack of specific information available, the potential for new or changed laws and regulations, the development of new remediation technologies, and the uncertainty regarding the timing of remedial work. As a result, we may incur material liabilities or costs related to environmental matters in the future and such environmental liabilities or costs could adversely affect our results and financial condition. In addition, there can be no assurance that changes in laws or regulations would not result in additional costs and affect the manner in which we are required to conduct our operations. 
 
Resource Conservation and Recovery Act
 
The Resource Conservation and Recovery Act and corresponding state laws and regulations affect coal mining operations by imposing requirements for the treatment, storage and disposal of hazardous wastes. Facilities at which hazardous wastes have been treated, stored or disposed of are subject to corrective action orders issued by the EPA and other potential obligations, which could adversely affect our results of operations or financial condition.
 

FORWARD-LOOKING INFORMATION
 
From time to time, we make certain comments and disclosures in reports and statements, including this report, or statements made by our officers, which may be forward-looking in nature. These statements are known as “forward-looking statements,” as that term is used in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Examples include statements related to our future outlook, anticipated capital expenditures, future cash flows and borrowings, and sources of funding. These forward-looking statements could also involve, among other things, statements regarding our intent, belief or expectation with respect to:

 
·
our cash flows, results of operation or financial condition;
 
 
·
the consummation of acquisition, disposition or financing transactions and the effect thereof on our business;
 
 
·
governmental policies and regulatory actions;
 
 
·
legal and administrative proceedings, settlements, investigations and claims;
 
 
·
weather conditions or catastrophic weather-related damage;
 
 
·
our production capabilities;
 
 
·
availability of transportation;
 
 
·
market demand for coal, electricity and steel;

 
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·
competition;
 
 
·
our relationships with, and other conditions affecting, our customers;
 
 
·
employee workforce factors;
 
 
·
our assumptions concerning economically recoverable coal reserve estimates;
 
 
·
future economic or capital market conditions;
 
 
·
our plans and objectives for future operations and expansion or consolidation;
 
 
·
the timing and completion of  our proposed acquisition of International Resource Partners (the “IRP Acquisition”), including the possibility that various closing conditions may not be satisfied or waived or the failure of the IRP Acquisition to close for any other reason;

 
·
our ability to integrate successfully operations that we may acquire or develop in the future, including those of International Resource Partners, or the risk that any such integration could be more difficult, time-consuming or costly than expected;
 
 
·
the consummation of financing transactions, acquisitions or dispositions and the related effects on our business, including financing related to the IRP Acquisition;
 
 
·
uncertainty of our expected financial performance following completion of the IRP Acquisition; and
 
 
·
disruption from the IRP Acquisition making it more difficult to maintain relationships with customers, employees or suppliers.
 
Any forward-looking statements are subject to the risks and uncertainties that could cause actual cash flows, results of operations, financial condition, cost reductions, acquisitions, dispositions, financing transactions, operations, expansion, consolidation and other events to differ materially from those expressed or implied in such forward-looking statements. Any forward-looking statements are also subject to a number of assumptions regarding, among other things, future economic, competitive and market conditions generally. These assumptions would be based on facts and conditions as they exist at the time such statements are made as well as predictions as to future facts and conditions, the accurate prediction of which may be difficult and involve the assessment of events beyond our control.

We wish to caution readers that forward-looking statements, including disclosures which use words such as “believe,” “intend,” “expect,” “may,” “should,” “anticipate,” “could,” “estimate,” “plan,” “predict,” “project,” or their negatives, and similar statements, are subject to certain risks and uncertainties which could cause actual results to differ materially from expectations. These risks and uncertainties include, but are not limited to, the following: a change in the demand for coal by electric utility customers, as well as the perceived benefits of alternative sources of energy; the loss of one or more of our largest customers; inability to secure new coal supply agreements or to extend existing coal supply agreements at market prices; our dependency on one railroad for transportation of a large percentage of our products; failure to exploit additional coal reserves; the risk that reserve estimates and pension, workers compensation and post-retirement benefit liabilities are inaccurate; failure to diversify our operations; increased capital expenditures; encountering difficult mining conditions; inherent complexities associated in mining in Central Appalachia including special dangers and risks of underground mining; increased costs of complying with mine health and safety regulations; bottlenecks or other difficulties in transporting coal to our customers; delays in the development of new mining projects; increased costs of raw materials; the effects of litigation, regulation and competition; lack of availability of financing sources; our compliance with debt covenants; the risk that we are unable to successfully integrate acquired assets into our business; and the risk factors set forth in this Annual Report on Form 10-K under Item 1A “Risk Factors.” These risks are representative of factors that could affect the outcome of the forward-looking statements. These and the other factors discussed elsewhere in this document are not necessarily all of the important factors that could cause our results to differ materially from those expressed in our forward-looking statements. Forward-looking statements speak only as of the date they are made and we undertake no obligation to update them.

Item 1A.     Risk Factors
 
Risks Related to the Coal Industry

Because the demand and pricing for coal is greatly influenced by consumption patterns of the domestic electricity generation industry, a reduction in the demand for coal by this industry would likely cause our revenues and profitability to decline significantly.

We derived 88% of our total revenues (contract and spot) in 2010 and 92% of our total revenues in 2009, from our electric utility customers.  Fuel cost is a significant component of the cost associated with coal-fired power generation, with respect to not only the price of the coal, but also the costs associated with emissions control and credits (i.e., sulfur dioxide, nitrogen oxides, etc.), combustion by-product disposal (i.e., ash) and equipment operations and maintenance (i.e., materials handling facilities).  All of these costs must be considered when choosing between coal generation and alternative methods, including natural gas, nuclear, hydroelectric and others.
 

 
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Weather patterns also can greatly affect electricity generation.  Extreme temperatures, both hot and cold, cause increased power usage and, therefore, increased generating requirements from all sources.  Mild temperatures, on the other hand, result in lower electrical demand, which allows generators to choose the lowest-cost sources of power generation when deciding which generation sources to dispatch.  Accordingly, significant changes in weather patterns could reduce the demand for our coal.

Overall economic activity and the associated demands for power by industrial users can have significant effects on overall electricity demand.  Downward economic pressures can cause decreased demands for power, by both residential and industrial customers.
 
Any downward pressure on coal prices, whether due to increased use of alternative energy sources, changes in weather patterns, decreases in overall demand or otherwise, would likely cause our profitability to decline.
 
Electric utility deregulation is expected to provide incentives to generators of electricity to minimize their fuel costs and is believed to have caused electric generators to be more aggressive in negotiating prices with coal suppliers.  To the extent utility deregulation causes our customers to be more cost-sensitive, deregulation may have a negative effect on our profitability.

Changes in the export and import markets for coal products could affect the demand for our coal, our pricing and our profitability.
 
We compete in a worldwide market. The pricing and demand for our products is affected by a number of factors beyond our control. These factors include:
 
 
currency exchange rates;
 
growth of economic development;
 
price of alternative sources of electricity;
 
world wide demand; and
 
ocean freight rates
 
Any decrease in the amount of coal exported from the United States, or any increase in the amount of coal imported into the United States, could have a material adverse impact on the demand for our coal, our pricing and our profitability.
 
Increased consolidation and competition in the U.S. coal industry may adversely affect our revenues and profitability.
 
During the last several years, the U.S. coal industry has experienced increased consolidation, which has contributed to the industry becoming more competitive.  Consequently, many of our competitors in the domestic coal industry are major coal producers who have significantly greater financial resources than us.  The intense competition among coal producers may impact our ability to retain or attract customers and may therefore adversely affect our future revenues and profitability.

Fluctuations in transportation costs and the availability and dependability of transportation could affect the demand for our coal and our ability to deliver coal to our customers.
 
Increases in transportation costs could have an adverse effect on demand for our coal.  Customers choose coal supplies based, primarily, on the total delivered cost of coal.  Any increase in transportation costs would cause an increase in the total delivered cost of coal.  That could cause some of our customers to seek less expensive sources of coal or alternative fuels to satisfy their energy needs.  In addition, significant decreases in transportation costs from other coal-producing regions, both domestic and international, could result in increased competition from coal producers in those regions.  For instance, coal mines in the western United States could become more attractive as a source of coal to consumers in the eastern United States, if the costs of transporting coal from the West were significantly reduced.

 
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Our Central Appalachia mines generally ship coal via rail systems.  During 2010, we shipped in excess of 90% of our coal from our Central Appalachia mines via CSX.  In the Midwest, we shipped in excess of 65% of our produced coal by truck and the remainder via the rail system or by barge.  We believe that our 2011 transportation modes will continue to be comparable to those used in 2010.  Our dependence upon railroads and third party trucking companies impacts our ability to deliver coal to our customers.  Disruption of service due to weather-related problems, strikes, lockouts, bottlenecks and other events could temporarily impair our ability to supply coal to our customers, resulting in decreased shipments.  Decreased performance levels over longer periods of time could cause our customers to look elsewhere for their fuel needs, negatively affecting our revenues and profitability.
 
In past years, the major eastern railroads (CSX and Norfolk Southern) have experienced periods of increased overall rail traffic due to an expanding economy and shortages of both equipment and personnel.  This increase in traffic could impact our ability to obtain the necessary rail cars to deliver coal to our customers and have an adverse impact on our financial results.

Shortages or increased costs of skilled labor in the coal regions that we operate may hamper our ability to achieve high labor productivity and competitive costs.
 
Coal mining continues to be a labor-intensive industry.  In times of increased demand, many producers attempt to increase coal production, which historically has resulted in a competitive market for the limited supply of trained coal miners.  In some cases, this market situation has caused compensation levels to increase, particularly for “skilled” positions such as electricians and mine foremen.  To maintain current production levels, we may be forced to respond to increases in wages and other forms of compensation, and related recruiting efforts by our competitors.  Any future shortage of skilled miners, or increases in our labor costs, could have an adverse impact on our labor productivity and costs and on our ability to expand production.
 
Government laws, regulations and other requirements relating to the protection of the environment, health and safety and other matters impose significant costs on us, and future requirements could limit our ability to produce coal.
 
We are subject to extensive federal, state and local regulations with respect to matters such as:
 
 
·
employee health and safety;
 
·
permitting and licensing requirements;
 
·
air quality standards;
 
·
water quality standards;
 
·
plant, wildlife and wetland protection;
 
·
blasting operations;
 
·
the management and disposal of hazardous and non-hazardous materials generated by mining operations;
 
·
the storage of petroleum products and other hazardous substances;
 
·
reclamation and restoration of properties after mining operations are completed;
 
·
discharge of materials into the environment, including air emissions and wastewater discharge;
 
·
surface subsidence from underground mining; and
 
·
the effects of mining operations on groundwater quality and availability.

Complying with these requirements, including the terms of our permits, has had, and will continue to have, a significant effect on our costs of operations.  We could incur substantial costs, including clean up costs, fines, civil or criminal sanctions and third party claims for personal injury or property damage as a result of violations of or liabilities under these laws and regulations.
 
The coal industry is also affected by significant legislation mandating specified benefits for retired miners.  In addition, the utility industry, which is the most significant end user of coal, is subject to extensive regulation regarding the environmental impact of its power generating activities.  Coal contains impurities, including sulfur, mercury, chlorine and other elements or compounds, many of which are released into the air when coal is burned.  Stricter environmental regulations of emissions from coal-fired electric generating plants could increase the costs of using coal, thereby reducing demand for coal as a fuel source or the volume and price of our coal sales, or making coal a less attractive fuel alternative in the planning and building of utility power plants in the future.
 

 
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New legislation, regulations and orders adopted or implemented in the future (or changes in interpretations of existing laws and regulations) may materially adversely affect our mining operations, our cost structure and our customers’ operations or ability to use coal.
 
The majority of our coal supply agreements contain provisions that allow the purchaser to terminate its contract if legislation is passed that either restricts the use or type of coal permissible at the purchaser’s plant or results in too great an increase in the cost of coal.  These factors and legislation, if enacted, could have a material adverse effect on our financial condition and results of operations.
 
The passage of legislation responsive to the Framework Convention on Global Climate Change or similar governmental initiatives could result in restrictions on coal use.
 
The United States and more than 160 other nations are signatories to the 1992 Framework Convention on Global Climate Change, commonly known as the Kyoto Protocol, which is intended to limit or capture emissions of greenhouse gases, such as carbon dioxide.  In December 1997, the signatories to the convention established a potentially binding set of emissions targets for developed nations.  Although the specific emissions targets vary from country to country, the United States would be required to reduce emissions to 93% of 1990 levels over a five-year budget period from 2008 through 2012.  The U.S. Senate has not ratified the treaty commitments.  The current administration could support the effort to ratify the treaty.  With Russia’s ratification of the Kyoto Protocol in 2004, it became binding on all ratifying countries.  The implementation of the Kyoto Protocol in the United States and other countries, and other emissions limits, such as those adopted by the European Union, could affect demand for coal inside and outside the United States.  If the Kyoto Protocol or other comprehensive legislation or regulations focusing on greenhouse gas emissions is enacted by the United States, it could have the effect of restricting the use of coal.  Other efforts to reduce emissions of greenhouse gases and federal initiatives to encourage the use of natural gas also may affect the use of coal as an energy source.

We are subject to the federal Clean Water Act and similar state laws which impose treatment, monitoring and reporting obligations.
 
The federal Clean Water Act and corresponding state laws affect coal mining operations by imposing restrictions on discharges into regulated waters.  Permits requiring regular monitoring and compliance with effluent limitations and reporting requirements govern the discharge of pollutants into regulated waters.  New requirements under the Clean Water Act (such as the proposal discussed below in the risk factor “We must obtain governmental permits and approvals for mining operations, which can be a costly and time consuming process and result in restrictions on our operations”) and corresponding state laws could cause us to incur significant additional costs that adversely affect our operating results. 
 
Regulations have expanded the definition of black lung disease and generally made it easier for claimants to assert and prosecute claims, which could increase our exposure to black lung benefit liabilities.
 
In January 2001, the United States Department of Labor amended the regulations implementing the federal black lung laws to give greater weight to the opinion of a claimant’s treating physician, expand the definition of black lung disease and limit the amount of medical evidence that can be submitted by claimants and respondents.  The amendments also alter administrative procedures for the adjudication of claims, which, according to the Department of Labor, results in streamlined procedures that are less formal, less adversarial and easier for participants to understand.  These and other changes to the federal black lung regulations could significantly increase our exposure to black lung benefits liabilities.

The Patient Protection and Affordable Care Act of 2010 (Act) was enacted into law on March 23, 2010 and included a black-lung provision that creates a rebuttable presumption that a miner with at least 15 years of service, with totally disabling pulmonary or respiratory lung impairment and negative radiographic chest x-ray evidence would be disabled due to pneumoconiosis and be eligible for black lung benefits.  The new Act also makes it easier for widows of miners to become eligible for benefits.  The enactment of this new legislation could significantly impact the Company’s future payments for black lung benefits.

 
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In recent years, legislation on black lung reform has been introduced but not enacted in Congress and in the Kentucky legislature.  It is possible that additional legislation will be reintroduced for consideration by Congress.  If any of the proposals included in this or similar legislation is passed, the number of claimants who are awarded benefits could significantly increase.  Any such changes in black lung legislation, if approved, may adversely affect our business, financial condition and results of operations.

Extensive environmental laws and regulations affect the end-users of coal and could reduce the demand for coal as a fuel source and cause the volume of our sales to decline.
 
The Clean Air Act and similar state and local laws extensively regulate the amount of sulfur dioxide, particulate matter, nitrogen oxides, mercury and other compounds emitted into the air from electric power plants, which are the largest end-users of our coal.  Compliance with such laws and regulations, which can take a variety of forms, may reduce demand for coal as a fuel source because they can require significant emissions control expenditures for coal-fired power plants to attain applicable ambient air quality standards, which may lead these generators to switch to other fuels that generate less of these emissions and may also reduce future demand for the construction of coal-fired power plants.

The EPA has adopted more stringent National Ambient Air Quality Standards for nitrogen dioxide and sulfur dioxide, both of which are emitted from coal-fired combustion units.  The EPA is considering whether to adopt a more stringent standard for ground-level ozone, to which emissions from coal combustion units can contribute.   The demand for coal could be affected at electric generating facilities located in geographic areas that exceed the modified standards.

The U.S. Department of Justice, on behalf of the EPA, has filed lawsuits against several investor-owned electric utilities and brought an administrative action against one government-owned utility for alleged violations of the Clean Air Act.  We supply coal to some of the currently-affected utilities, and it is possible that other of our customers will be sued.  These lawsuits could require the utilities to pay penalties, install pollution control equipment or undertake other emission reduction measures, any of which could adversely impact their demand for our coal.
 
A regional haze program initiated by the EPA to protect and to improve visibility at and around national parks, national wilderness areas and international parks restricts the construction of new coal-fired power plants whose operation may impair visibility at and around federally protected areas and may require some existing coal-fired power plants to install additional control measures designed to limit haze-causing emissions.
 
The Clean Air Act also imposes standards on sources of hazardous air pollutants.  These standards and future standards could have the effect of decreasing demand for coal.  So-called multi-pollutant bills, which could regulate additional air pollutants, have been proposed by various members of Congress.  If such initiatives are enacted into law, power plant operators could choose other fuel sources to meet their requirements, reducing the demand for coal.

As a result of the U.S. Supreme Court’s decision on April 2, 2007 in Massachusetts, et al.  v. EPA, 549 U.S.  497 (2007), finding that greenhouse gases fall within the Clean Air Act definition of “air pollutant,” the EPA was required to determine whether emissions of greenhouse gases “endanger” public health or welfare.  In December 2009, the EPA published its finding that current and projected concentrations of carbon dioxide and five other greenhouse gases in the atmosphere threaten the public’s health and welfare.  This finding enables the EPA to proceed with a broad regulatory program for the control of greenhouse gas emissions, including carbon dioxide emissions.  The EPA has recently completed several rulemaking actions indicating its intent to do so, including, among others, a final greenhouse gas reporting rule for certain major stationary source permitting programs, final regulations to control greenhouse gas emissions from light duty vehicles, and a final “tailoring” rule explaining how it would implement the Clean Air Act’s Title V and prevention of significant deterioration permitting programs with respect to greenhouse gas emissions from major stationary sources  In recent legislative sessions, both houses of Congress have considered, but failed to enact, new legislation that could establish a national cap on, or other regulation of, carbon emissions and other greenhouse gases.  Recent proposals include a cap and trade system that would require the purchase of emission permits, which could be traded on the open market.  These and other proposals would make it more costly to operate coal-fired plants and could make coal a less attractive fuel for future power plants.  Any new or proposed requirements adversely affecting the use of coal could adversely affect our operations and results.
 

 
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In December 2009, approximately 190 countries participated in the United Nations Climate Change Conference in Copenhagen.  The participants “took note” of a non-binding accord under which participating nations would report, by January 31, 2010, their commitments to reduce greenhouse gas emissions.  Under this non-binding framework, the U.S. has committed to cut greenhouse gas emissions by 17% below 2005 levels by 2020, 42% below 2005 levels by 2030, and 83% below 2005 levels by 2050.

The permitting of new coal-fired power plants has also recently been contested by state regulators and environmental organizations based on concerns relating to greenhouse gas emissions.  In addition, in September 2009, the United States Court of Appeals for the Second Circuit issued its decision in Connecticut v.  AEP allowing plaintiffs’ claims that public utilities’ greenhouse gas emissions created a “public nuisance” to go to trial over defendants’ objections based upon political question, preemption and lack of standing.  In December 2010, the U.S. Supreme Court granted certiorari review of this decision by the Second Circuit.  The plaintiffs in this case are seeking various remedies, including injunctive relief.  These cases expose other significant contributors to greenhouse gas emissions to similar litigation risk.  The effect of these recent cases may be mitigated in the event Congress adopts greenhouse gas legislation and because the EPA has finalized the adoption of greenhouse gas emission standards.  Nevertheless, increased efforts to control greenhouse gas emissions by state, federal, judicial or international authorities could result in reduced demand for coal.
 
The characteristics of coal may make it difficult for coal users to comply with various environmental standards related to coal combustion.  As a result, they may switch to other fuels, which would affect the volume or price of our sales.
 
Coal contains impurities, including sulfur, nitrogen oxide, mercury, chlorine and other elements or compounds, many of which are released into the air when coal is burned.  Stricter environmental regulations of emissions from coal-fired electric generating plants could increase the costs of using coal thereby reducing demand for coal as a fuel source, and the volume and price of our coal sales.  Stricter regulations could make coal a less attractive fuel alternative in the planning and building of utility power plants in the future. 

For example, in order to meet the federal Clean Air Act limits for sulfur dioxide emissions from electric power plants, coal users may need to install scrubbers, use sulfur dioxide emission allowances (some of which they may purchase), blend high sulfur coal with low sulfur coal or switch to other fuels.  Each option has limitations.  Lower sulfur coal may be more costly to purchase on an energy basis than higher sulfur coal depending on mining and transportation costs.  The cost of installing scrubbers is significant and emission allowances may become more expensive as their availability declines.  Switching to other fuels may require expensive modification of existing plants.
 
In 2005, the EPA adopted federal rules intended to reduce the interstate transport of fine particulate matter and ozone through reductions in sulfur dioxides and nitrogen oxide emissions from certain sources throughout the eastern United States.  The reductions were to be implemented in stages, some through a market-based cap-and-trade program.  Such new regulations would likely require some power plants to install new equipment, at substantial cost, or discourage the use of certain coals containing higher levels of mercury.  The particular rules introduced by the EPA in March 2005 were subsequently struck down by the U.S. Court of Appeals for the D.C. Circuit on July 11, 2008.  On December 23, 2008, the U.S. Court of Appeals for the D.C. Circuit remanded consolidated cases to the EPA without vacatur of the Clean Air Interstate Rule in order that the EPA could remedy flaws in the Rule.  In July 2010, the EPA issued a proposed Clean Air Transport Rule in response to the Court’s prior remand of the 2005 rule.  The recently proposed rule calls for reductions of sulfur dioxides and nitrogen oxides that drift across state lines in phases beginning in 2012.  New and proposed reductions in emissions of sulfur dioxides, nitrogen oxides, particulate matter or greenhouse gases may require the installation of additional costly control technology or the implementation of other measures, including trading of emission allowances and switching to other fuels.  These and other proposals would make it more costly to operate coal-fired plants and could make coal a less attractive fuel for future power plants.  


 
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We must obtain governmental permits and approvals for mining operations, which can be a costly and time consuming process and result in restrictions on our operations.

Numerous governmental permits and approvals are required for mining operations.  Our operations are principally regulated under permits issued by state regulatory and enforcement agencies pursuant to the federal Surface Mining Control and Reclamation Act (SMCRA).  Regulatory authorities exercise considerable discretion in the timing and scope of permit issuance.  Requirements imposed by these authorities may be costly and time consuming and may result in delays in the commencement or continuation of exploration or production operations.  In addition, we often are required to prepare and present to federal, state and local authorities data pertaining to the effect or impact that proposed exploration for or production of coal might have on the environment.  Further, the public may comment on and otherwise engage in the permitting process, including through intervention in the courts.  Accordingly, the permits we need may not be issued, or, if issued, may not be issued in a timely fashion, or may involve requirements that restrict our ability to conduct our mining operations or to do so profitably.
 
Prior to placing excess fill material in valleys in connection with surface mining operations, coal mining companies are required to obtain a permit from the U.S. Army Corps of Engineers (Corps) under Section 404 of the Clean Water Act (404 Permit).  Previously, this permit could be either a simplified Nationwide Permit #21 (NWP 21) or a more complicated individual permit.  Litigation respecting the validity of the NWP 21 permit program has been ongoing for several years.  Recently, the Corps announced its decision to suspend the use of NWP 21 in a six state Appalachian region, including Kentucky, where we operate.  Litigation respecting the issuance of certain Section 404 permits has also been ongoing for several years, focusing primarily on whether the Corps’ decision to issue such permits conformed to the requirements of the Clean Water Act and/or the National Environmental Policy Act.  The matters at issue in such litigation are such that a ruling for the plaintiffs could have an adverse impact on our planned surface mining operations.
 
 In 2009, the EPA announced publicly that it will exercise its statutory right to more actively review Section 404 permitting actions by the Corps.  In the third quarter of 2009, the EPA announced that it would further review 79 surface mining permit applications, including four of our permits.  These 79 permits were identified as likely to impact water quality and therefore requiring additional review under the Clean Water Act.  EPA oversight could further delay and/or restrict the issuance of such permits, either of which events could have an adverse impact on our planned mining operations.  More recently, the EPA announced acceptable levels for the conductivity of water in streams receiving discharge from permitted coal mining sites in a six-state area of Central Appalachia, including Kentucky, where we operate.  If such levels of conductivity are permanently imposed, they could have a significant impact on our ability to secure Section 404 permits and have a material impact on our operations.  The National Mining Association (NMA), on behalf of its member companies including coal producers such as ourselves, has filed suit against the EPA and the Corps contesting the legality of the enhanced review process and the imposition of such conductivity standard.  Recently, the U.S. District Court for the District of Columbia, before which this suit was brought, issued its opinion denying the EPA’s motion to dismiss the case on grounds that there was no final agency action, that the case was not ripe for adjudication and that the NMA lacked standing.  The court also denied the NMA’s motion for a preliminary injunction of EPA’s exercise of such oversight and the imposition of such standard.  The states of West Virginia and Kentucky, and the coal associations in those states, have also filed suits contesting these actions by the EPA.
 
We have significant reclamation and mine closure obligations.  If the assumptions underlying our accruals are materially inaccurate, we could be required to expend greater amounts than anticipated.
 
The SMCRA establishes operational, reclamation and closure standards for all aspects of surface mining as well as many aspects of underground mining.  We accrue for the costs of current mine disturbance and of final mine closure, including the cost of treating mine water discharge where necessary.  Under U.S. generally accepted accounting principles we are required to account for the costs related to the closure of mines and the reclamation of the land upon exhaustion of coal reserves.  The fair value of an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made.  The present value of the estimated asset retirement costs is capitalized as part of the carrying amount of the long-lived asset.  At December 31, 2010, we had accrued $48.4 million related to estimated mine reclamation costs.  The amounts recorded are dependent upon a number of variables, including the estimated future retirement costs, estimated proven reserves, assumptions involving profit margins, inflation rates, and the assumed credit-adjusted interest rates.  Furthermore, these obligations are unfunded.  If these accruals are insufficient or our liability in a particular year is greater than currently anticipated, our future operating results could be adversely affected.

 
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Terrorist attacks and threats, escalation of military activity in response to such attacks or acts of war may negatively affect our business, financial condition and results of operations.
 
Terrorist attacks and threats, escalation of military activity in response to such attacks or acts of war may negatively affect our business, financial condition and results of operations.  Our business is affected by general economic conditions, fluctuations in consumer confidence and spending, and market liquidity, which can decline as a result of numerous factors outside of our control, such as terrorist attacks and acts of war.  Future terrorist attacks against U.S. targets, rumors or threats of war, actual conflicts involving the United States or its allies, or military or trade disruptions affecting our customers could cause delays or losses in transportation and deliveries of coal to our customers, decreased sales of our coal and extension of time for payment of accounts receivable from our customers.  Strategic targets such as energy-related assets may be at greater risk of future terrorist attacks than other targets in the United States.  In addition, disruption or significant increases in energy prices could result in government-imposed price controls.  It is possible that any, or a combination, of these occurrences could have a material adverse effect on our business, financial condition and results of operations.
 
Risks Related to Our Operations

We have experienced operating losses and net losses in recent years and may experience losses in the future. 
 
We experienced operating losses and net losses in each of the years ended December 31, 2008 and 2007.  While we were profitable in the years ended December 31, 2010 and 2009, we must continue to carefully manage our business, including the balance of our long-term and short-term sales contracts and our production costs.  Although we seek to balance our contract mix to achieve optimal revenues over the long term, the market price of coal is affected by many factors that are outside of our control.  Our production costs have increased in recent years, and we expect higher costs to continue for the next several years.  Additionally, certain of our long term contracts for sales of coal are priced substantially above current spot prices for coal.  Our profitability in the future will be impacted by the price levels that we achieve on future long term contracts.  Accordingly, we cannot assure you that we will be able to achieve profitability in the future.

The loss of, or significant reduction in, purchases by our largest customers could adversely affect our revenues.
 
For 2010, we generated approximately 88% of our total revenues from several long-term contracts and spot sales with electrical utilities, including 39% from South Carolina Public Service Authority, 32% from Georgia Power Company and 11% from Indianapolis Power and Light.  At December 31, 2010, we had coal supply agreements with these customers that expire in 2011 to 2012.  The execution of a substantial coal supply agreement is frequently the basis on which we undertake the development of coal reserves required to be supplied under the contract.
 
Many of our coal supply agreements contain provisions that permit adjustment of the contract price upward or downward at specified times.  Failure of the parties to agree on a price under those provisions may allow either party to either terminate the contract or reduce the coal to be delivered under the contract.  Coal supply agreements also typically contain force majeure provisions allowing temporary suspension of performance by the customer or us for the duration of specified events beyond the control of the affected party.  Most coal supply agreements contain provisions requiring us to deliver coal meeting quality thresholds for certain characteristics such as:
 
 
·
British thermal units (Btu’s);
 
·
sulfur content;
 
·
ash content;
 
·
grindability; and
 
·
ash fusion temperature.

In some cases, failure to meet these specifications could result in economic penalties, including price adjustments, the rejection of deliveries or termination of the contracts.  In addition, all of our contracts allow our customers to renegotiate or terminate their contracts in the event of changes in regulations or other governmental impositions affecting our industry that increase the cost of coal beyond specified limits.  Further, we have been required in the past to purchase sulfur credits or make other pricing adjustments to comply with contractual requirements relating to the sulfur content of coal sold to our customers, and may be required to do so in the future.
 

 
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The operating profits we realize from coal sold under supply agreements depend on a variety of factors.  In addition, price adjustment and other provisions may increase our exposure to short-term coal price volatility provided by those contracts.  If a substantial portion of our coal supply agreements expire or are modified or terminated, we could be materially adversely affected to the extent that we are unable to find alternate buyers for our coal at the same level of profitability.  As a result, we might not be able to replace existing long-term coal supply agreements at the same prices or with similar profit margins when they expire or are modified or terminated.

In addition, our ability to receive payment for coal sold and delivered under these contracts depends on the continued creditworthiness of our customers.  The bankruptcy of any of our customers could materially and adversely affect our financial position.

Our operating results will be negatively impacted if we are unable to balance our mix of contract and spot sales.
 
We have implemented a sales plan that includes long-term contracts (one year or greater) and spot sales/ short-term contracts (less than one year).  We have structured our sales plan based on the assumptions that demand will remain adequate to maintain current shipping levels and that any disruptions in the market will be relatively short-lived.  If we are unable to maintain our planned balance of contract sales with spot sales, or our markets become depressed for an extended period of time, our volumes and margins could decrease, negatively affecting our operating results.

Our ability to operate our company effectively could be impaired if we lose senior executives or fail to employ needed additional personnel.
 
The loss of senior executives could have a material adverse effect on our business.  There may be a limited number of persons with the requisite experience and skills to serve in our senior management positions.  We may not be able to locate or employ qualified executives on acceptable terms.  In addition, as our business develops and expands, we believe that our future success will depend greatly on our continued ability to attract and retain highly skilled and qualified personnel.  We might not continue to be able to employ key personnel, or to attract and retain qualified personnel in the future.  Failure to retain senior executives or attract key personnel could have a material adverse effect on our operations and financial results.
 
Underground mining is subject to increased regulation, and may require us to incur additional cost.

Underground coal mining is subject to ever increasing federal and state regulatory control relating to mine safety and health and to ever increasing enforcement activities intended to compel compliance with such laws and regulations.  Within the last few years the industry has seen enactment of the federal MINER Act and subsequent additional legislation and regulation imposing significant new safety initiatives and the Dodd-Frank Act imposing new mine safety information reporting requirements.  Various states also have enacted their own new laws and regulations imposing additional requirements related to mine safety.  These new laws and regulations have and will continue to cause us to incur substantial additional costs, which will adversely impact our operating performance.

The U.S. Department of Labor, Mine Safety and Health Administration (MSHA), periodically notifies certain coal mines that a potential pattern of violations may exist based upon an initial statistical screening of violation history and pattern criteria review by MSHA.   In the past, certain of our mines have received notices that a potential pattern of violations might exist.  Upon receipt of such a notification, we conduct a comprehensive review of the operation that received the notification and prepare and submit to MSHA a plan designed to enhance employee safety at the mine through better education, training, mining practices, and safety management.  Following implementation of the plan, MSHA conducts a complete inspection of the mine and further evaluates the situation and then advises the operator whether a pattern of violation exists and whether further action will be taken.  No pattern of violations has been found to exist at any of our mines that have received such a notification.  The failure to remediate the situation resulting in a finding that a pattern of violation does exist at a mine could have a significant impact on our operations, including the permanent or temporary closure of our mines.

 
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In 2010, a U.S. House of Representatives committee approved a mine safety bill which would give MSHA additional powers to temporarily close mines, mandate additional safety training and impose larger penalties on companies and their executives.  A comparable bill introduced in the US Senate failed to receive the necessary votes for passage. If reintroduced and subsequently enacted, this or a similar bill could further increase our costs and impact operating performance.

The Dodd-Frank Act includes new requirements for reporting certain mine safety information on a Form 8-K, and for including additional mine safety disclosures in our periodic reports filed with the SEC.  Under the Dodd-Frank Act, the SEC is authorized to issue rules and regulations regarding mine safety disclosures, and the SEC has issued proposed rules as of the date of this Form 10-K.  While the new rules are not yet in effect, such rulemaking by the SEC may cause us to incur additional costs in complying with the new reporting and disclosure requirements.

Unexpected increases in raw material costs could significantly impair our operating results.
 
Our coal mining operations use significant amounts of steel, petroleum products and other raw materials in various pieces of mining equipment, supplies and materials, including the roof bolts required by the room and pillar method of mining.  Recently and historically, petroleum prices and other commodity prices have been volatile.  If the price of steel or other of these materials increase, our operational expenses will increase, which could have a significant negative impact on our cash flow and operating results.
 
Coal mining is subject to conditions or events beyond our control, which could cause our quarterly or annual results to deteriorate.
 
Our coal mining operations are conducted, in large part, in underground mines and, to a lesser extent, at surface mines.  These mines are subject to conditions or events beyond our control that could disrupt operations, affect production and the cost of mining at particular mines for varying lengths of time and have a significant impact on our operating results.  These conditions or events have included:
 
 
·
variations in thickness of the layer, or seam, of coal;
 
·
variations in geological conditions;
 
·
amounts of rock and other natural materials intruding into the coal seam;
 
·
equipment failures and unexpected major repairs;
 
·
unexpected maintenance problems;
 
·
unexpected departures of one or more of our contract miners;
 
·
fires and explosions from methane and other sources;
 
·
accidental minewater discharges or other environmental accidents;
 
·
other accidents or natural disasters; and
 
·
weather conditions.

Mining in Central Appalachia is complex due to geological characteristics of the region.
 
The geological characteristics of coal reserves in Central Appalachia, such as depth of overburden and coal seam thickness, make them complex and costly to mine.  As mines become depleted, replacement reserves may not be available when required or, if available, may not be capable of being mined at costs comparable to those characteristic of the depleting mines.  In addition, as compared to mines in other regions permitting, licensing and other environmental and regulatory requirements are more costly and time consuming to satisfy.  These factors could materially adversely affect the mining operations and cost structures of, and customers’ ability to use coal produced by, operators in Central Appalachia, including us.


 
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Our future success depends upon our ability to acquire or develop additional coal reserves that are economically recoverable.
 
Our recoverable reserves decline as we produce coal.  Since we attempt, where practical, to mine our lowest-cost reserves first, we may not be able to mine all of our reserves at a similar cost as we do at our current operations.  Our planned development and exploration projects might not result in significant additional reserves, and we might not have continuing success developing additional mines.  For example, our construction of additional mining facilities necessary to exploit our reserves could be delayed or terminated due to various factors, including unforeseen geological conditions, weather delays or unanticipated development costs.  Our ability to acquire additional coal reserves in the future also could be limited by restrictions under our existing or future debt facilities, competition from other coal companies for attractive properties or the lack of suitable acquisition candidates.
 
In order to develop our reserves, we must receive various governmental permits.  We have not yet applied for the permits required or developed the mines necessary to mine all of our reserves.  In addition, we might not continue to receive the permits necessary for us to operate profitably in the future. We may not be able to negotiate new leases from the government or from private parties or obtain mining contracts for properties containing additional reserves or maintain our leasehold interests in properties on which mining operations are not commenced during the term of the lease.

Factors beyond our control could impact the amount and pricing of coal supplied by our independent contractors and other third parties.
 
In addition to coal we produce from our Company-operated mines, we have mines that typically are operated by independent contract mine operators, and we purchase coal from third parties for resale.  For 2011, we anticipate less than 10% of our total production will come from mines operated by independent contract mine operators and from third party purchased coal sources.  Operational difficulties, changes in demand for contract mine operators from our competitors and other factors beyond our control could affect the availability, pricing and quality of coal produced for us by independent contract mine operators.  Disruptions in supply, increases in prices paid for coal produced by independent contract mine operators or purchased from third parties, or the availability of more lucrative direct sales opportunities for our purchased coal sources could increase our costs or lower our volumes, either of which could negatively affect our profitability.

We face significant uncertainty in estimating our recoverable coal reserves, and variations from those estimates could lead to decreased revenues and profitability.
 
Forecasts of our future performance are based on estimates of our recoverable coal reserves.  Estimates of those reserves were initially based on studies conducted by Marshall Miller & Associates, Inc. in 2004 for our CAPP reserves and 2005 and 2006 for our Midwest reserves in accordance with industry-accepted standards which we have updated for current activity using similar methodologies.  A number of sources of information were used to determine recoverable reserves estimates, including:
 
 
currently available geological, mining and property control data and maps;
 
our own operational experience and that of our consultants;
 
historical production from similar areas with similar conditions;
 
previously completed geological and reserve studies;
 
the assumed effects of regulations and taxes by governmental agencies; and
 
assumptions governing future prices and future operating costs.

Reserve estimates will change from time to time to reflect, among other factors:

 
mining activities;
 
new engineering and geological data;
 
acquisition or divestiture of reserve holdings; and
 
modification of mining plans or mining methods.
 

 
26

 


Therefore, actual coal tonnage recovered from identified reserve areas or properties, and costs associated with our mining operations, may vary from estimates.  These variations could be material, and therefore could result in decreased profitability.
 
Our operations could be adversely affected if we are unable to obtain required surety bonds.
 
Federal and state laws require bonds to secure our obligations to reclaim lands used for mining, to pay federal and state workers’ compensation and to satisfy other miscellaneous obligations.  As of December 31, 2010, we had outstanding surety bonds with third parties for post-mining reclamation totaling $60.2 million.  Furthermore, we have surety bonds for an additional $44.9 million in place for our federal and state workers’ compensation obligations and other miscellaneous obligations.  Insurance companies have informed us, along with other participants in the coal industry, that they no longer will provide surety bonds for workers’ compensation and other post-employment benefits without collateral.  We have satisfied our obligations under these statutes and regulations by providing letters of credit, cash collateral or other assurances of payment.  However, letters of credit can be significantly more costly to us than surety bonds.  The issuance of letters of credit under our Revolver also reduces amounts that we can borrow under our Revolver.  If we are unable to secure surety bonds for these obligations in the future, and are forced to secure letters of credit indefinitely, our profitability may be negatively affected.

Our work force could become unionized in the future, which could adversely affect the stability of our production and reduce our profitability.

Our company owned mines are currently operated by union-free employees.  However, our subsidiaries’ employees have the right at any time under the National Labor Relations Act to form or affiliate with a union.  Any unionization of our subsidiaries’ employees, or the employees of third-party contractors who mine coal for us, could adversely affect the stability of our production and reduce our profitability.
 
The current administration has indicated that it will support legislation that may make it easier for employees to unionize.  Legislation has been proposed to the United States Congress to enact a law allowing our workers to choose union representation solely by signing election cards (“Card Check”), which would eliminate the use of secret ballots to elect union representation.  While the impact is uncertain, if Card Check legislation is enacted into law, it will be administratively easier to unionize coal mines and may lead to more coal mines becoming unionized.

We have significant unfunded obligations for long-term employee benefits for which we accrue based upon assumptions, which, if incorrect, could result in us being required to expend greater amounts than anticipated.
 
We are required by law to provide various long-term employee benefits.  We accrue amounts for these obligations based on the present value of expected future costs.  We employed an independent actuary to complete estimates for our workers’ compensation and black lung (both state and federal) obligations.  At December 31, 2010, the current and non-current portions of these obligations included $45.7 million for coal workers’ black lung benefits and $64.9 million for workers’ compensation benefits.
 
We use a valuation method under which the total present and future liabilities are booked based on actuarial studies.  Our independent actuary updates these liability estimates annually.  However, if our assumptions are incorrect, we could be required to expend greater amounts than anticipated.  All of these obligations are unfunded.  In addition, the federal government and the governments of the states in which we operate consider changes in workers’ compensation laws from time to time.  Such changes, if enacted, could increase our benefit expenses and payments.

We may be unable to adequately provide funding for our pension plan obligations based on our current estimates of those obligations.
 
We provide benefits under a defined benefit pension plan that was frozen in 2007.  As of December 31, 2010, we estimated that our obligation under the pension plan was underfunded by approximately $12.0 million.  If future payments are insufficient to fund the pension plan adequately to cover our future pension obligations, we could incur cash expenditures and costs materially higher than anticipated.  The pension obligation is calculated annually and is based on several assumptions, including then prevailing conditions, which may change from year to year.  In any year, if our assumptions are inaccurate, we could be required to expend greater amounts than anticipated.

 
27

 

 
Substantially all of our assets are subject to security interests.
 
Substantially all of our cash, receivables, inventory and other assets are subject to various liens and security interests under our debt instruments.  If one of these security interest holders becomes entitled to exercise its rights as a secured party, it would have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to its security interest, and the collateral accordingly would be unavailable to us and our other creditors, except to the extent, if any, that other creditors have a superior or equal security interest in the affected collateral or the value of the affected collateral exceeds the amount of indebtedness in respect of which these foreclosure rights are exercised.
 
Our current leverage amount may harm our financial condition and results of operations.
 
Our total consolidated long-term debt as of December 31, 2010 was $284.0 million (net of a discount on our convertible notes of $38.5 million), $150.0 million of which matures in June 2012.  Our level of indebtedness could result in the following:

 
it could affect our ability to satisfy our outstanding obligations;
 
a substantial portion of our cash flows from operations will have to be dedicated to interest and principal payments and may not be available for operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other purposes;
 
it may impair our ability to obtain additional financing in the future;
 
it may limit our flexibility in planning for, or reacting to, changes in our business and industry; and
 
it may make us more vulnerable to downturns in our business, our industry or the economy in general.

Our operations may not generate sufficient cash to enable us to service our debt.  If we fail to make a payment on our debt, this could cause us to be in default on our outstanding indebtedness. In addition, we may incur additional indebtedness in the future, and, as a result, the related risks that we now face, including those described above, could intensify.  We expect that our indebtedness will increase in connection with the proposed acquisition of IRP.

We currently have $150 million of Senior Notes outstanding that are due in June 2012. There is no assurance that cash, future borrowings or equity financing will be available for the payment or refinancing of the Senior Notes at their maturity.  If we are unable to refinance our indebtedness or obtain additional financing on favorable terms, we could face substantial liquidity pressures and might be required to sell material assets or operations to meet our debt service requirements.

We may be unable to comply with restrictions imposed by the terms of our indebtedness, which could result in a default under these instruments.
 
Our debt instruments impose a number of restrictions on us.  A failure to comply with these restrictions could adversely affect our ability to borrow under our revolving credit facility or result in an event of default under our debt instruments.  Our debt instruments contain financial and other covenants that create limitations on our ability to, among other things, utilize the full amount on our revolver for borrowings or to issue letters of credit or incur additional debt, and require us to maintain various financial ratios and comply with various other financial covenants.  The minimum Adjusted EBITDA and Leverage Ratio covenants are only applicable if our unrestricted cash falls below $75 million and remain in effect until our unrestricted cash exceeds $75 million for 90 consecutive days (the Trigger Event).  As of December 31, 2010, our unrestricted cash was $180.4 million. These most restrictive covenants include the following:

 
·
If we have a Trigger Event, our revolving credit facility requires that we achieve a minimum Adjusted EBITDA, which is defined in that agreement as “Consolidated EBITDA”.  Adjusted EBITDA is measured at the end of each quarter for the preceding 12 months.  If measured, the required minimum Adjusted EBITDA would be $105.0 million during 2011.  In order to meet the twelve month Adjusted EBITDA target at December 31, 2010, we needed Adjusted EBITDA of $105.0 million in the year ended December 31, 2010.   Our Adjusted EBITDA for the year ended December 31, 2010 was $156.6 million.  The most directly comparable US GAAP financial measure is net income.  For the year ended December 31 2010, we had net income of $78.2 million.  Adjusted EBITDA is defined and reconciled to EBITDA and Net Loss under “Reconciliation of Non-GAAP Measures” in Part I – Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 

 
28

 


 
 
·
If we have a Trigger Event, our revolving credit facility requires that our Leverage Ratio (as defined in the revolving credit facility) not exceed a specified multiple at the end of each quarter.  If measured, the Leverage Ratio would be permitted to be 0.63X to 0.60X during 2011.  Our Leverage Ratio was 0.38X as of December 31, 2010.
 
 
·
Our revolving credit facility limits the Capital Expenditures (as defined in the revolving credit facility) that we may make or agree to make in any fiscal year.  For 2010, we were limited to Capital Expenditures of $100.0 million and we made actual Capital Expenditures of $95.4 million.  For 2011, we cannot make Capital Expenditures in excess of $119.6 million which includes $4.6 million of unused Capital expenditures from 2010 that we are allowed to carry forward and use only in 2011 (where they shall be deemed to be spent last).
 
Additional detail regarding the terms of our revolving credit facility, including these covenants and the related definitions, can be found in our debt agreements, as amended, that have been filed as exhibits to our SEC filings.
 
 In the event of a default, our lenders could terminate their commitments to us and declare all amounts borrowed, together with accrued interest and fees, immediately due and payable.  If this were to occur, we might not be able to pay these amounts or we might be forced to seek amendments to our debt agreements which could make the terms of these agreements more onerous for us and require the payment of amendment or waiver fees.  Failure to comply with these restrictions, even if waived by our lenders, also could adversely affect our credit ratings, which could increase our costs of debt financings and impair our ability to obtain additional debt financing.  While the lenders have, to date, waived any covenant violations and amended the covenants, there is no guarantee they will continue to do so if future violations occur.
 
Changes in our credit ratings could adversely affect our costs and expenses.
 
Any downgrade in our credit ratings could adversely affect our ability to borrow and result in more restrictive borrowing terms, including increased borrowing costs, more restrictive covenants and the extension of less open credit.  This, in turn, could affect our internal cost of capital estimates and therefore impact operational decisions.

Defects in title or loss of any leasehold interests in our properties could limit our ability to mine these properties or result in significant unanticipated costs.
 
We conduct substantially all of our mining operations on properties that we lease.  The loss of any lease could adversely affect our ability to mine the associated reserves.  Because we generally do not obtain title insurance or otherwise verify title to our leased properties, our right to mine some of our reserves has been in the past, and may again in the future be, adversely affected if defects in title or boundaries exist.  In order to obtain leases or rights to conduct our mining operations on property where these defects exist, we have had to, and may in the future have to, incur unanticipated costs.  In addition, we may not be able to successfully negotiate new leases for properties containing additional reserves.  Some leases have minimum production requirements.  Failure to meet those requirements could result in losses of prepaid royalties and, in some rare cases, could result in a loss of the lease itself.

Inability to satisfy contractual obligations may adversely affect our profitability.
 
From time to time, we have disputes with our customers over the provisions of long-term contracts relating to, among other things, coal quality, pricing, quantity and delays in delivery.  In addition, we may not be able to produce sufficient amounts of coal to meet our commitments to our customers.  Our inability to satisfy our contractual obligations could result in our need to purchase coal from third party sources to satisfy those obligations or may result in customers initiating claims against us.  We may not be able to resolve all of these disputes in a satisfactory manner, which could result in substantial damages or otherwise harm our relationships with customers.

 
29

 


We may be unable to exploit opportunities to diversify our operations.
 
Our future business plan may consider opportunities other than underground and surface mining in eastern Kentucky and southern Indiana.  We will consider opportunities to further increase the percentage of coal that comes from surface mines.  We may also consider opportunities to expand both surface and underground mining activities in areas that are outside of eastern Kentucky and southern Indiana.  We may also consider opportunities in other energy-related areas that are not prohibited by the Indenture governing our senior notes due 2012 or other financing agreements.  If we undertake these diversification strategies and fail to execute them successfully, our financial condition and results of operations may be adversely affected.
 
There are risks associated with our acquisition strategy, including our inability to successfully complete acquisitions, our assumption of liabilities, dilution of your investment, significant costs and additional financing required.
 
We may explore opportunities to expand our operations through strategic acquisitions of other coal mining companies.  Risks associated with our current and potential acquisitions include the disruption of our ongoing business, problems retaining the employees of the acquired business, assets acquired proving to be less valuable than expected, the potential assumption of unknown or unexpected liabilities, costs and problems, the inability of management to maintain uniform standards, controls, procedures and policies, the difficulty of managing a larger company, the risk of becoming involved in labor, commercial or regulatory disputes or litigation related to the new enterprises and the difficulty of integrating the acquired operations and personnel into our existing business.
 
We may choose to use shares of our common stock or other securities to finance a portion of the consideration for future acquisitions, either by issuing them to pay a portion of the purchase price or selling additional shares to investors to raise cash to pay a portion of the purchase price.  If shares of our common stock do not maintain sufficient market value or potential acquisition candidates are unwilling to accept shares of our common stock as part of the consideration for the sale of their businesses, we will be required to raise capital through additional sales of debt or equity securities, which might not be possible, or forego the acquisition opportunity, and our growth could be limited.  In addition, securities issued in such acquisitions may dilute the holdings of our current or future shareholders.

Our currently available cash may not be sufficient to finance any additional acquisitions.
 
We believe that our cash on hand, the availability under our revolving credit facility and cash generated from our operations will provide us with adequate liquidity through 2011.  However, such funds may not provide sufficient cash to fund any future acquisitions.  Accordingly, we may need to conduct additional debt or equity financings in order to fund any such additional acquisitions, unless we issue shares of our common stock as consideration for those acquisitions.  If we are unable to obtain any such financings, we may be required to forego future acquisition opportunities
 
Our current reserve base in the Midwest is limited.
 
Our southern Indiana mining complex currently has rights to proven and probable reserves that we believe will be exhausted in approximately 14 years at 2010 levels of production, compared to our current Central Appalachia mining complexes, which have reserves that we believe will last an average of approximately 37 years at 2010 levels of production.  We intend to increase our reserves in southern Indiana by acquiring rights to additional exploitable reserves that are either adjacent to or nearby our current reserves.  If we are unable to successfully acquire such rights on acceptable terms, or if our exploration or acquisition activities indicate that such coal reserves or rights do not exist or are not available on acceptable terms, our production and revenues will decline as our reserves in that region are depleted.  Exhaustion of reserves at particular mines also may have an adverse effect on our operating results that is disproportionate to the percentage of overall production represented by such mines.


 
30

 

Surface mining is subject to increased regulation, and may require us to incur additional costs.

Surface mining is subject to numerous regulations related, among others, to blasting activities that can result in additional costs.  For example, when blasting in close proximity to structures, additional costs are incurred in designing and implementing more complex blast delay regimens, conducting pre-blast surveys and blast monitoring, and the risk of potential blast-related damages increases.  Since the nature of surface mining requires ongoing disturbance to the surface, environmental compliance costs can be significantly greater than with underground operations.  In addition, the U.S. Army Corps of Engineers imposes stream mitigation requirements on surface mining operations.  These regulations require that footage of stream loss be replaced through various mitigation processes, if any ephemeral, intermittent, or perennial streams are filled due to mining operations.  In 2008, the U.S. Department of Interior’s Office of Surface Mining imposed regulatory requirements applicable to excess spoil placement, including the requirement that operators return as much spoil as possible to the excavation created by the mine.  These regulations may cause us to incur significant additional costs, which could adversely impact our operating performance.
 
We are subject to various legal proceedings, which may have an adverse effect on our business.
 
We are party to a number of legal proceedings incidental to our normal business activities, including a large number of workers’ compensation claims.  While we cannot predict the outcome of the proceedings, there is always the potential that the costs of defending litigation in an individual matter or the aggregation of many matters could have an adverse effect on our cash flows, results of operations or financial position.
 
Our ability to use net operating loss carryforwards may be subject to limitation
 
Section 382 of the U.S. Internal Revenue Code of 1986, as amended, imposes an annual limit on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in its stock ownership or equity structure.  Our ability to use net operating losses is limited by prior changes in our ownership, and may be further limited by the issuance of common stock in connection with the convertible notes issued in 2009, or by the consummation of other transactions.  As a result, as we earn net taxable income, our ability to use net operating loss carryforwards to offset U.S. federal taxable income may become subject to limitations, which could potentially result in increased future tax liabilities for us.
 
The IRP Acquisition may not be consummated, and if consummated, we may fail to realize the growth prospects and cost savings anticipated as a result of the IRP Acquisition.
 
There are a number of risks and uncertainties relating to the IRP Acquisition. For example, the IRP Acquisition may not be consummated or may not be consummated in the timeframe or manner currently anticipated, as a result of several factors, including, among other things, the failure of one or more of the conditions to closing. There can be no assurance that the conditions to closing of the IRP Acquisition will be satisfied or waived or that other events will not intervene to delay or result in the termination of the IRP Acquisition. Any delay in closing or a failure to close could have a negative impact on our business and stock price.
 
The success of the IRP Acquisition will depend, in part, on our ability to realize the anticipated business opportunities and growth prospects from combining our businesses with those of IRP.  We may never realize these business opportunities and growth prospects.  Integrating operations will be complex and will require significant efforts and expenditures on the part of both us and IRP.  Our management might have its attention diverted while trying to integrate operations and corporate and administrative infrastructures.  We might experience increased competition that limits our ability to expand our business, and we might not be able to capitalize on expected business opportunities, including retaining current customers.  If any of these factors limit our ability to integrate the operations successfully or on a timely basis, the expectations of future results of operations expected to result from the IRP Acquisition might not be met.
 
In addition, James River Coal Company and International Resource Partners have operated and, until the completion of the IRP Acquisition, will continue to operate, independently.  It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses, tax costs or inefficiencies, or inconsistencies in standards, controls, information technology systems, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers, employees or other third parties or our ability to achieve the anticipated benefits of the IRP Acquisition and could harm our financial performance.
 
Risks Relating to our Common Stock

The market price of our common stock has been volatile and difficult to predict, and may continue to be volatile and difficult to predict in the future, and the value of your investment may decline.
 
The market price of our common stock has been volatile in the past and may continue to be volatile in the future. The market price of our common stock will be affected by, among other things:
 
 
variations in our quarterly operating results;
 
changes in financial estimates by securities analysts;
 
sales of shares of our common stock by our officers and directors or by our shareholders;
 
changes in general conditions in the economy or the financial markets;
 
changes in accounting standards, policies or interpretations;
 
other developments affecting us, our industry, clients or competitors; and
 
the operating and stock price performance of companies that investors deem comparable to us.

Any of these factors could have a negative effect on the price of our common stock on the Nasdaq Global Select Market, make it difficult to predict the market price for our common stock in the future and cause the value of your investment to decline.

Dividends are limited by our revolving credit facility, senior notes and convertible senior notes.
 
We do not anticipate paying any cash dividends on our common stock in the near future. In addition, covenants in our revolving credit facility, senior notes and convertible senior notes restrict our ability to pay cash dividends and may prohibit the payment of dividends and certain other payments.


 
31

 

Provisions of our articles of incorporation, bylaws and shareholder rights agreement could discourage potential acquisition proposals and could deter or prevent a change in control.
 
Some provisions of our articles of incorporation and bylaws, as well as Virginia statutes, may have the effect of delaying, deferring or preventing a change in control. These provisions may make it more difficult for other persons, without the approval of our Board of Directors, to make a tender offer or otherwise acquire substantial amounts of our common stock or to launch other takeover attempts that a shareholder might consider to be in such shareholder's best interest. These provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock.
 
We have a shareholder rights agreement which, in certain circumstances, including a person or group acquiring, or the commencement of a tender or exchange offer that would result in a person or group acquiring, beneficial ownership of more than 20% of the outstanding shares of our common stock, would entitle each right holder, other than the person or group triggering the plan, to receive, upon exercise of the right, shares of our common stock having a then-current fair value equal to twice the exercise price of a right. 

This shareholder rights agreement provides us with a defensive mechanism that decreases the risk that a hostile acquirer will attempt to take control of us without negotiating directly with our Board of Directors. The shareholder rights agreement may discourage acquirers from attempting to purchase us, which may adversely affect the price of our common stock.


Item 1B.     Unresolved Staff Comments
 
None.
 
Item 2.     Properties
 
As of December 31, 2010, we owned approximately 11,800 acres of land.  Our mineral rights are primarily controlled through leases.  In a mining context, control of a property is typically divided into three categories:

 
·
mineral rights, which allows the controlling party to remove the minerals on the property;

 
·
surface rights, which allows the controlling party to use and disturb the surface of the property; and

 
·
fee control, which includes both mineral and surface rights.

Our rights with respect to properties that we lease vary from lease to lease, but encompass mineral rights, surface rights, or both.

The coal properties that we control in Central Appalachia are located in the Big Sandy, Hazard and Upper Cumberland coal districts of the Central Appalachian coal basin in eastern Kentucky and north central Tennessee.  These three coal districts are located in the Appalachian Plateau structural and physiographic province.  The coal properties that we control in the Midwest are part of the Illinois Coal basin and are located in southwest Indiana.  The terms of our leases can vary significantly, including the following provisions:

 
·
length of term;

 
·
renewal requirements;

 
·
minimum royalties;

 
·
recoupment provisions;

 
·
tonnage royalty rates;

 
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·
minimum tonnage royalty rates;

 
·
wheelage rates;

 
·
usage fees; and

 
·
other factors.

Our leases typically provide for periodic royalty payments, subject to specified annual minimums.  The annual minimums are typically based on the forecasted tonnage of coal to be produced on the leased property over the term of the lease.  Payments made pursuant to these minimums for years in which periodic royalty payments do not meet the minimums are typically recoupable against future periodic production royalties paid within a fixed period of time.  We typically are responsible for the payment of property taxes due on the properties we have under lease.

For a discussion of our coal reserves see Item 1 Business “Reserves.”

Our corporate headquarters is located at 901 E. Byrd Street; Richmond, Virginia and is occupied pursuant to a lease that expires in 2014.

Item 3.     Legal Proceedings
 
We are parties to a number of legal proceedings incidental to our normal business activities, including a large number of workers’ compensation claims.  While we cannot predict the outcome of these proceedings, in our opinion, any liability arising from these matters individually and in the aggregate should not have a material adverse effect on our consolidated financial position, cash flows or results of operations.

Item 4.     [Removed and Reserved]
 

 
33

 

PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
Our common stock trades on the Nasdaq Global Select Market under the ticker symbol “JRCC”.  The table below sets forth the high and low closing sales prices for our common stock for the periods indicated, as reported by Nasdaq.

   
First
Quarter
Second
Quarter
Third Quarter
Fourth Quarter
Fiscal year ended December 31, 2010
  
       
High
 
$22.18
19.39
19.83
25.33
Low
 
$15.17
14.67
15.28
16.00
Fiscal year ended December 31, 2009
  
       
High
 
$18.30
24.11
21.15
22.31
Low
 
$9.09
12.62
13.50
17.20

Recent Sales of Unregistered Securities
 
We issued restricted shares of common stock and options to purchase common stock to the following persons or classes of persons, in reliance upon the exemption contained in Section 4(2) of the Securities Act of 1933, as follows:
 
Recipient
 
No.
Shares
 
No.
Options
 
Date of
Issuance
 
Consideration
 
Option
Exercise
Price
 
                       
Operating and senior management
 
282,622
      -  
April 21, 2010
 
 Services rendered
 
N/A
 
                       
Non-employee directors (aggregate)
 
5,000
 
20,000
 
April 21, 2010
 
Services rendered
 
$17.01
 
                       

Holders
 
As of December 31, 2010, there were 139 record holders of our common stock.

Dividends
 
We did not pay any cash dividends on our common stock during the years ended December 31, 2010, 2009 or 2008.  We do not anticipate paying cash dividends in the foreseeable future.  Any future determination as to the payment of cash dividends will depend upon such factors as earnings, capital requirements, our financial condition, restrictions in financing agreements and other factors deemed relevant by the Board of Directors.  The payment of cash dividends is also currently prohibited by our revolving credit facility, our convertible senior notes and our senior notes.

 
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Securities Authorized for Issuance under Equity Compensation Plans

Please refer to note 7 of our December 31, 2010 consolidated financial statements for securities authorized to be issued under our 2004 Equity Incentive Plan.

Stock Performance Graph

Set forth below is a line graph comparing the percentage change in the cumulative total shareholder return of James River Coal Company’s Common Stock against the cumulative total return of the NASDAQ Composite Index and the Dow Jones U.S. Coal Index for the period commencing on December 31, 2005 (the date the Company’s Common Stock began trading on the Nasdaq Global Market) and ending on December 31, 2010.
 
 
Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2011
Index Data: Copyright Dow Jones, Inc. Used with permission. All rights reserved.
Index Data: Copyright NASDAQ OMX, Inc. Used with permission. All rights reserved.

Item  6.     Selected Financial Data
 
The following table presents our selected consolidated financial and operating data as of and for each of the periods indicated.  The selected consolidated financial data is derived from our audited consolidated financial statements.  The selected consolidated financial and operating data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes.

 
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Year Ended December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
Consolidated Statement of Operations:
                             
Revenues
  $ 701,116       681,558       568,507       520,560       564,791  
Cost of coal sold
    514,515       508,888       527,888       473,347       496,799  
Gain on curtailment of pension plan
    -       -       -       (6,091 )     -  
Depreciation, depletion, and amortization
    64,368       62,078       70,277       71,856       74,562  
 Gross profit (loss)
    122,233       110,592       (29,658 )     (18,552 )     (6,570 )
                                         
Selling, general, and administrative expenses
    38,347       39,720       34,992       32,191       30,867  
Operating income (loss)
    83,886       70,872       (64,650 )     (50,743 )     (37,437 )
                                         
Interest expense
    29,943       17,057       17,746       19,764       16,782  
Interest income
    (683 )     (60 )     (469 )     (471 )     (366 )
Charges associated with repayment and amendment of debt
    -       1,643       15,618       2,421       -  
Miscellaneous (income) expense, net
    27       (281 )     (1,279 )     (598 )     (533 )
Income tax expense (benefit)
    (23,566 )     1,559       (273 )     (17,844 )     (27,151 )
                                         
Net income (loss)
  $ 78,165       50,954       (95,993 )     (54,015 )     (26,169 )
                                         
Basic earnings (loss) per common share:
    2.82       1.85       (3.91 )     (3.29 )     (1.65 )
Diluted earnings (loss) per common share:
    2.82       1.85       (3.91 )     (3.29 )     (1.65 )


   
December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
(in thousands, except per share, per ton and number of employees information)
 
Consolidated Balance Sheet Data:
                             
Working capital (deficit)
  $ 191,625       109,998       (54,961 )     (8,471 )     (2,589 )
Property, plant, and equipment, net
    385,652       354,088       344,848       319,204       337,780  
Total assets
    784,569       669,312       463,546       439,287       451,254  
Long term debt, including current portion
    284,022       278,268       168,000       188,800       167,493  
Total shareholders’ equity
    247,383       170,342       65,238       69,774       86,397  

   
Year Ended December 31
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
Consolidated Statement of Cash Flow Data:
                             
Net cash provided by (used in) operating activities
  $ 169,062       27,559       (1,576 )     4,022       31,680  
Net cash used in investing activities
    (95,344 )     (72,010 )     (73,589 )     (49,201 )     (54,738 )
Net cash provided by financing activities
    (1,273 )     149,058       73,076       48,785       15,929  
                                         
Supplemental Operating Data:
                                       
Tons sold
    8,919       9,623       11,383       12,049       13,128  
Tons produced
    8,910       9,877       11,355       12,051       13,054  
Revenue per ton sold (a)
  $ 78.61       70.83       49.94       42.63       42.67  
Number of employees
    1,746       1,736       1,751       1,681       1,742  
Capital expenditures
  $ 95,426       72,159       74,697       49,343       62,507  
                                         
(a)
Revenue per ton sold in 2007 and 2006 excludes synfuel handling revenue.

 
36

 

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operation
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes and "Selected Financial Data" included elsewhere in this filing.  This discussion contains forward-looking statements that involve risks and uncertainties.  Our actual results could differ materially from those anticipated in the forward-looking statements as a result of numerous factors, including the risks discussed in "Risk Factors" in this filing.

Overview

We mine, process and sell bituminous, steam- and industrial-grade coal through six operating subsidiaries (“mining complexes”) located throughout eastern Kentucky and in southern Indiana.  We have two reportable business segments based on the coal basins in which we operate (Central Appalachia (CAPP) and the Midwest (Midwest)).  We derived 88% of our total revenues (contract and spot) in 2010 from coal sales to electric utility customers and the remaining 12% from coal sales to industrial and other customers.  In 2010, our mines produced 8.8 million tons of coal (including 0.1 million tons of contract coal) and we purchased another 0.1 million tons for resale.  Of the 8.8 million tons produced from Company mines, approximately 65% came from underground mines, while the remaining 35% came from surface mines.  In 2010, we generated revenues of $701.1 million and net income of $78.2 million.
 
On March 6, 2011, we signed a definitive agreement to purchase IRP and its subsidiary companies for $475 million in an all-cash transaction.  We have secured $375 million in committed bridge financing from Deutsche Bank and UBS, which in addition to existing cash balances, is expected to be sufficient to finance the purchase price for IRP. Rather than borrow under the committed financing, we may seek to issue common stock, convertible notes, senior notes or other securities in one or more public or private offerings in connection with the proposed acquisition.  There can be no assurance that we will undertake or complete any such financing transaction.
 
The Purchase Agreement contains customary representations, warranties, covenants and conditions, as well as indemnification provisions subject to specified limitations.  The closing of the proposed acquisition is subject to the termination or expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, certain third party consents and other customary closing conditions.  The proposed acquisition is expected to close in the first half of 2011.
 
IRP mines, processes and sells metallurgical and steam coal through its mining complexes in Southern West Virginia and Eastern Kentucky.  IRP, through its wholly owned subsidiary Logan & Kanawha, also conducts coal brokering and trading operations.   Including brokered coal, IRP had revenues of $490.3 million for the year ended December 31, 2010.  IRP had approximately 86 million tons of proven and probable coal reserves as of December 31, 2010.
 
CAPP Segment

In Central Appalachia, the majority of our coal is primarily sold to customers in the southern portion of the South Atlantic region of the United States.  The South Atlantic Region includes the states of Florida, Georgia, South Carolina, North Carolina, West Virginia, Virginia, Maryland and Delaware.  According to the most recent information available from the US Energy Information Administration (EIA), in 2009 the South Atlantic region consumed 149 million tons of coal or about 16% of all coal for electric generation in the United States.  We have been providing coal to customers in the South Atlantic region since our formation in 1988.  In 2010, South Carolina Public Service Authority and Georgia Power Company were our largest customers, representing approximately 39% and 32% of our total revenues, respectively.  No other CAPP customer accounted for more than 10% of our total revenues.
 
According to the EIA, coal production for Eastern Kentucky and West Virginia was 210 million tons in 2009.  During 2010, our CAPP segment shipped 6.1 million tons of coal.  As of December 31, 2010, we estimate that we controlled approximately 230.4 million tons of proven and probable coal reserves in our CAPP segment.  Based on our most recent analysis prepared by Marshall Miller & Associates, Inc. (“MM&A”) as of March 31, 2004, we estimate that these reserves have an average heat content of 13,300 Btu per pound and an average sulfur content of 1.3%.  At current production levels, we believe these reserves would support approximately 37 years of production.
 
Midwest Segment
 
In the Midwest, the majority of our coal is sold in the East North Central Region, which includes the states of Illinois, Indiana, Ohio, Michigan and Wisconsin.  According to the EIA, in 2009 the East North Central Region consumed about 218 million tons of coal or 23% of all coal consumed for electric generation in the United States. In 2010, our Midwest segment’s largest customer, Indianapolis Power and Light, represented approximately 11% of our total revenues. No other Midwest customer accounted for more than 10% of our total revenues.
 
During 2010, our Midwest segment shipped 2.8 million tons of coal.  We believe that coal-fired electric utilities and industrial customers value the high energy coal that comprises the majority of our Midwest reserves.  As of December 31, 2010, we estimate that we controlled approximately 40.9 million tons of proven and probable coal reserves in our Midwest segment.  Based on our most recent analyses prepared by MM&A as of February 1, 2005 and April 11, 2006, we estimate that these reserves have an average heat content of 12,000 Btu per pound and average sulfur content of 3.2%.  At current production levels, we believe these reserves would support approximately 14 years of production.

 
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Reserves
 
MM&A prepared a detailed study of our CAPP reserves as of March 31, 2004 based on all of our geologic information, including our updated drilling and mining data. MM&A completed their report on our CAPP reserves in June 2004.  For the Triad properties, MM&A also prepared a detailed study of Triad’s reserves as of February 1, 2005 for the reserves obtained in the acquisition of Triad and as of April 11, 2006 for certain additional reserves acquired in the second quarter of 2006.  The MM&A studies were planned and performed to obtain reasonable assurance of the subject demonstrated reserves.  In connection with the studies, MM&A prepared reserve maps and had certified professional geologists develop estimates based on data supplied by us and Triad using standards accepted by government and industry.  We have used MM&A’s March 31, 2004 study as the basis for our current internal estimate of our Central Appalachia reserves and MM&A’s February 1, 2005 and April 11, 2006 studies as the basis for our current internal estimate of our Midwest reserves.
 
Reserves for these purposes are defined by SEC Industry Guide 7 as that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination.  The reserve estimates were prepared using industry-standard methodology to provide reasonable assurance that the reserves are recoverable, considering technical, economic and legal limitations.  Although MM&A has reviewed our reserves and found them to be reasonable (notwithstanding unforeseen geological, market, labor or regulatory issues that may affect the operations), MM&A’s engagement did not include performing an economic feasibility study for our reserves.  In accordance with standard industry practice, we have performed our own economic feasibility analysis for our reserves.  It is not generally considered to be practical, however, nor is it standard industry practice, to perform a feasibility study for a company’s entire reserve portfolio.  In addition, MM&A did not independently verify our control of our properties, and has relied solely on property information supplied by us.  Reserve acreage, average seam thickness, average seam density and average mine and wash recovery percentages were verified by MM&A to prepare a reserve tonnage estimate for each reserve.  There are numerous uncertainties inherent in estimating quantities and values of economically recoverable coal reserves as discussed in “Critical Accounting Estimates – Coal Reserves”.
 
Based on the MM&A reserve studies and the foregoing assumptions and qualifications, and after giving effect to our operations from the respective dates of the studies through December 31, 2010, we estimate that, as of December 31, 2010, we controlled approximately 230.4 million tons of proven and probable coal reserves in the CAPP region and 40.9 million tons in the Midwest region.  The following table provides additional information regarding changes to our reserves for the year ended December 31, 2010 (in millions of tons):

   
CAPP
   
Midwest
   
Total
 
                   
Proven and Probable Reserves, as of December 31, 2009 (1)
    231.2       39.9       271.1  
Coal Extracted
    (6.1 )     (2.8 )     (8.9 )
Acquisitions (2)
    0.8       -       0.8  
Adjustments (3)
    5.1       3.8       8.9  
Divestitures (4)
    (0.6 )     -       (0.6 )
Proven and Probable Reserves, as of December 31, 2010 (1)
    230.4       40.9       271.3  

(1) Calculated in the same manner, and based on the same assumptions and qualifications, as used in the MM&A studies described above, but these estimates have not been reviewed by MM&A.  Proven reserves have the highest degree of geologic assurance and are reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings, or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspections, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established.  Probable reserves have a moderate degree of geologic assurance and are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced.  The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.  This reserve information reflects recoverable tonnage on an as-received basis with 5.5% moisture.


 
38

 


(2) Represents estimated reserves on leases entered into or properties acquired during the relevant period.  We calculated the reserves in the same manner, and based on the same assumptions and qualifications, as used in the MM&A studies described above, but these estimates have not been reviewed by MM&A.

(3) Represents changes in reserves due to additional information obtained from exploration activities, production activities or discovery of new geologic information. We calculated the adjustments to the reserves in the same manner, and based on the same assumptions and qualifications, as used in the MM&A studies described above, but these estimates have not been reviewed by MM&A.

(4) Represents changes in reserves due to expired or transferred leases.

Key Performance Indicators

We manage our business through several key performance metrics that provide a summary of information in the areas of sales, operations, and general and administrative costs.

In the sales area, our long-term metrics are the volume-weighted average remaining term of our contracts and our open contract position for the next several years. During periods of high prices, we may seek to lengthen the average remaining term of our contracts and reduce the open tonnage for future periods. In the short-term, we closely monitor the Average Selling Price per Ton (ASP), and the mix between our spot sales and contract sales.

In the operations area, we monitor the volume of coal that is produced by each of our principal sources, including company mines, contract mines, and purchased coal sources. For our company mines, we focus on both operating costs and operating productivity. We closely monitor the cost per ton of our mines against our budgeted costs and against our other mines.

EBITDA and Adjusted EBITDA are also measures used by management to measure operating performance. We define EBITDA as net income (loss) plus interest expense (net), income tax expense (benefit) and depreciation, depletion and amortization. We regularly use EBITDA to evaluate our performance as compared to other companies in our industry that have different financing and capital structures and/or tax rates. In addition, we use EBITDA in evaluating acquisition targets. EBITDA is not a recognized term under U.S generally accepted accounting principles (US GAAP) and is not an alternative to net income, operating income or any other performance measures derived in accordance with US GAAP or an alternative to cash flow from operating activities as a measure of operating liquidity.  Adjusted EBITDA is used in calculating compliance with our debt covenants and adjusts EBITDA for certain items as defined in our debt agreements, including stock compensation and certain bank fees.  See “Other Supplemental Information  —  Reconciliation of Non-US GAAP Measures.”

Trends In Our Business

Near-term, the global economic slowdown has lowered demand for coal which has resulted in a decline in spot coal prices.   The price of spot coal has also been impacted by a decrease in the price of competing fuel sources including natural gas.  The coal industry has made cutbacks in supply in response to the decrease in demand for coal and has experienced additional declines due to a number of regulatory factors.  Due to the uncertainties in the global market place, we are unable to forecast the price or demand for coal over the next few years.  Long-term, we believe that the demand for coal worldwide will continue to be strong and that supply challenges will continue in the regions that we mine coal.  We also believe that in the United States coal will continue to be one of the most economical energy sources.   A number of factors beyond our control impact coal prices, including:

 
·
the supply of domestic and foreign coal;
 
·
the demand for electricity;
 
·
the demand for steel and the continued financial viability of the domestic and foreign steel industries;
 
·
the cost of transporting coal to the customer;
 
·
domestic and foreign governmental regulations and taxes;
 
·
world economic conditions
 
·
air emission standards for coal-fired power plants; and
 
·
the price and availability of alternative fuels for electricity generation.

 
39

 


As discussed previously, our costs of production have increased in recent years.  We expect the higher costs to continue for the next several years, due to a number of factors, including increased governmental regulations, high prices in worldwide commodity markets, and a highly competitive market for a limited supply of skilled mining personnel.
 
Our business is very sensitive to changes in supply and demand for coal and we carefully manage our mines to maximize operating results.  As our current long term contracts are fulfilled, our profitability in the future will be impacted by the price levels that we achieve on future long term contracts.  Events beyond our control could impact our profit margins.

Results of Operations

Year Ended December 31, 2010 Compared with the Year Ended December 31, 2009

The following table shows selected operating results for 2010 and 2009 (in thousands, except per ton amounts):

   
Year Ended December 31,
       
   
2010
   
2009
   
Change
 
   
Total
   
Per Ton
   
Total
   
Per Ton
   
Total
 
Volume Shipped (tons)
    8,919             9,623             -7 %
                                     
Coal sales revenue
  $ 701,116     $ 78.61     $ 681,558     $ 70.83       3 %
Cost of coal sold
    514,515       57.69       508,888       52.88       1 %
Depreciation, depletion and amortization
    64,368       7.22       62,078       6.45       4 %
Gross profit
    122,233       13.70       110,592       11.49       11 %
Selling, general and administrative
    38,347       4.30       39,720       4.13       -3 %
 
Volume and Revenues by Segment
 
   
Year Ended December 31,
 
   
2010
   
2009
 
                         
   
CAPP
   
Midwest
   
CAPP
   
Midwest
 
                         
Volume Shipped (tons)
    6,109       2,810       6,525       3,098  
                                 
Coal sales revenue
  $ 585,064     $ 116,052     $ 579,108     $ 102,450  
                                 
Average sales price per ton
    95.77       41.30       88.75       33.07  
 
In 2010, we shipped 8.9 million tons of coal compared to 9.6 million tons in 2009.  Coal sales revenue increased from $681.6 million in 2009 to $701.1 million in 2010. This increase was due to an increase in the average sales price per ton in the CAPP and Midwest regions, which was partially offset by a decrease in tons shipped in the CAPP and Midwest regions.

In 2010, the CAPP region sold approximately 4.8 million tons of coal under long-term contracts (79% of total CAPP sales volume) at an average selling price of $103.14 per ton.  In 2009, the CAPP region sold approximately 6.0 million tons of coal under long-term contracts (92% of total CAPP sales volume) at an average selling price of $89.55 per ton.  In 2010, the CAPP region sold 1.3 million tons of coal (21% of total CAPP sales volume) under short term contracts (includes spot sales) at an average selling price of $67.42 per ton.  In 2009, the CAPP region sold 0.5 million tons of coal (8% of total CAPP sales volume) under short term contracts (includes spot sales) at an average selling price of $79.31 per ton.


 
40

 

The Midwest’s region sales of coal were primarily sold under long term contracts for both 2010 and 2009. In 2010, the Midwest region sold 2.8 million tons at an average sales price of $41.30 per ton.  In 2009, the Midwest region sold 3.1 million tons at an average sales price of $33.07 per ton.

Cost of Coal Sold

   
Year Ended December 31,
 
   
2010
   
2009
 
                                     
   
CAPP
   
Midwest
   
Corporate
   
CAPP
   
Midwest
   
Corporate
 
                                     
Cost of Coal Sold
  $ 419,564     $ 94,951     $ -     $ 416,721     $ 92,167     $ -  
                                                 
Per ton
    68.68       33.79       -       63.87       29.75       -  
                                                 
Depreciation, depletion, and amortization
    53,467       10,840       61       49,380       12,646       52  
                                                 
Per ton
    8.75       3.86       -       7.57       4.08       -  
 
The cost of coal sold, excluding depreciation, depletion and amortization, increased from $508.9 million in 2009 to $514.5 million in 2010.  Our cost per ton of coal sold in the CAPP region increased from $63.87 per ton in 2009 to $68.68 per ton in the 2010.  Our costs continue to be impacted by lower productivity due to increased federal and state regulatory scrutiny and a decrease in tons produced in response to market conditions.  The major components of the $4.81 per ton increase in the cost per ton of coal sold from 2009 to 2010 include an increase in our labor and benefit costs of $1.71 per ton, sales related costs of $1.48 per ton and variable costs of $0.74 per ton.   For more detail regarding the increased regulatory activity see “Part II – Item 1A – Risk Factors – Underground mining is subject to increased regulation, and may require us to incur additional cost.”

Our cost per ton of coal sold in the Midwest increased $4.04 per ton from $29.75 in the 2009 period to $33.79 per ton in the 2010 period.  The major components of this increase include an increase in the variable costs of $1.63 per ton, labor and benefit costs of $0.82 per ton, and sales related costs of $0.83 per ton.  The increase in the variable costs was primarily due to an increase in diesel and explosives costs.
 
Depreciation, depletion and amortization
 
Depreciation, depletion and amortization increased from $62.1 million in 2009 to $64.4 million in 2010.  In the CAPP region, depreciation, depletion and amortization increased $4.1 million to $53.5 million or $8.75 per ton.  In the Midwest, depreciation, depletion and amortization decreased $1.8 million to $10.8 million or $3.86 per ton.

Selling, general and administrative
 
Selling, general and administrative expenses decreased from $39.7 million in 2009 to $38.3 million in 2010.  This decrease was primarily due to a decrease in bank fees associated with the issuance of letters of credit.

Interest Expense
 
Interest expense increased from $17.1 million in 2009 to $29.9 million in 2010.  This increase was the result of additional interest expense associated with our convertible senior notes that were issued in the fourth quarter of 2009.  During 2010 and 2009, we recorded $13.5 million and $1.4 million of interest expense, respectively, on our convertible senior notes, including $5.8 million and $0.6 million, respectively, related to the non-cash amortization of the debt discount recorded on this issuance.


 
41

 


Income Taxes

Our effective tax (benefit) rates for 2010 and 2009 were (43.2%) and 3.0%, respectively.  Our effective income tax rate, as compared to the statutory federal rate, is impacted primarily by the amount of the valuation allowance recorded against our deferred tax assets, including our net operating loss carryforwards, and percentage depletion.  For 2010, our effective tax rate was reduced from the statutory federal rate of 35% primarily as the result of the reversal of our income tax valuation allowance (60.9%) and by percentage depletion (20.4%).  As described further in “Critical Accounting Estimates – Income Taxes,” the reversal of our income tax valuation allowance, during 2010, was the result of the conclusion that our deferred tax assets that were previously reduced by a valuation allowance were more likely than not to ultimately be realizable.   In making this conclusion we considered our forecasts of future taxable income and other relevant factors, including a history of recent positive operating results.  For 2009 our effective tax rate was reduced from the statutory federal tax rate primarily by percentage depletion (25.8%) and a change in the valuation allowance (6.2%).    

As of December 31, 2010, we had no valuation allowance against gross deferred tax assets based on the conclusion that our deferred tax assets, including our net operating loss carryforwards, are more likely than not to be realized. The criteria for recording a valuation allowance are described in “Critical Accounting Estimates – Income Taxes.”  Percentage depletion is an income tax deduction that is limited to a percentage of taxable income from each of our mining properties.  Because percentage depletion can be deducted in excess of cost basis in the properties, it creates a permanent difference and directly impacts the effective tax rate.  Fluctuations in the effective tax rate may occur due to the varying levels of profitability (and thus, taxable income and percentage depletion) at each of our mine locations.

Results of Operations

Year Ended December 31, 2009 Compared with the Year Ended December 31, 2008

The following table shows selected operating results for 2009 and 2008 (in thousands, except per ton amounts):

   
Year Ended December 31,
       
   
2009
   
2008
   
Change
 
   
Total
   
Per Ton
   
Total
   
Per Ton
   
Total
 
Volume Shipped (tons)
    9,623             11,383             -15 %
                                     
Coal sales revenue
  $ 681,558     $ 70.83     $ 568,507     $ 49.94       20 %
Cost of coal sold
    508,888       52.88       527,888       46.38       -4 %
Depreciation, depletion and amortization
    62,078       6.45       70,277       6.17       -12 %
Gross profit (loss)
    110,592       11.49       (29,658 )     (2.61 )     N/A  
Selling, general and administrative
    39,720       4.13       34,992       3.07       14 %
 
 
42

 

Volume and Revenues by Segment

   
Year Ended December 31,
 
   
2009
   
2008
 
                         
   
CAPP
   
Midwest
   
CAPP
   
Midwest
 
                         
Volume Shipped (tons)
    6,525       3,098       8,271       3,112  
                                 
Coal sales revenue
  $ 579,108     $ 102,450     $ 467,609     $ 100,898  
                                 
Average sales price per ton
    88.75       33.07       56.54       32.42  
 
In 2009, we shipped 9.6 million tons of coal compared to 11.4 million tons in 2008.  Coal sales revenue increased from $568.5 million in 2008 to $681.6 million in 2009. This increase was due to an increase in the average sales price per ton in the CAPP region, which was partially offset by a decrease in tons shipped in the CAPP region.

In 2009, the CAPP region sold approximately 6.0 million tons of coal under long-term contracts (92% of total CAPP sales volume) at an average selling price of $89.55 per ton.  In 2008, the CAPP region sold approximately 4.6 million tons of coal under long-term contracts (56% of total CAPP sales volume) at an average selling price of $52.52 per ton. In 2009, the CAPP region sold 0.5 million tons of coal (8% of total CAPP sales volume) under short term contracts (includes spot sales) at an average selling price of $79.31 per ton. In 2008, the CAPP region sold 3.7 million tons of coal (44% of total CAPP sales volume) under short term contracts (includes spot sales) at an average selling price of $61.62 per ton.  

The Midwest’s region sales of coal were primarily sold under long term contracts for both 2009 and 2008. In 2009, the Midwest region sold 3.1 million tons at an average sales price of $33.07 per ton.  In 2008, the Midwest region sold 3.1 million tons at an average sales price of $32.42 per ton.

Cost of Coal Sold

   
Year Ended December 31,
 
   
2009
   
2008
 
                                     
   
CAPP
   
Midwest
   
Corporate
 
CAPP
   
Midwest
   
Corporate
 
                                     
Cost of Coal Sold
  $ 416,721     $ 92,167     $ -     $ 433,781     $ 94,107     $ -  
Per ton
    63.87       29.75       -       52.45       30.24       -  
                                                 
Depreciation, depletion, and amortization
    49,380       12,646       52       55,979       14,218       80  
Per ton
    7.57       4.08       -       6.77       4.57       -  
 
The cost of coal sold, excluding depreciation, depletion and amortization, decreased from $527.9 million in 2008 to $508.9 million in 2009 due to less tons sold.  Our cost per ton of coal sold in the CAPP region increased from $52.45 per ton in 2008 to $63.87 per ton in 2009.  This $11.42 increase in cost per ton of coal sold was primarily the result of lower productivity due to increased federal and state regulatory scrutiny which caused an increase in labor costs as compared to prior year, a decrease in tons produced in response to market conditions, an increase in machine parts and repairs costs, and the impact of increased average sales prices on our sales related costs (primarily royalties and severance taxes). The major components of this increase include an increase in the Company’s sales related costs of $4.32 per ton, labor and benefit costs of $2.74 per ton, preparation and loading costs of $1.86 per ton and variable mine costs of $1.45 per ton.    For more detail regarding the increased regulatory activity see “Part II – Item 1A – Risk Factors – Underground mining is subject to increased regulation, and may require us to incur additional cost.”

Our cost per ton of coal sold in the Midwest decreased $0.49 per ton from $30.24 per ton in 2008 period to $29.75 per ton in 2009.  The decrease in cost per ton of coal sold was due to a $1.63 per ton decrease in variable costs, offset by a $0.91 per ton increase in preparation plant costs.  The decrease in the variable costs was primarily due to a decrease in diesel and explosives costs.
 

 
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Depreciation, depletion and amortization
 
Depreciation, depletion and amortization decreased from $70.3 million in 2008 to $62.1 million in 2009.  In the CAPP region, depreciation, depletion and amortization decreased $6.6 million to $49.4 million or $7.57 per ton.  In the Midwest, depreciation, depletion and amortization decreased $1.6 million to $12.6 million or $4.08 per ton.

Selling, general and administrative
 
Selling, general and administrative expenses increased from $35.0 million in 2008 to $39.7 million in 2009.  The increase was primarily due to higher letter of credit fees, and an increase in certain salary and benefit amounts. The increase in the letter of credit fees is due to an increase in the usage fee under our Letter of Credit Facility.

Charges associated with repayment and amendment of debt

In 2009, we expensed $1.6 million in 2009 in connection with a fee to terminate a letter of credit facility.

In 2008, we expensed approximately $13.3 million of costs associated with the various credit amendments.  Additionally, we wrote-off approximately $2.4 million of unamortized financing charges.  

Income Taxes

Our effective tax (benefit) rates for 2009 and 2008 were 3.0% and (0.3%), respectively.  Our effective income tax rate is impacted primarily by the amount of the valuation allowance recorded against our deferred tax assets including our net operating loss carryforwards and percentage depletion.  For 2009 our effective tax rate was decreased by 25.8% for percentage depletion.  In 2008, our effective tax benefit rate was increased by 3.8% for percentage depletion.  For 2009 our effective rate was decreased by 6.2% and our effective tax benefit rate 39.2%, for a change in the valuation allowance.  As of December 31, 2009, we had a $33.2 million valuation allowance against gross deferred tax assets based on the conclusion that the net operating loss was, at that time, not more likely than not to be realized. The criteria for recording a valuation allowance are described in “Critical Accounting Estimates – Income Taxes.  In 2009, the effective tax rate was positively impacted by a reduction in the valuation allowance due to the generation of taxable income and the utilization of a portion of the net operating loss carryforwards.  Percentage depletion is an income tax deduction that is limited to a percentage of taxable income from each of our mining properties.  Because percentage depletion can be deducted in excess of cost basis in the properties, it creates a permanent difference and directly impacts the effective tax rate.  Fluctuations in the effective tax rate may occur due to the varying levels of profitability (and thus, taxable income and percentage depletion) at each of our mine locations.

Liquidity and Capital Resources

The following chart reflects the components of our debt as of December 31, 2010 and 2009 (in thousands):

   
2010
   
2009
 
Senior Notes
  $ 150,000     $ 150,000  
Convertible Senior Notes, net of discount
    134,022       128,268  
Revolver
    -       -  
     Total long-term debt
    284,022       278,268  
Less amounts classified as current
    -       -  
     Total long-term debt, less current maturities
  $ 284,022     $ 278,268  


 
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Senior Notes and Convertible Senior Notes

There have been no changes to the terms of our Senior Notes or Convertible Senior Notes during 2010.  See Item 15 of Part IV, “Financial Statements — Note 4 — Long Term Debt and Interest Expense” for a description of our Senior Notes and Convertible Senior Notes.
 
Revolving Credit Agreement

In January 2010, we amended and restated our existing Revolving Credit Agreement (as amended and restated the Revolving Credit Agreement is referred to as the Revolver).  The following is a summary of significant terms of the Revolver.
 
Maturity
February 2012
Interest/Usage Rate
Company’s option of Base Rate(a) plus 3.0% or LIBOR plus 4.0% per annum
Maximum Availability
Lesser of $65.0 million or the borrowing base (b)
Periodic Principal Payments
None 

 
(a)
Base rate is the higher of (1) the Federal Fund Rate plus 3.0%, (2) the prime rate and (3) a LIBOR rate plus 1.0%.
 
(b)
The Revolver’s borrowing base is based on the sum 85% of the Company’s eligible accounts receivable plus 65% of the eligible inventory minus reserves from time to time set by the administrative agent.  The eligible accounts receivable and inventories are further adjusted as specified in the agreement.  The Company’s borrowing base can also be increased by 95% of any cash collateral that the Company maintains in a cash collateral account.

The Revolver provides that we can use the Revolver availability to issue letters of credit. The Revolver provides for a 4.25% fee on any outstanding letters of credit issued under the Revolver and a 0.5% fee on the unused portion of the Revolver. The Revolver requires certain mandatory prepayments from certain asset sales, incurrence of indebtedness and excess cash flow. The Revolver includes financial covenants that require the Company to maintain a minimum Adjusted EBITDA and a maximum Leverage Ratio and limit capital expenditures, each as defined by the agreement. However, the minimum Adjusted EBITDA and maximum Leverage Ratio covenants are only applicable if our unrestricted cash balance falls below $75.0 million and would remain in effect until the our unrestricted cash exceeds $75.0 million for 90 consecutive days.

As of December 31, 2010, we had used $58.8 million of the $65.0 million available under the Revolver to secure outstanding letters of credits.  
 
We were in compliance with all of the financial covenants under our outstanding debt instruments as of December 31, 2010.  We cannot assure you that we will remain in compliance in subsequent periods.  If necessary, we will consider seeking a waiver or other alternatives to remain in compliance with the covenants.  For more detail regarding the covenants under the Facilities, see Part I - Item 1A - Risk Factors - “We may be unable to comply with restrictions imposed by the terms of our indebtedness, which could result in a default under these instruments.”  

Liquidity

As of December 31, 2010, we had total liquidity of approximately $186.6 million, consisting of $6.2 million of unused borrowing capacity under the Revolver and $180.4 million of cash and cash equivalents (excluding restricted cash and short term investments).   As of December 31, 2010, we have used $58.8 million of the Revolver’s availability to secure outstanding letters of credits.

Our primary source of cash is expected to be sales of coal to our utility and industrial customers. The price of coal received can change dramatically based on market factors and will directly affect this source of cash.  Our primary uses of cash include the payment of ordinary mining expenses to mine coal, capital expenditures and benefit payments. Ordinary mining expenses are driven by the cost of supplies, including steel prices and diesel fuel. Benefit payments include payments for workers’ compensation and black lung benefits paid over the lives of our employees as the claims are submitted. We are required to pay these when due, and are not required to set aside cash for these payments. We have posted surety bonds secured by letters of credit or issued letters of credit with state regulatory departments to guarantee these payments.  We believe that our Revolver provides us with the ability to meet the necessary bonding requirements. 

 
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Additionally, on March 6, 2011, we signed a definitive agreement to purchase IRP and its subsidiary companies for $475 million in an all-cash transaction.  We have secured $375 million in committed financing from Deutsche Bank and UBS, which in addition to existing cash balances, is expected to be sufficient to finance the purchase price for IRP.  Rather than borrow under the committed financing, we may seek to issue common stock, convertible notes, senior notes or other securities in one or more public or private offerings in connection with the proposed acquisition.  There can be no assurance that we will undertake or complete any such financing transaction.
 
We believe that cash generated from operations, borrowings under our credit facilities and future debt and equity offerings, if any, will be sufficient to complete the proposed acquisition of IRP and to meet working capital requirements, anticipated capital expenditures, and scheduled debt payments throughout 2011 and for the next several years. Nevertheless, our ability to satisfy our working capital requirements and debt service obligations, or fund planned capital expenditures, will substantially depend upon our future operating performance (which will be affected by prevailing economic conditions in the coal industry), debt covenants, and financial, business and other factors, some of which are beyond our control.  We expect that our indebtedness will increase in connection with the proposed acquisition of IRP.  Additionally, we have $150 million of Senior Notes outstanding that are due in June 2012.  There is no assurance that cash, future borrowings or equity financing will be available for the payment or refinancing of the Senior Notes at their maturity.  If we are unable to refinance our indebtedness or obtain additional financing on favorable terms, we could face substantial liquidity pressures and might be required to sell material assets or operations to meet our debt service requirements.
 
In the event that the sources of cash described above are not sufficient to meet our future cash requirements, we will need to reduce certain planned expenditures, seek additional financing, or both. We may seek to raise funds through additional debt financing or the issuance of additional equity securities. If such actions are not sufficient, we may need to limit our growth, sell assets or reduce or curtail some of our operations to levels consistent with the constraints imposed by our available cash flow, or any combination of these options. Our ability to seek additional debt or equity financing may be limited by our existing and any future financing arrangements, economic and financial conditions, or all three. In particular, our Convertible Senior Notes, Senior Notes and Revolver restrict our ability to incur additional indebtedness. We cannot provide assurance that any reductions in our planned expenditures or in our expansion would be sufficient to cover shortfalls in available cash or that additional debt or equity financing would be available on terms acceptable to us, if at all.
 
Currently, our primary use of cash during the next several years is expected to be ordinary course of business expenses, capital expenditures for existing mines and the repayment our Senior Notes which mature in June 2012. We currently project that our capital expenditures for 2011 will be approximately $115 million. Our projected capital expenditures primarily consist of capital expenditure for normal mining activities including new and replacement mine equipment.  Our projected capital expenditures for 2011 also include approximately $30 million for safety mandates and new mine and infrastructure development. We expect that such expenditures will be funded through cash on hand and cash generated by operations.

Net cash provided by or used in operating activities reflects net income or net loss adjusted for non-cash charges and changes in net working capital (including non-current operating assets and liabilities).  Net cash provided by operating activities was $169.1 million and $27.6 million in 2010 and 2009, respectively.  We had net income of $78.2 million in 2010 as compared to net income of $51.0 million in 2009.  During 2010, our net income, as adjusted for non cash charges was decreased by a $31.7 million decrease in cash from our operating assets and liabilities.  The $31.7 million change in our operating assets and liabilities for 2010, includes a $38.5 million decrease in restricted cash and short term investments, a $16.7 million increase in accounts receivables and a $10.9 million increase in accounts payable.  During 2009, our net income, as adjusted for non cash charges was decreased by a $96.6 million decrease in cash from our operating assets and liabilities.  The $96.6 million change in our operating assets and liabilities for 2009, includes a $56.8 million increase in restricted cash and short term investments to secure our letters of credit, a $10.0 million increase in accounts receivables, a $15.0 million increase in inventories and a $10.6 million decrease in accounts payable.
 
Net cash used by investing activities increased $23.3 million to $95.3 million for 2010, as compared to 2009.  Capital expenditures were $95.4 million in 2010 and $72.2 million in 2009.  Capital expenditures primarily consisted of new and replacement mine equipment and various projects to improve the production and efficiency of our mining operations. Additionally during 2010, our capital expenditures also included approximately $30.0 million for safety mandates and new mine and infrastructure development.

 
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Net cash used by financing activities was $1.3 million in 2010 and consisted primarily of debt issuance costs on the amendment to the Revolver. During 2009 net cash provided by financing activities was $149.1 million and consisted primarily of the receipt of $167.0 million of net proceeds from our Convertible Senior Notes and $18.0 million of payments on our revolving credit facility. 

Contractual Obligations

The following is a summary of our contractual obligations and commitments as of December 31, 2010:

   
Payment Due by Period (in thousands)
 
                               
Contractual Obligations
 
Total
   
2011
    2012-2013     2014-2015    
Thereafter
 
Long term debt (1)
  $ 322,500       -       150,000       172,500       -  
Cash interest on long term debt and fees under our Revolver for letters of credit (2)
    63,129       24,587       23,017       15,525       -  
Operating lease obligations(3)
    12,730       7,393       4,609       728       -  
Royalty obligations(4)
    214,949       25,042       47,020       42,236       100,651  
Purchase obligations(5)
    -       -       -       -       -  
    $ 613,308       57,022       224,646       230,989       100,651  

 
(1)
Consists of our Senior Notes and our Convertible Senior Notes as of December 31, 2010.

 
(2)
Consists of interest payments on our Senior Notes and Convertible Senior Notes.  Also includes a charge associated with outstanding letters of credit fees under the Revolver through the Revolver’s maturity (assumes the full amount of the Revolver capacity is used for letters of credit).  No replacement facilities are shown to replace the Senior Notes, Convertible Senior Notes or Revolver upon expiration of those facilities.

 
(3)
See Note 11 in the notes to the consolidated financial statements for additional information on leases.

 
(4)
Royalty obligations include minimum royalties payable on leased coal rights.  Certain coal leases do not have set expiration dates but extend until completion of mining of all merchantable and mineable coal reserves.  For purposes of this table, we have generally assumed that minimum royalties on such leases will be paid for a period of ten years.  Certain coal leases require payment based on minimum tonnage, for these contracts an average sales price of $90.00 per ton was used to project the future commitment. See Note 12 in the notes to the consolidated financial statements for additional information on royalty obligations.

 
(5)
Purchase obligations do not include agreements to purchase coal with vendors that do not include quantities or minimum tonnages, or monthly purchase orders.

Additionally, we have liabilities relating to pension, workers compensation, black lung, and mine reclamation and closure. As of December 31, 2010, the undiscounted payments related to these items are estimated to be:
 
Payments Due by Years (In Thousands)
Within 1 Year
  
2 - 3
Years
  
4 - 5
Years
$18,367
  
38,707
 
46,038
 
Our determination of these noncurrent liabilities is calculated annually and is based on several assumptions, including then prevailing conditions, which may change from year to year. In any year, if our assumptions are inaccurate, we could be required to expend greater amounts than anticipated. Moreover, in particular for periods after 2011, our estimates may change from the amounts included in the table, and may change significantly, if our assumptions change to reflect changing conditions. These assumptions are discussed in the Notes to the Consolidated Financial Statements and in the Critical Accounting Estimates in Management’s Discussion and Analysis.

 
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Off-Balance Sheet Arrangements

In the normal course of business, we are a party to certain off-balance sheet arrangements, including guarantees, operating leases, indemnifications, and financial instruments with off-balance sheet risk, such as bank letters of credit and performance or surety bonds.  Liabilities related to these arrangements are not reflected in our consolidated balance sheets, and, except for the operating leases, we do not expect any material impact on our cash flow, results of operations or financial condition from these off-balance sheet arrangements.

We use surety bonds to secure reclamation, workers’ compensation and other miscellaneous obligations. At December 31, 2010, we had $105.1 million of outstanding surety bonds with third parties. These bonds were in place to secure obligations as follows: post-mining reclamation bonds of $60.2 million, workers’ compensation bonds of $40.3 million, wage payment, collection bonds, and other miscellaneous obligation bonds of $4.6 million. Surety bond costs have increased over time and the market terms of surety bonds have generally become less favorable. To the extent that surety bonds become unavailable, we would seek to secure obligations with letters of credit, cash deposits, or other suitable forms of collateral.

We also use bank letters of credit to secure our obligations for post-mining reclamation, workers’ compensation programs, various insurance contracts and other obligations. As of December 31, 2010, we had $58.8 million of letters of credit outstanding.  The letters of credit are issued under our Revolver.

Critical Accounting Estimates

Overview

Our discussion and analysis of our financial condition, results of operations, liquidity and capital resources are based upon our consolidated financial statements, which have been prepared in accordance with U.S generally accepted accounting principles (US GAAP).  US GAAP require estimates and judgments that affect reported amounts for assets, liabilities, revenues and expenses.  The estimates and judgments we make in connection with our consolidated financial statements are based on historical experience and various other factors we believe are reasonable under the circumstances.  Note 1 of the notes to the consolidated financial statements lists and describes our significant accounting policies.  The following critical accounting policies have a material effect on amounts reported in our consolidated financial statements.

Workers' Compensation

We are liable under various state statutes for providing workers’ compensation benefits.  Except as indicated, we are self insured for workers’ compensation at our Kentucky operations, with specific excess insurance purchased from independent insurance carriers to cover individual traumatic claims in excess of the self-insured limits.  For the period June 2002 to June 2005, workers compensation coverage was insured through a third party insurance company using a large risk rating plan.  Our operations in Indiana are insured through a third party insurance company using a large risk rating plan.

We accrue for the present value of certain workers’ compensation obligations as calculated annually by an independent actuary based upon assumptions for work-related injury and illness rates, discount rates and future trends for medical care costs.  The discount rate is based on interest rates on bonds with maturities similar to the estimated future cash flows.  The discount rate used to calculate the present value of these future obligations was 4.5% at December 31, 2010.  Significant changes to interest rates result in substantial volatility to our consolidated financial statements. If we were to decrease our estimate of the discount rate from 4.5% to 4.0%, all other things being equal, the present value of our workers’ compensation obligation would increase by approximately $2.2 million. A change in the law, through either legislation or judicial action, could cause these assumptions to change. If the estimates do not materialize as anticipated, our actual costs and cash expenditures could differ materially from that currently estimated. Our estimated workers’ compensation liability as of December 31, 2010 was $64.9 million.

 
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Coal Miners' Pneumoconiosis

We are required under the Federal Mine Safety and Health Act of 1977, as amended, as well as various state statutes, to provide pneumoconiosis (black lung) benefits to eligible current and former employees and their dependents. We provide for federal and state black lung claims through a self-insurance program for our Central Appalachia operations.   For the period between June 2002 and June 2005, all black lung liabilities were insured through a third party insurance company using a large risk rating plan.  Our operations in Indiana are insured through a third party insurance company using a large risk rating plan.

An independent actuary calculates the estimated pneumoconiosis liability annually based on assumptions regarding disability incidence, medical costs, mortality, death benefits, dependents and interest rates. The discount rate is based on interest rates on high quality corporate bonds with maturities similar to the estimated future cash flows. The discount rate used to calculate the present value of these future obligations was 5.4% at December 31, 2010. Significant changes to interest rates result in substantial volatility to our consolidated financial statements. If we were to decrease our estimate of the discount rate by 0.5% to 4.9%, all other things being equal, the present value of our black lung obligation would increase by approximately $3.3 million. A change in the law, through either legislation or judicial action, could cause these assumptions to change. If these estimates prove inaccurate, the actual costs and cash expenditures could vary materially from the amount currently estimated. Our estimated pneumoconiosis liability as of December 31, 2010 was $45.7 million.

In March 2010, The Patient Protection and Affordable Care Act of 2010 (Act) was enacted into law and included a black-lung provision that creates a rebuttable presumption that a miner with at least 15 years of service, with totally disabling pulmonary or respiratory lung impairment and negative radiographic chest x-ray evidence would be disabled due to pneumoconiosis and be eligible for black lung benefits.  The new Act also makes it easier for widows of miners to become eligible for benefits.  In 2010, we estimated the impact of these changes on a limited population of current and potential future claimants, resulting in an estimated $9.8 million increase to the black lung obligation. This estimated increase in the black lung obligation was recorded along with an increase in the actuarial loss included in “Accumulated other comprehensive loss” on our balance sheet.   As of December 31, 2010, we are not able to estimate the impact of this legislation on the obligations related to future claims from older terminated miners and possible re-filed claims, due to significant uncertainty around the number of claims that will be filed and the effect the new award criteria will have on these claim populations.  We will continue to assess the impact of this legislation on our initial estimate as additional information becomes available and future regulations are issued.

Defined Benefit Pension

We have in place a non-contributory defined benefit pension plan under which all benefits were frozen in 2007.  The estimated cost and benefits of our non-contributory defined benefit pension plans are determined annually by independent actuaries, who, with our review and approval, use various actuarial assumptions, including discount rate and expected long-term rate of return on pension plan assets. In estimating the discount rate, we look to rates of return on high-quality, fixed-income investments with comparable maturities. At December 31, 2010, the discount rate used to determine the obligation was 5.4%. Significant changes to interest rates result in substantial volatility to our consolidated financial statements. If we were to decrease our estimate of the discount rate from 5.4% to 4.9%, all other things being equal, the present value of our projected benefit obligation would increase by approximately $4.8 million.  The expected long-term rate of return on pension plan assets is based on long-term historical return information and future estimates of long-term investment returns for the target asset allocation of investments that comprise plan assets. The expected long-term rate of return on plan assets used to determine expense was 7.5% for the period ended December 31, 2010. Significant changes to these rates would introduce volatility to our pension expense.  Our accrued pension obligation as of December 31, 2010 was $12.0 million.


 
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Reclamation and Mine Closure Obligation

The Surface Mining Control Reclamation Act of 1977 establishes operational, reclamation and closure standards for all aspects of surface mining as well as many aspects of underground mining. Our asset retirement obligation liabilities consist of spending estimates related to reclaiming surface land and support facilities at both surface and underground mines in accordance with federal and state reclamation laws. Our total reclamation and mine-closing liabilities are based upon permit requirements and our engineering estimates related to these requirements. US GAAP requires that asset retirement obligations be initially recorded as a liability based on fair value, which is calculated as the present value of the estimated future cash flows. Our management and engineers periodically review the estimate of ultimate reclamation liability and the expected period in which reclamation work will be performed. In estimating future cash flows, we considered the estimated current cost of reclamation and applied inflation rates and a third party profit. The third party profit is an estimate of the approximate markup that would be charged by contractors for work performed on our behalf. The discount rate is our estimate of our credit adjusted risk free rate. The estimated liability can change significantly if actual costs vary from assumptions or if governmental regulations change significantly. The actual costs could be different due to several reasons, including the possibility that our estimates could be incorrect, in which case our liabilities would differ. If we perform the reclamation work using our personnel rather than hiring a third party, as assumed under US GAAP, then the costs should be lower. If governmental regulations change, then the costs of reclamation will be impacted. US GAAP recognizes that the recorded liability could be different than the final cost of the reclamation and addresses the settlement of the liability. When the obligation is settled, and there is a difference between the recorded liability and the amount paid to settle the obligation, a gain or loss upon settlement is included in earnings. Our asset retirement obligation as of December 31, 2010 was $48.4 million.

Contingencies
 
We are the subject of, or a party to, various suits and pending or threatened litigation involving governmental agencies or private interests. We have accrued the probable and reasonably estimable costs for the resolution of these claims based upon management’s best estimate of potential results, assuming a combination of litigation and settlement strategies. Management does not believe that the outcome or timing of current legal or environmental matters will have a material impact on our financial condition, results of operations, or cash flows.  See the notes to the consolidated financial statements for further discussion on our contingencies.

Income Taxes
 
Deferred tax assets and liabilities are required to be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Deferred tax assets are also required to be reduced by a valuation allowance if it is more likely than not that some portion of the deferred tax asset will not be realized. In evaluating the need for a valuation allowance, we take into account various factors, including the expected level of future taxable income. We have also considered tax planning strategies in determining the deferred tax asset that will ultimately be realized. If actual results differ from the assumptions made in the evaluation of the amount of our valuation allowance, we record a change in valuation allowance through income tax expense in the period such determination is made.

We have no valuation allowance against our gross deferred tax assets as of December 31, 2010.  In connection with the completion of our forecasts of future taxable income in the fourth quarter of 2010 and considering other relevant factors, including a history of recent positive operating results, we concluded that  our deferred tax assets that were previously being reduced by a valuation allowance is more likely than not to ultimately be realizable.  As a result, the 2010 income taxes include a $33.2 million income tax benefit related to the reversal of the income tax valuation allowance.   This $33.2 million income tax benefit consists of the year end reversal of $22.1 million of the valuation allowance in connection with the conclusion that the deferred tax assets will be more likely than not to be realized and the reversal of $11.1 million of the valuation during the year in connection with the utilization of net operating losses.

Coal Reserves

There are numerous uncertainties inherent in estimating quantities and values of economically recoverable coal reserves. Many of these uncertainties are beyond our control. As a result, estimates of economically recoverable coal reserves are by their nature uncertain. Information about our reserves consists of estimates based on engineering, economic and geological data initially assembled by our staff and analyzed by Marshall Miller & Associates, Inc. (MM&A). The reserve information has subsequently been updated by our staff. The updates to the reserves have been calculated in the same manner, and based on similar assumptions and qualifications, as used in the MM&A studies described above, but these updates to the reserve estimates have not been reviewed by MM&A.  A number of sources of information were used to determine accurate recoverable reserves estimates, including:

 
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·
all currently available data;

 
·
our own operational experience and that of our consultants;

 
·
historical production from similar areas with similar conditions;

 
·
previously completed geological and reserve studies;

 
·
the assumed effects of regulations and taxes by governmental agencies; and

 
·
assumptions governing future prices and future operating costs.

Reserve estimates will change from time to time to reflect, among other factors:

·      mining activities;

·      new engineering and geological data;

·      acquisition or divestiture of reserve holdings; and

·      modification of mining plans or mining methods.

Each of these factors may in fact vary considerably from the assumptions used in estimating reserves. For these reasons, estimates of the economically recoverable quantities of coal attributable to a particular group of properties, and classifications of these reserves based on risk of recovery and estimates of future net cash flows, may vary substantially. Actual production, revenue and expenditures with respect to reserves will likely vary from estimates, and these variances could be material. In particular, a variance in reserve estimates could have a material adverse impact on our annual expense for depreciation, depletion and amortization and on our annual calculation for potential impairment. For a further discussion of our coal reserves, see “Reserves.”

Evaluation of Goodwill and Long-Lived Assets for Impairment

Goodwill is not amortized, but is subject to periodic assessments of impairment.  Impairment testing is performed at the reporting unit level. We test goodwill for impairment annually during the fourth quarter, or when changes in circumstances indicate that the carrying value may not be recoverable.  Long-lived asset groups are tested for recoverability when changes in circumstances indicate the carrying value may not be recoverable.  Events that trigger a test for recoverability include material adverse changes in projected revenues and expenses, significant underperformance relative to historical or projected future operating results and significant negative industry or economic trends.

The estimates used to determine whether impairment has occurred to goodwill and long-lived assets are subject to a number of management assumptions.  We estimate the fair value of a reporting unit or asset group based on market prices (i.e., the amount for which the asset could be bought by or sold to a third party), when available.  When market prices are not available, we estimate the fair value of the reporting unit or asset group using the income approach and/or the market approach, which are subject to a number of management assumptions.  The income approach uses cash flow projections.  Inherent in our development of cash flow projections are assumptions and estimates derived from a review of our operating results, approved operating budgets, expected growth rates and cost of capital.  We also make certain assumptions about future economic conditions, interest rates, and other market data.  Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates can change in future periods.

 
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Changes in assumptions or estimates could materially affect the determination of fair value of an asset group, and therefore could affect the amount of potential impairment of the asset.  The following assumptions are key to our income approach:

 
·
We make assumptions about coal production, sales price for unpriced coal, cost to mine the coal and estimated residual value of property, plant and equipment.  These assumptions are key inputs for developing our cash flow projections.  These projections are derived using our internal operating budget and are developed on a mine by mine basis.  These projections are updated annually and reviewed by the Board of Directors.  Historically, the Company’s primary variances between its projections and actual results have been with regard to assumptions for future coal production, sales prices of coal and costs to mine the coal.  These factors are based on our best knowledge at the time we prepare our budgets but can vary significantly due to regulatory issues, unforeseen mining conditions, change in commodity prices, availability and costs of labor and changes in supply and demand.  While we make our best estimates at the time we prepare our budgets it is reasonably likely that these estimates will change in future budgets, due to the changing nature of the coal environment;
 
·
Economic Projections – Assumptions regarding general economic conditions are included in and affect the assumptions used in our impairment tests.  These assumptions include, but are not limited to, supply and demand for coal, inflation, interest rates, and prices of raw materials (commodities); and
 
·
Discount Rate – When measuring a possible impairment, future cash flows are discounted at a rate that we believe represents our cost of capital.

Recent Accounting Pronouncements
 
In 2010, there were no accounting pronouncements that became effective that had a significant impact on our financial statements.

Other Supplemental Information

Reconciliation of Non-GAAP Measures

EBITDA is a measure used by management to measure operating performance.  We define EBITDA as net income or loss plus interest expense (net), income tax expense (benefit) and depreciation, depletion and amortization (EBITDA), to better measure our operating performance.  We regularly use EBITDA to evaluate our performance as compared to other companies in our industry that have different financing and capital structures and/or tax rates.  In addition, we use EBITDA in evaluating acquisition targets.

Adjusted EBITDA and the leverage ratio are the amounts used in our current debt covenants.  Adjusted EBITDA is defined as EBITDA further adjusted for certain cash and non-cash charges and the leverage ratio limits are debt to a multiple of adjusted EBITDA.  The leverage ratio is calculated as the Company’s Senior Funded Indebtedness divided by annualized Adjusted EBITDA.  Adjusted EBITDA is calculated below.  The Senior Funded Indebtedness includes the amounts outstanding under our Revolver and the amount of letters of credits issued under our Revolver.  As of December 31, 2010, we had $58.8 million of Senior Funded Indebtedness outstanding.  Adjusted EBITDA and the leverage ratio are used to determine compliance with financial covenants and our ability to engage in certain activities such as incurring additional debt and making certain payments.

EBITDA, Adjusted EBITDA, and the leverage ratio are not recognized terms under US GAAP and are not an alternative to net income, operating income or any other performance measures derived in accordance with US GAAP or an alternative to cash flow from operating activities as a measure of operating liquidity.  Because not all companies use identical calculations, this presentation of EBITDA, Adjusted EBITDA and the leverage ratio may not be comparable to other similarly titled measures of other companies.  Additionally, EBITDA or Adjusted EBITDA are not intended to be a measure of free cash flow for management’s discretionary use, as they do not reflect certain cash requirements such as tax payments, interest payments and other contractual obligations.


 
52

 

EBITDA and Adjusted EBITDA are calculated as follows:
 
   
Year Ended
 
   
December 31
   
December 31
 
   
2010
   
2009
 
             
Net income
  $ 78,165       50,954  
Income tax expense (benefit)
    (23,566 )     1,559  
Interest expense
    29,943       17,057  
Interest income
    (683 )     (60 )
Depreciation, depletion, and amortization
    64,368       62,078  
EBITDA (before adjustments)
    148,227       131,588  
Other adjustments specified in our debt agreement
    8,401       14,511  
Adjusted EBITDA
  $ 156,628       146,099  

Item 7a.      Quantitative and Qualitative Disclosures about Market Risk

Our $150 million Senior Notes and $172.5 million Convertible Senior Notes have a fixed interest rate and are not sensitive to changes in the general level of interest rates.  Our Revolver has floating interest rates based on our option of either the base rate or LIBOR rate.  As of December 31, 2010, we had no borrowings outstanding under the Revolver.  We currently do not use interest rate swaps to manage this risk.  A 100 basis point (1.0%) increase in the average interest rate for our floating rate borrowings would increase our annual interest expense by approximately $0.1 million for each $10 million of borrowings under the Revolver.

We manage our commodity price risk through the use of long-term coal supply agreements, which we define as contracts with a term of one year or more, rather than through the use of derivative instruments.  The percentage of our sales pursuant to long-term contracts was approximately 88% for the year ended December 31, 2010.

All of our transactions are denominated in U.S. dollars, and, as a result, we do not have material exposure to currency exchange-rate risks.

We are not engaged in any foreign currency exchange rate or commodity price-hedging transactions and we have no trading market risk.

Item 8.     Financial Statements and Supplementary Data
 
See Financial Statements beginning on page F-1.
 
Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
 
None.

 
53

 


Item 9A.     Controls and Procedures
 
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Accounting Officer (“CAO”) (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CAO concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CAO, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting

Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of consolidated financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.  There has been no change in the Company’s internal control over financial reporting during the year ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
The Company’s management, including the Company’s CEO and CAO, does not expect that the Company’s disclosure controls and procedures or the Company’s internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of the controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2010.

 
54

 


Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
James River Coal Company:
 
We have audited James River Coal Company and subsidiaries’ (the Company’s) internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, James River Coal Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of James River Coal Company and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2010, and our report dated March 9, 2011 expressed an unqualified opinion on those consolidated financial statements.
 
/s/ KPMG LLP
 
Richmond, VA
 
March 9, 2011
 

 
55

 


Item 9B.     Other Information

On July 21, 2010, the Dodd-Frank Act was enacted.  Section 1503 of the Dodd-Frank Act contains new reporting requirements regarding coal or other mine safety. The following is provided per the Dodd-Frank Act reporting requirements.

The operation of our mines is subject to regulation by the federal Mine Safety and Health Administration (MSHA) under the Federal Mine Safety and Health Act of 1977 (the Mine Act). MSHA inspects our mines on a regular basis and issues various citations and orders when it believes a violation has occurred under the Mine Act. The table below presents information regarding certain mining safety and health citations which MSHA has issued with respect to our coal mining operations. In evaluating this information, consideration should be given to factors such as: (i) the number of citations and orders will vary depending on the size of the coal mine, (ii) the number of citations issued will vary from inspector to inspector and mine to mine, and (iii) citations and orders can be contested and appealed, and in that process, may be reduced in severity and amount, and are sometimes dismissed.

The information below includes references to specific sections of the Mine Act.   The information provided is for the three months ended December 31, 2010, except for pending legal actions, which are as of December 31, 2010:

(1)
For each coal or other mine, of which the issuer or a subsidiary of the issuer is an operator (number of occurrences, except for proposed assessment dollar values)
 
 
 
 
 
 
 
 

 
56

 

Table I - Mine Safety Information (Columns A to G show the 12 and 3 months ended December 31, 2010 totals, respectively)
 
                 
Mine
 Section
104A S&S
 Citations
(A)
 Section
104(b)
 Orders
(B)
 Section
 104(d)
 Citations
 and Orders
 (C)
 Section
110(b)(2)
 Violations 
 (D)
 Section 107(a)
Orders
(E)
 Proposed MSHA
 Assessments 
 (F)
 Fatalities
(G)
 Pending Legal
 Actions
(H)
Bell County Coal Corporation
               
Jellico
 76/8
 1/-
 1/-
 -/-
 -/-
 $54,615/31,688
 -/-
 10
Garmeada  #2
 26/7
 -/-
 -/-
 -/-
 -/-
 11,153/3,350
 -/-
 6
Coal Creek
 6/1
 -/-
 -/-
 -/-
 -/-
 733/733
 -/-
 3
Cabin Hollow
 -/-
 -/-
 -/-
 -/-
 -/-
 1,657/-
 -/-
 2
Mosley Spur
 -/-
 -/-
 -/-
 -/-
 -/-
 -/-
 -/-
 3
Bell Preparation Plant
 3/-
 -/-
 -/-
 -/-
 -/-
 1,176/1,176
 -/-
 -
Bledsoe Coal Corporation
               
Beechfork Mine
 119/36
 1/-
 4/1
 -/-
 1/1
 248,896/ 57,651
 -/-
 7
Oldhouse Branch
 31/15
 -/-
 -/-
 -/-
 -/-
 16,901/ 3,500
 -/-
 3
Abner Branch Rider
 90/28
 -/-
 13/-
 -/-
 -/-
 577,533/ 283,992
 1/-
 8
Tantrough
 49/7
 -/-
 1/-
 -/-
 -/-
 37,274/ 9,997
 -/-
 5
#4
 -
 -/-
 -/-
 -/-
 -/-
 -
 -/-
 4
Marion Branch
 -
 -/-
 -/-
 -/-
 -/-
 -
 -/-
 1
#61 Plant
 1/-
 -/-
 -/-
 -/-
 -/-
 852/ -
 -/-
 1
#1 Plant
 7/-
 -/-
 -/-
 -/-
 -/-
 5,210/ 392
 -/-
 -
Clover Loadout
 1/-
 -/-
 -/-
 -/-
 -/-
 852/ 352
 -/-
 -
Blue Diamond Coal Company
               
#74
 -/-
 -/-
 -/-
 -/-
 -/-
 -/-
 -/-
 1
#75
 102/25
 -/-
 3/1
 -/-
 -/-
 460,711/ 116,082
 -/-
 8
#77
 71/14
 -/-
 5/-
 -/-
 -/-
 895,482/ 85,279
 -/-
 23
Calvary No. 81
 107/26
 1/-
 7/-
 -/-
 -/-
 727.892/ 225,068
 -/-
 14
76 Plant
 11/-
 -/-
 -/-
 -/-
 -/-
 9,370/ 1,300
 -/-
 2
James River Coal Service Company
               
Buckeye Strip #1
 2/2
 -/-
 -/-
 -/-
 -/-
 6,399/ 5473
 -/-
 -
Buckeye Highwall Miner
 3/3
 -/-
 -/-
 -/-
 -/-
 1,667/ 1367
 -/-
 -
Bear Branch Surface
 -/-
 -/-
 1/-
 -/-
 -/-
 9,900/ -
 -/-
 1
Lick Branch Strip
 1/-
 -/-
 -/-
 -/-
 -/-
 508/  -
 -/-
 1
Montgomery Creek 
 1/-
 -/-
 -/-
 -/-
 -/-
 962/ -
 -/-
 -
Harmonds Branch
 5/4
 -/-
 -/-
 -/-
 -/-
 3,810/ 2,384
 -/-
 -
Leeco Inc.
               
# 68
 241/63
 2/2
 20/6
 -/-
 -/-
 928,479/ 349,457
 1/ -
 22
# 64 Plant
 10/2
 1/1
 -/-
 -/-
 1/1
 4,496 / 1,056
 -/-
 -
Jeff Tipple
 1/1
 -/-
 -/-
 -/-
 -/-
 563 / 563
 -/-
 -
Mccoy Elkhorn Coal Corp.
               
Mine #12
 -/-
 -/-
 -/-
 -/-
 -/-
 -/-
 -/-
 1
Mine # 15
 76/20
 -/-
 3/3
 -/-
 -/-
 97,358/ 8,963
 -/-
 21
Mine # 15A
 5/5
 -/-
 2/2
 -/-
 -/-
 13,117/ 13,117
 -/-
 -
Mine # 16
 39/9
 -/-
 4/4
 -/-
 -/-
 105,538/ 59,562
 -/-
 11
Mine # 23
 35/13
 -/-
 1/-
 -/-
 -/-
 18,246/ 17,363
 -/-
 11
Bevins Branch Preparation Plant
 14/2
 -/-
 -/-
 -/-
 -/-
 8,240 / 552
 -/-
 2
Burke Preparation Plant
 8/-
 -/-
 -/-
 -/-
 -/-
 1,832 / -
 -/-
 -
Shamrock Coal Company
               
Beech Fork Coal Prep Facility
 14/-
 -/-
 -/-
 -/-
 -/-
 26,897/ 12,290
 -/-
 3
Shamrock
 49/-
 -/-
 3/-
 -/-
 -/-
 259,483/ -
 -/-
 7
Triad Underground Mining LLC
               
Freelandville Underground
 18/3
 -/-
 -/-
 -/-
 -/-
 38,551/ 5,157
 1/ -
 6
Triad Mining Inc.
               
Log Creek Surface
 -/-
 -/-
 -/-
 -/-
 -/-
 -/-
 -/-
 1
Freelandville Mine
 2/1
 -/-
 -/-
 -/-
 -/-
4,673/3,143
 -/-
 1
Patoka River Preparation Plant
 2/1
 -/-
 -/-
 -/-
 -/-
725/325
 -/-
-


 
57

 


 
(A)
The total number of violations of mandatory health or safety standards that could significantly and substantially contribute to the cause and effect of a coal or other mine safety or health hazard under section 104 of the Mine Act for which the operator received a citation from the Mine Safety and Health Administration.
 
(B)
The total number of orders issued under section 104(b) of the Mine Act.
 
(C)
The total number of citations and orders for unwarrantable failure of the mine operator to comply with mandatory health or safety standards under section 104(d) of the Mine Act.
 
(D)
The total number of flagrant violations under section 110(b)(2) of the Mine Act.
 
(E)
The total number of imminent danger orders issued under section 107(a) of the Mine Act.
 
(F)
The total dollar value of proposed assessments from the MSHA under the Mine Act.
 
(G)
The total number of mining-related fatalities.
 
(H)
The total number of pending legal actions before the Federal Mine Safety and Health Review Commission.  Each legal action is assigned a docket number and may have as its subject matter one or more citations, orders, penalties or complaints.

 
(2)
A list of such coal or other mine, of which the issuer or a subsidiary of the issuer is an operator, that received written notice from the MSHA of — (A) a pattern of violations of mandatory health or safety standards that are of such nature as could have significantly and substantially contributed to the cause and effect of coal or other mine health and safety hazards under section 104(e) of such Act (30 U.S.C. 814 (e)); or (B) the potential to have such a pattern.

Bledsoe Coal Corporation, a subsidiary of James River Coal Company, received written notification that a potential pattern of violation exists at its Abner Branch Rider Mine.  The notification was based on a screening of compliance records for the 12 months ended August 31, 2010 and of accident and employment records for the 12 months ending June 30, 2010.  

Upon receipt of such a notification, we conduct a comprehensive review of the operation that received the notification and prepare and submit to MSHA a plan designed to enhance employee safety at the mine through better education, training, and safety management.  Following implementation of the plan, MSHA will conduct a complete inspection of the mine and further evaluate the situation and then advise the operator whether a pattern of violation exists and whether further action will be taken.  The failure to remediate the situation resulting in a finding that a pattern of violation does exist at a mine could have a significant impact on the operations of that mine.

 
(3)
Any pending legal action before the Federal Mine Safety and Health Review Commission involving such coal or other mine.

See footnote (H) in the table above.

 
58

 

PART III

Item 10.     Director, Executive Officers and Corporate Governance of the Registrant
 
The information contained under the headings “Election of Directors”, “Section 16(a) Beneficial Ownership Reporting Compliance” "Board Matters" and "Management" in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company’s 2011 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference.
 
Item 11.     Executive Compensation
 
The information contained under the headings “Compensation Committee Report,” “Executive Compensation,” “Equity Compensation Plans,” and “Compensation Committee Interlocks and Insider Participation” in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company’s 2011 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference.
 
Item 12.     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The information contained under the headings “Principal Shareholders and Securities Ownership of Management,” and “Equity Compensation Plans” in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company’s 2011 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference.
 
Item 13.     Certain Relationships and Related Transactions
 
The information contained under the heading “Compensation Committee Interlocks and Insider Participation” in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company’s 2011 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference.
 
Item 14.     Principal Accountant Fees and Services
 
The information contained under the heading “Independent Registered Public Accountants” in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company’s 2011 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference.
 


 
59

 

PART IV
 
Item 15. Exhibits, Financial Statement Schedules

 
(a)
The following documents are filed as part of this Report:
 
1. 
Financial Statements

The following financial statements and related report of Independent Registered Public Accounting Firm are incorporated in Item 8 of this report:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2010 and 2009

Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008

Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Loss) for the years ended December 31, 2010, 2009 and 2008

Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
 
Notes to Consolidated Financial Statements
 
2. 
Financial Statement Schedules
 
None.
 
3. 
Exhibits
 
The following exhibits are required to be filed with this Report by Item 601 of Regulation S-K:

Exhibit
Number
Description
   
   
2.1
Second Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code of the Registrant and its Subsidiaries, dated as of April 20, 2004, incorporated herein by reference to Exhibit 2 to the Registrant’s Registration Statement on Form S-1 filed August 13, 2004
   
2.2
Stock Purchase Agreement by and among James River Coal Company, Triad Mining, Inc. and the Stockholders of Triad Mining, Inc. dated as of March 30, 2005, incorporated herein by reference to Exhibit 2.2 to the Registrant’s Registration Statement on Form S-1 filed April 19, 2005
   
2.3
Purchase Agreement, dated as of March 6, 2011, by and between Lightfoot Capital Partners, LP, International Industries, Inc., International Resource Partners GP LLC, Kayne Anderson Energy Development Company and Tortoise Capital Resources Corporation and the Company and International Resource Partners GP LLC, as Agent, incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K, dated March 7, 2011
   
3.1
Amended and Restated Articles of Incorporation of the Registrant, as Amended, incorporated herein by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1 filed August 13, 2004
   
3.2
Amended and Restated Bylaws of the Registrant, incorporated herein by reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q filed August 9, 2007
   
4.1
Specimen common stock certificate, incorporated herein by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 filed August 13, 2004

 
60

 


   
4.2
Rights Agreement between the Registrant and SunTrust Bank as Rights Agent, dated as of May 25, 2004, incorporated herein by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S-1 filed August 13, 2004
   
4.3
Amendment No. 1 to Rights Agreement between the Registrant and Computershare Trust Company, N.A., successor to SunTrust Bank, as Rights Agent, dated as of November 3, 2006, incorporated herein by reference to Exhibit 4.2 to the Registrant’s Quarterly Report on Form 10-Q filed November 9, 2006
   
4.4
Amendment No. 2 to Rights Agreement between the Registrant and Computershare Trust Company, N.A., successor to SunTrust Bank, as Rights Agent, dated as of August 2, 2007, incorporated herein by reference to Exhibit 4.2 to the Registrant’s Quarterly Report on Form 10-Q filed August 9, 2007
   
4.5
Amendment No. 3 to Rights Agreement between Registrant and Computershare Trust Company, N.A., successor to SunTrust Bank, as Rights Agent, dated as of November 3, 2009, incorporated herein by reference to Exhibit 4.1 to the Registrant’s Amendment No. 1 to Form 8-K filed November 3, 2009
   
4.6
Form of rights certificate, incorporated herein by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form 8-A filed January 24, 2005
   
4.7
Indenture among the Registrant, certain of its subsidiaries and U.S. Bank, National Association, as Trustee, dated as of May 31, 2005, incorporated herein by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form S-1/A filed May 24, 2005
   
4.8
Form of Senior Debt Indenture, incorporated herein by reference to Exhibit 4.8 to the Registrant’s Registration Statement on Form S-3 filed June 7, 2007
   
4.9
Form of Subordinated Debt Indenture, incorporated herein by reference to Exhibit 4.10 to the Registrant’s Registration Statement on Form S-3 filed June 7, 2007
   
4.10
Indenture related to the 4.50% Convertible Senior Notes due 2015, dated as of November 20, 2009, between James River Coal Company and U.S. Bank National Association, as trustee (including the form of 4.50% Convertible Senior Notes due 2015), incorporated herein by reference to Exhibit 4.1 to the Registrant’s Form 8-K filed November 25, 2009
   
10.1
Registration Rights Agreement by and among the Registrant and the Shareholders identified therein, dated May 6, 2004, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1 filed August 13, 2004
   
10.2
Loan and Security Agreement by and among the Registrant and its Subsidiaries, the Lenders that are Signatories thereto, Wells Fargo Foothill, Inc. and Morgan Stanley Senior Funding, Inc., dated as of May 6, 2004, incorporated herein by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1 filed August 13, 2004
   
10.3
$75,000,000 Term Loan Agreement by and among the Registrant and its Subsidiaries, the Lenders from time to time party thereto and BNY Asset Solutions LLC, dated as of May 6, 2004, incorporated herein by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1 filed August 13, 2004
   
10.4*
Employment Agreement between the Registrant and Peter T. Socha, dated as of May 7, 2004, incorporated herein by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1 filed August 13, 2004
   
10.4a*
Amendment to Employment Agreement between the Registrant and Peter T. Socha, dated as of December 31, 2008

 
61

 


   
10.5*
2004 Equity Incentive Plan of the Registrant, incorporated herein by reference to Exhibit 10.5 to the Registrant’s Registration Statement on Form S-1 filed August 13, 2004
   
10.6
Form of Indemnification Agreement between the Registrant and its officers and directors, incorporated herein by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form S-1 filed August 13, 2004
   
10.7**
Agreement for Purchase and Sale of Coal among Georgia Power Company, the Registrant and James River Coal Sales, Inc., dated as of March 11, 2004, incorporated herein by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-1 filed August 13, 2004
   
10.8**
Agreement No. 2 for Purchase and Sale of Coal among Georgia Power Company, the Registrant and James River Coal Sales, Inc., dated as of May 15, 2008 
   
10.8a**
First Amendment to Agreement No. 2 for Purchase and Sale of Coal among Georgia Power Company, the Registrant and James River Coal Sales, Inc., dated as of July 21, 2008 
   
10.9**
Fuel Supply Agreement #141944 between South Carolina Public Service Authority and the Registrant, dated as of March 1, 2004, incorporated herein by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1 filed August 13, 2004
   
10.9a**
Amendment to Fuel Supply #141944 between South Carolina Public Service Authority, the Registrant and James River Coal Sales, Inc., dated April 7, 2009.
   
10.10
Credit Agreement between Registrant and PNC Bank, National Association and Morgan Stanley Senior Funding, Inc. dated as of May 31, 2005, incorporated herein by reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-Q filed November 14, 2005
   
10.11
Amendment No. 1 and Waiver to the Credit Agreement between the Registrant and PNC Bank, National Association and Morgan Stanley Senior Funding, Inc., dated as of February 22, 2006, incorporated herein by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K filed March 16, 2006
   
10.12
Amendment No. 2 and Waiver to the Credit Agreement between the Registrant and PNC Bank, National Association and Morgan Stanley Senior Funding, Inc., dated as of May 30, 2006, incorporated herein by reference to Exhibit 10.13 to the Registrant’s Quarterly Report on Form 10-Q filed August 9, 2006
   
10.13
Amendment No. 3 and Waiver to the Credit Agreement between the Registrant and PNC Bank, National Association and Morgan Stanley Senior Funding, Inc., dated as of November 7, 2006, incorporated herein by reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K filed March 16, 2007
   
10.14
Amendment No. 4 to the Credit Agreement between the Registrant and PNC Bank, National Association and Morgan Stanley Senior Funding, Inc., dated as of December 27, 2006, incorporated herein by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K filed March 16, 2007
   
10.15
Registration Rights Agreement between the Registrant and the Shareholders named therein, dated as of May 31, 2005, incorporated herein by reference to Exhibit 10.9 to the Registrant’s Annual report on Form 10-K filed March 16, 2006
   
10.16*
Severance and Retention Plan, effective as of March 13, 2006, incorporated herein by reference to Exhibit 10.12 to the Registrant’s Quarterly Report on Form 10-Q filed August 9, 2006
   
10.16a*
Amendment to Severance and Retention Plan dated as of December 31, 2008
   
10.17
$100,000,000 Term Credit Agreement by and among the Registrant, certain of its subsidiaries, the Lenders thereto, Morgan Stanley Senior Funding, Inc., as Administrative Agent, Sole Bookrunner and Lead Arranger, and Morgan Stanley & Co. Incorporated, as Collateral Agent, dated as of February 26, 2007, incorporated herein by reference to Exhibit 10.15 to the Registrant’s Annual Report on Form 10-K filed March 16, 2007
   
10.18
$35,000,000 Revolving Credit Agreement by and among the Registrant, certain of its subsidiaries, the Lenders thereto, and General Electric Capital Corporation, as Co-Lead Arranger, Administrative Agent and Collateral Agent, with Morgan Stanley Senior Funding, Inc., having acted as Co-Lead Arranger, dated as of February 26, 2007, incorporated herein by reference to Exhibit 10.16 to the Registrant’s Annual Report on Form 10-K filed March 16, 2007

 
62

 


   
10.19
Waiver, Consent and Second Amendment to Term Credit Agreement by and among the Registrant, certain of its subsidiaries, the Lenders thereto, Morgan Stanley Senior Funding, Inc., as Administrative Agent, Sole Bookrunner and Lead Arranger, and Morgan Stanley & Co. Incorporated, as Collateral Agent, dated as of August 7, 2007, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed August 8, 2007
   
10.19a
Fifth Amendment to Term Credit Agreement by and among the Registrant, certain of its subsidiaries, and the other credit parties thereto, as guarantors, the lenders party thereto, Morgan Stanley Senior Funding, Inc., as Administrative Agent and as Sole-Bookrunner and Lead Arranger, and Morgan Stanley & Co. Incorporated, as Collateral Agent, dated as of November 20, 2009, incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed November 25, 2009
   
10.20
Waiver, Consent and First Amendment to Revolving Credit Agreement by and among the Registrant, certain of its subsidiaries, the Lenders thereto, and General Electric Capital Corporation, as Co-Lead Arranger, Administrative Agent and Collateral Agent, with Morgan Stanley Senior Funding, Inc., having acted as Co-Lead Arranger, dated as of August 7, 2007, incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed August 8, 2007
   
10.21*
Annual Incentive Compensation Plan, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed August 9, 2007
   
10.21a*
Amendment to Annual Incentive Compensation Plan, dated December 31, 2008
   
10.22
Amended and Restated Revolving Credit Agreement by and among the Registrant, James River Coal Service Company, Leeco, Inc., Triad Mining, Inc., Triad Underground Mining, LLC, Bledsoe Coal Corporation,  Johns Creek Elkhorn Coal Corporation, Bell County Coal Corporation, James River Coal Sales, Inc., Bledsoe Coal Leasing Company, Blue Diamond Coal Company, and McCoy Elkhorn Coal Corporation, as Borrowers, the other Credit Parties thereto from time to time, as Guarantors, the Lenders party thereto from time to time, and General Electric Capital Corporation, as Administrative Agent  and Collateral Agent, GE Capital Markets, Inc., and UBS Securities LLC, as Joint Lead Arrangers and Joint Bookrunners, and UBS Securities LLC, as Documentation Agent, dated as of January 28, 2010, incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K, dated February 3, 2010
   
10.22a
Second Amendment to Amended and Restated Revolving Credit Agreement by and among the Registrant, certain of its subsidiaries, the Lenders thereto, and General Electric Capital Corporation as Administrative and  Collateral Agent  dated as of October 29, 2010, incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed November 3, 2010
   
10.22b
Consent and Third Amendment to Amended and Restated Revolving Credit Agreement, dated as of March 6, 2011, by and among the Company and certain of its Subsidiaries identified on the signature pages thereto, as Borrowers, and the other credit parties thereto, identified on the signature pages thereto as Guarantors, the Lenders party thereto, and General Electrical Capital Corporation, as Administrative Agent and as Collateral Agent, incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K, dated March 7, 2011
   
10.23
Senior Bridge Facility Commitment Letter, dated as of March 6, 2011, by and between the Company and Deutsche Bank AG Cayman Islands Branch, Deutsche Bank Securities Inc., UBS Loan Finance LLC and UBS Securities LLC, incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K, dated March 7, 2011
   
12.1
Computation of Ratio of Earnings to Fixed Charges
   
21
Subsidiaries of the Registrant, incorporated herein by reference to Exhibit 21 to the Registrant’s Annual Report on Form 10-K filed March 16, 2006
   
23.1
Consent of Marshall Miller & Associates, Inc. (filed herewith)
   
23.2
Consent of KPMG LLP (filed herewith)

 
63

 


   
24
Power of Attorney (see signature page)
   
31.1
Certification of Peter T. Socha, President and Chief Executive Officer of James River Coal Company, pursuant to rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
   
31.2
Certification of Samuel M. Hopkins, II, Vice President and Chief Accounting Officer of James River Coal Company, pursuant to rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
   
32.1
Certification of Peter T. Socha, President and Chief Executive Officer of James River Coal Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
   
32.2
Certification of Samuel M. Hopkins, II, Vice President and Chief Accounting Officer of James River Coal Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
 
   
*
Management contract or compensatory plan or arrangement.
**
Portions of these documents have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment of the omitted portions.


 
64

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Audited Financial Statements
Page
   
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets as of December 31, 2010 and 2009
F-3
Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008
F-5
Consolidated Statements of Changes in Shareholders Equity and Comprehensive Income (Loss) for the years ended December 31, 2010, 2009 and 2008
F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
F-7
Notes to Consolidated Financial Statements
F-8

 
 
 
 
 
 
 
 
 
 
 

 
F-1

 

 
Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders
James River Coal Company:
 
We have audited the accompanying consolidated balance sheets of James River Coal Company and subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of James River Coal Company and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), James River Coal Company’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 9, 2011expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
/s/ KPMG LLP
 
Richmond, VA
March 9, 2011
 


 

 
F-2

 

JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)

 
             
   
December 31, 2010
   
December 31, 2009
 
Assets
           
             
Current assets:
           
Cash and cash equivalents
  $ 180,376       107,931  
Trade receivables
    59,970       43,289  
Inventories:
               
Coal
    23,305       22,727  
Materials and supplies
    13,690       10,462  
Total inventories
    36,995       33,189  
Prepaid royalties
    6,039       6,045  
Other current assets
    5,991       3,552  
Total current assets
    289,371       194,006  
Property, plant, and equipment, at cost:
               
Land
    7,751       7,194  
Mineral rights
    231,681       231,919  
Buildings, machinery and equipment
    423,617       362,654  
Mine development costs
    48,301       41,069  
Total property, plant, and equipment
    711,350       642,836  
Less accumulated depreciation, depletion, and amortization
    325,698       288,748  
Property, plant and equipment, net
    385,652       354,088  
Goodwill
    26,492       26,492  
Restricted cash and short term investments (note 1)
    23,500       62,042  
Other assets
    59,554       32,684  
Total assets
  $ 784,569       669,312  
                 
                 
See accompanying notes to consolidated financial statements.
               
 
 
 
 
F-3

 
 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
 
   
December 31, 2010
   
December 31, 2009
 
Liabilities and Shareholders' Equity
           
             
Current liabilities:
           
Accounts payable
  $ 57,300       46,472  
Accrued salaries, wages, and employee benefits
    7,744       6,982  
Workers' compensation benefits
    9,000       8,950  
Black lung benefits
    2,282       1,782  
Accrued taxes
    4,924       4,383  
Other current liabilities (note 3)
    16,496       15,439  
Total current liabilities
    97,746       84,008  
Long-term debt, less current maturities
    284,022       278,268  
Other liabilities:
               
Noncurrent portion of workers' compensation benefits
    55,944       50,385  
Noncurrent portion of black lung benefits
    43,443       31,017  
Pension obligations
    11,968       14,827  
Asset retirement obligations
    43,398       39,843  
Other
    665       622  
Total other liabilities
    155,418       136,694  
Total liabilities
    537,186       498,970  
                 
Commitments and contingencies (note 12)
               
Shareholders' equity:
               
Preferred stock, $1.00 par value.  Authorized 10,000,000 shares
    -       -  
Common stock, $.01 par value. Authorized 100,000,000 shares; issued and outstanding 27,779,351 and 27,544,878 shares as of December 31, 2010 and 2009, respectively
    278       275  
Paid-in-capital
    324,705       320,079  
Accumulated deficit
    (58,593 )     (136,758 )
Accumulated other comprehensive loss
    (19,007 )     (13,254 )
Total shareholders' equity
    247,383       170,342  
                 
Total liabilities and shareholders' equity
  $ 784,569       669,312  
                 
See accompanying notes to consolidated financial statements.
 
 
 
 
F-4

 
 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share data)
 
   
December 31,
   
December 31,
   
December 31,
 
   
2010
   
2009
   
2008
 
                   
Revenues
  $ 701,116       681,558       568,507  
Cost of sales:
                       
Cost of coal sold
    514,515       508,888       527,888  
Depreciation, depletion, and amortization
    64,368       62,078       70,277  
Total cost of sales
    578,883       570,966       598,165  
Gross profit (loss)
    122,233       110,592       (29,658 )
Selling, general, and administrative expenses
    38,347       39,720       34,992  
Total operating income (loss)
    83,886       70,872       (64,650 )
Interest expense
    29,943       17,057       17,746  
Interest income
    (683 )     (60 )     (469 )
Charges associated with repayment and amendment of debt (note 4)
    -       1,643       15,618  
Miscellaneous expense (income), net
    27       (281 )     (1,279 )
Total other expenses, net
    29,287       18,359       31,616  
Income (loss) before income taxes
    54,599       52,513       (96,266 )
Income tax expense (benefit)
    (23,566 )     1,559       (273 )
Net income (loss)
  $ 78,165       50,954       (95,993 )
Income (loss) per common share (note 13)
                       
Basic income (loss) per common share
  $ 2.82       1.85       (3.91 )
                         
Diluted income (loss) per common share
  $ 2.82       1.85       (3.91 )
                         
See accompanying notes to consolidated financial statements.
                       
                         
 
 
F-5

 
 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’
Equity and Comprehensive Income (Loss)
in thousands)
 
 
 Predecessor Company
 
Common
 stock
 shares
   
Common
 stock par
 value
   
Paid-in-
capital
   
Retained
earnings
 (accumulated
 deficit)
   
Accumulated other comprehensive
 income (loss)
   
Total
 
                                     
Balances, December 31, 2007
    21,906     $ 219       159,403       (91,719 )     1,871       69,774  
Net loss
    -       -       -       (95,993 )     -       (95,993 )
Amortization of black lung liability
    -       -       -       -       (562 )     (562 )
Black lung obligation adjustment
    -       -       -       -       (5,334 )     (5,334 )
Pension liability adjustment
    -       -       -       -       (15,665 )     (15,665 )
Comprehensive loss
                                            (117,554 )
Issuance on common stock, net of offering costs of $421
    4,913       49       93,771       -       -       93,820  
Common stock issued for acquisition of mineral rights (note 2)
    388       4       15,996       -       -       16,000  
Issuance of restricted stock awards, net of forfeitures
    238       2       (2 )     -       -       -  
Repurchase of shares for tax withholding
    (72 )     -       (2,474 )     -       -       (2,474 )
Exercise of stock options
    20       -       542       -       -       542  
Stock based compensation
    -       -       5,130       -       -       5,130  
Balances, December 31, 2008
    27,393       274       272,366       (187,712 )     (19,690 )     65,238  
Net Income
    -       -       -       50,954       -       50,954  
Amortization of pension actuarial amount
    -       -       -       -       1,606       1,606  
Black lung obligation adjustment
    -       -       -       -       (574 )     (574 )
Pension liability adjustment
    -       -       -       -       5,404       5,404  
Comprehensive income
                                            57,390  
Equity component of convertible debt offering, net of offering costs of $1,433
                    43,385       -       -       43,385  
Issuance of restricted stock awards, net of forfeitures
    234       2       (2 )     -       -       -  
Repurchase of shares for tax withholding
    (87 )     (1 )     (1,712 )     -       -       (1,713 )
Exercise of stock options
    5       -       75       -       -       75  
Stock based compensation
    -       -       5,967       -       -       5,967  
Balances, December 31, 2009
    27,545       275       320,079       (136,758 )     (13,254 )     170,342  
Net Income
    -       -       -       78,165       -       78,165  
Amortization of pension actuarial amount
    -       -       -       -       783       783  
Amortization of black lung actuarial amount
                                    412       412  
Black lung obligation adjustment
    -       -       -       -       (10,320 )     (10,320 )
Pension liability adjustment
                                    (168 )     (168 )
Tax impact of adjustments to accumulated other comprehensive loss
    -       -       -       -       3,540       3,540  
Comprehensive income
                                            72,412  
Issuance of restricted stock awards, net of forfeitures
    284       3       (3 )     -       -       -  
Repurchase of shares for tax withholding
    (55 )     -       (844 )     -       -       (844 )
Exercise of stock options
    5       -       73       -       -       73  
Stock based compensation
    -       -       5,400       -       -       5,400  
Balances, December 31, 2010
    27,779     $ 278       324,705       (58,593 )     (19,007 )     247,383  
                                                 
See accompanying notes to consolidated financial statements.
                           
 
 
 
F-6

 
 
 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
 
 
   
Year
   
Year
   
Year
 
   
Ended
   
Ended
   
Ended
 
   
December 31,
   
December 31,
   
December 31,
 
   
2010
   
2009
   
2008
 
Cash flows from operating activities:
                 
Net income (loss)
  $ 78,165       50,954       (95,993 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities
                       
Depreciation, depletion, and amortization of property, plant, and equipment
    64,368       62,078       70,277  
Accretion of asset retirement obligations
    3,334       3,212       2,768  
Amortization of debt discount and issue costs
    8,066       1,813       1,411  
Stock-based compensation
    5,400       5,967       5,130  
Deferred income tax benefit
    (22,236 )     180       4  
Loss (gain) on sale or disposal of property, plant, and equipment
    307       (61 )     (163 )
Write-off of deferred financing costs
    -       -       2,383  
Changes in operating assets and liabilities:
                       
Receivables
    (16,681 )     (9,988 )     7,745  
Inventories
    (3,680 )     (15,025 )     (2,236 )
Prepaid royalties and other current assets
    (2,433 )     (1,440 )     100  
Restricted cash and short term investments
    38,542       (56,820 )     (5,222 )
Other assets
    (2,060 )     (4,233 )     (4,403 )
Accounts payable
    10,828       (10,596 )     9,762  
Accrued salaries, wages, and employee benefits
    762       340       632  
Accrued taxes
    (303 )     (1,787 )     (2,251 )
Other current liabilities
    1,066       (3,626 )     8,702  
Workers' compensation benefits
    5,609       3,558       2,185  
Black lung benefits
    3,018       1,657       538  
Pension obligations
    (2,244 )     2,144       (1,395 )
Asset retirement obligations
    (809 )     (861 )     (1,082 )
Other liabilities
    43       93       (468 )
Net cash provided by (used in) operating activities
    169,062       27,559       (1,576 )
Cash flows from investing activities:
                       
Additions to property, plant, and equipment
    (95,426 )     (72,159 )     (74,697 )
Proceeds from sale of property, plant and equipment
    82       149       1,108  
Net cash used in investing activities
    (95,344 )     (72,010 )     (73,589 )
Cash flows from financing activities:
                       
Proceeds from issuance of long-term debt
    -       172,500       -  
Repayment of long-term debt
    -       -       (38,800 )
Proceeds from Revolver
    -       12,500       26,500  
Repayments of Revolver
    -       (30,500 )     (8,500 )
Net proceeds from issuance of common stock
    -       -       93,820  
Debt issuance costs
    (1,346 )     (5,517 )     (486 )
Proceeds from exercise of stock options
    73       75       542  
Net cash provided by (used in) financing activities
    (1,273 )     149,058       73,076  
Increase (decrease) in cash and cash equivalents
    72,445       104,607       (2,089 )
Cash and cash equivalents at beginning of period
    107,931       3,324       5,413  
Cash and cash equivalents at end of period
  $ 180,376       107,931       3,324  
                         
                         
See accompanying notes to consolidated financial statements.
         
 
 
 
F-7

 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
(1)
Summary of Significant Accounting Policies and Other Information
 
Description of Business and Principles of Consolidation
 
James River Coal Company and its wholly owned subsidiaries (collectively the Company) mine, process and sell bituminous, steam- and industrial-grade coal through five operating complexes located throughout eastern Kentucky and one in southern Indiana. Substantially all coal sales and account receivables relate to the electric utility and industrial markets.
 
The consolidated financial statements include the accounts of James River Coal Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
 
Cash and Cash Equivalents and Restricted Cash and Short Term Investments
 
Cash and cash equivalents are stated at cost. Cash equivalents consist of highly-liquid investments with an original maturity of three months or less when purchased.
 
Restricted cash is stated at cost.  Restricted cash and short term investments consists of cash, cash equivalents and investments in bonds and certificate of deposits.  The Company intends to hold all investments held as restricted cash until maturity.
 
As of December 31, 2010, the Company had restricted cash and short term investments of $23.5 million that it maintained in collateral accounts.  The restricted cash and short term investments consisted of $15.0 million of cash to ensure that the Company has adequate capacity under the Revolver to support its outstanding letters of credit (Note 4) and $8.5 million of cash equivalents and short term investments to support the issuance of surety bonds.
  
As of December 31, 2009, the Company had restricted cash of approximately $62.0 million.  The restricted cash secured 105% of the letters of credit that were outstanding as of that date.
 
Trade Receivables
 
Trade receivables are recorded at the invoiced amount and do not bear interest. The Company evaluates the need for an allowance for doubtful accounts based on review of historical write off experience. The Company has determined that no allowance is necessary for trade receivables as of December 31, 2010 and 2009. The Company does not have any off-balance sheet credit exposure related to its customers.
 
Inventories
 
Inventories of coal and materials and supplies are stated at the lower of cost or market. Cost is determined using the average cost for coal inventories and the first-in, first-out method for materials and supplies. Coal inventory costs include labor, supplies, equipment cost, depletion, royalties, black lung tax, reclamation tax and preparation plant cost.
 
Asset Retirement Obligations
 
The Company’s asset retirement obligation liabilities primarily consist of spending estimates related to reclaiming surface land and support facilities at both surface and underground mines in accordance with federal and state reclamation laws. Asset retirement obligations are initially recorded as a liability based on fair value, which is calculated as the present value of the estimated future cash flows, in the period in which it is incurred. The estimate of ultimate reclamation liability and the expected period in which reclamation work will be performed is reviewed periodically by the Company’s management and engineers. In estimating future cash flows, the Company considers the estimated current cost of reclamation and applies inflation rates and a third party profit. The third party profit is an estimate of the approximate markup that would be charged by contractors for work performed on behalf of the Company. When the liability is initially recorded, the offset is capitalized by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Accretion expense is included in cost of produced coal. To the extent there is a difference between the liability recorded and the cost incurred, a gain or loss upon settlement is recognized.  The following table sets forth the changes in the Company’s asset retirement obligations at December 31, 2010 and 2009 (in thousands):
 
 
F-8

 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
 
   
2010
   
2009
 
Asset retirement obligations at beginning of year
  $ 44,843     $ 41,509  
Liabilities incurred
    1,166       1,246  
Liabilities disposed
    (154 )     (621 )
Revisions in estimated cash flows
    50       190  
Accretion expense
    3,334       3,212  
Liabilities settled
    (850 )     (693 )
Asset retirement obligations at end of year
    48,389       44,843  
Less amount included in other current liabilities
    (4,991 )     (5,000 )
Total non-current liability
  $ 43,398     $ 39,843  
 
 
Property, Plant, and Equipment
 
Expenditures for maintenance and repairs are charged to expense, and the costs of mining equipment rebuilds and betterments that extend the useful life are capitalized. Depreciation is provided principally using the straight-line method based upon estimated useful lives, generally ten to 20 years for buildings and one to seven years for machinery and equipment. Mine development costs are capitalized and amortized by the units of production method over estimated total recoverable proven and probable reserves. Amortization of mineral rights is provided by the units of production method over estimated total recoverable proven and probable reserves.
 
Impairment of Long-Lived Assets
 
Long-lived assets, such as property, plant, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.  Events that trigger a test for recoverability include material adverse changes in projected revenues and expenses, significant underperformance relative to historical or projected future operating results, and significant negative industry or economic trends.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset.  If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.  The Company did not recognize any impairment charges during the periods presented.
 
Goodwill
 
Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired.  Goodwill is not amortized but is tested for impairment annually, or if certain circumstances indicate a possible impairment may exist. Impairment testing is performed at a reporting unit level. An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds the fair value of the reporting unit, with the fair value of the reporting unit determined using a discounted cash flow analysis.
 
Prepaid Royalties
 
Mineral rights are often acquired in exchange for advance royalty payments. Royalty payments representing prepayments recoupable against future production are capitalized, and amounts expected to be recouped within one year are classified as a current asset. As mining occurs on these leases, the prepayment is offset against earned royalties and is included in the cost of coal sold. Amounts determined to be nonrecoupable are charged to expense.
 
 
F-9

 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
Other Assets
 
Other assets at December 31, 2010 and 2009 are as follows (in thousands):
 
   
2010
   
2009
 
Deferred tax asset, net
  $ 30,847     $ 5,071  
Prepaid royalties, net of current portion
    17,064       13,910  
Deferred financing costs
    5,842       6,808  
Other
    5,801       6,895  
    $ 59,554     $ 32,684  
 
Deferred financing costs are the costs to obtain new debt financing or amend existing financing agreements and are deferred and amortized to interest expense over the life of the related indebtedness or credit facility using either the effective interest method or the straight-line method if it approximates the effective interest method.
 
Revenue Recognition
 
Revenues include sales to customers of Company-produced coal and coal purchased from third parties. The Company recognizes revenue from the sale of Company-produced coal and coal purchased from third parties at the time delivery occurs and risk of loss passes to the customer, which is either upon shipment or upon customer receipt of coal based on contractual terms. Also, the sales price must be determinable and collection reasonably assured.
 
Income Taxes
 
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
 
The Company evaluates its deferred tax assets to determine the necessity of a valuation allowance.  A valuation allowance is required if it is more likely than not that some portion of the deferred tax asset will not be realized. In evaluating the need for a valuation allowance, the Company takes into account various factors, including the expected level of future taxable income. The Company also considers tax planning strategies in determining the deferred tax asset that will ultimately be realized.
 
Our effective income tax rate is impacted by the amount of the valuation allowance recorded and percentage depletion. Percentage depletion is an income tax deduction that is limited to a percentage of taxable income from each of our mining properties. Because percentage depletion can be deducted in excess of the cost bases of the properties, it creates a permanent difference and directly impacts the effective tax rate. Fluctuations in the effective tax rate may occur between fiscal periods due to the varying levels of profitability (and thus, taxable income and percentage depletion) at each of our mine locations.
 
The Company records interest and penalties, if any, associated with income taxes as a component of income tax expense.
 
Accumulated Other Comprehensive Income (Loss)
 
The accumulated other comprehensive income (loss) at December 31, 2010, includes a $12.2 million actuarial loss on the Company’s pension plan, a $10.3 million actuarial loss on its black lung obligation and a $3.5 million tax benefit associated with the items included in accumulated comprehensive income (loss).  The accumulated other comprehensive income (loss) at December 31, 2009, includes a $12.8 million actuarial loss on the Company’s pension plan and a $0.4 million actuarial loss on its black lung obligation.
 
 
 
F-10

 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
Workers’ Compensation
 
The Company is liable for workers’ compensation benefits for traumatic injuries under state workers’ compensation laws in which it has operations. Except as indicated, the Company is self insured for workers’ compensation for its Kentucky operations, with specific excess insurance purchased from independent insurance carriers to cover individual traumatic claims in excess of the self-insured limits.  For the period June 2002 to June 2005, workers’ compensation coverage was insured through a third party insurance company using a large risk rating plan.  The Company’s operations in Indiana are insured through a third party insurance company using a large risk rating plan.
 
The Company accrues for workers’ compensation benefits by recognizing a liability when it is probable that the liability has been incurred and the cost can be reasonably estimated. The Company provides information to independent actuaries, who after review and consultation with the Company with regards to actuarial assumptions, including the discount rate, prepare an estimate of the liabilities for workers’ compensation benefits.
 
Black Lung Benefits
 
The Company is responsible under the Federal Coal Mine Health and Safety Act of 1969, as amended, and various states’ statutes for the payment of medical and disability benefits to employees and their dependents resulting from occurrences of coal worker’s pneumoconiosis disease (black lung). The Company provides coverage for federal and state black lung claims through its self-insurance programs for its Central Appalachia operations.  For the period between June 2002 and June 2005, all black lung liabilities were insured through a third party insurance company using a large risk rating plan.  The Company’s operations in Indiana are insured through a third party insurance company using a large risk rating plan. The Company uses the service cost method to account for its self-insured black lung obligation. The liability measured under the service cost method represents the discounted future estimated cost for former employees either receiving or projected to receive benefits, and the portion of the projected liability relative to prior service for active employees projected to receive benefits.
 
The periodic expense for black lung claims under the service cost method represents the service cost, which is the portion of the present value of benefits allocated to the current year, interest on the accumulated benefit obligation, and amortization of unrecognized actuarial gains and losses. Actuarial gains and losses are included as a component of accumulated other comprehensive income (loss) and are amortized over the average remaining work life of the workforce.
 
Annual actuarial studies are prepared by independent actuaries using certain assumptions to determine the liability. The calculation is based on assumptions regarding disability incidence, medical costs, mortality, death benefits, dependents, and interest rates. These assumptions are derived from actual Company experience and industry sources.
 
Health Claims
 
The Company is self-insured for certain health care coverage. The cost of this self-insurance program is accrued based upon estimates of the costs for known and anticipated claims. The Company recorded an estimated amount to cover known claims and claims incurred but not reported of $1.7 million and $2.2 million as of December 31, 2010 and 2009, respectively, which is included in accrued salaries, wages, and employee benefits.
 
Equity-Based Compensation Plan
 
The Company’s stock compensation expense is based on estimated grant-date fair values. Compensation expense is adjusted for estimated forfeitures and is recognized on a straight-line basis over the requisite service period of the award.  The Company’s estimated future forfeiture rates are based on its historical experience.
 
 
F-11

 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
Use of Estimates
 
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in order to prepare these consolidated financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP). Significant estimates made by management include the valuation allowance for deferred tax assets, asset retirement obligations and amounts accrued related to the Company’s workers’ compensation, black lung, pension and health claim obligations. Actual results could differ from these estimates.
 
(2)
Acquisition of Mineral Rights
 
In 2008, the Company closed a transaction under an Asset Purchase Agreement to acquire certain coal reserves and permits.  The acquired assets included approximately 10.2 million tons of proven and probable surface reserves and 3.6 million tons of proven and probable underground reserves, plus additional surface resources.  The purchase price for the acquisition was $36 million, comprised of $16 million in cash at closing, a short term promissory note for $4 million that was paid in full in 2008 and 387,973 shares of newly issued common stock of the Company, valued at $16 million (shares valued based on the most recent closing price prior to closing).
 
(3)
Other Current Liabilities
 
Other current liabilities at December 31, 2010 and 2009 are as follows (in thousands):
 
   
2010
   
2009
 
Accrued interest
  $ 2,098       2,069  
Current portion of asset retirement obligation
    4,991       5,000  
Accrued royalties
    7,284       7,746  
Other
    2,123       624  
    $ 16,496       15,439  
 
(4)
Long Term Debt and Interest Expense
 
Long-term debt is as follows at December 31, 2010 and 2009 (in thousands):
 
   
2010
   
2009
 
Senior Notes
  $ 150,000     $ 150,000  
Convertible Senior Notes, net of discount
    134,022       128,268  
Revolver
    -       -  
     Total long-term debt
    284,022       278,268  
Less amounts classified as current
    -       -  
     Total long-term debt, less current maturities
  $ 284,022     $ 278,268  
 
 
 
 
F-12

 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
Scheduled maturities of long-term debt are as follows (in thousands):
 
Year ended December 31:
     
2011
  $ -  
2012
    150,000  
2013
    -  
2014
    -  
2015
    172,500  
    $ 322,500  

Senior Notes
 
The $150 million of Senior Notes are due on June 1, 2012 (the Senior Notes).  The Senior Notes are unsecured and accrue interest at 9.375% per annum.  Interest payments on the Senior Notes are required semi-annually.  The Company may redeem the Senior Notes, in whole or in part, at any time at redemption prices of 102.34% through June 1, 2011 and 100% thereafter.
 
The Senior Notes limit the Company’s ability, among other things, to pay cash dividends.  In addition, if a change of control occurs (as defined in the Indenture), each holder of the Senior Notes will have the right to require the Company to repurchase all or a part of the Senior Notes at a price equal to 101% of their principal amount, plus any accrued interest to the date of repurchase.
 
Convertible Senior Notes
 
In 2009, the Company issued $172.5 million of 4.5% Convertible Senior Notes due on December 1, 2015 (the “Convertible Senior Notes”).   The Convertible Senior Notes are shown net of a $38.5 million and a $44.2 million discount as of December 31, 2010 and 2009, respectively.  The discount on the Convertible Senior Notes relates to the $44.8 million of the proceeds that were allocated to the equity component of the Convertible Senior Notes at issuance, resulting in an effective interest rate of 10.2%.  The Convertible Senior Notes are unsecured and are convertible under certain circumstances and during certain periods at an initial conversion rate of 38.7913 shares of the Company’s common stock per $1,000 principal amount of Convertible Senior Notes, representing an initial conversion price of approximately $25.78 per share of the Company’s stock.  Interest on the Convertible Senior Notes is paid semi-annually.  
 
None of the Convertible Senior Notes are currently eligible for conversion.  The Convertible Senior Notes are convertible at the option of the holders (with the length of time the Notes are convertible being dependent upon the conversion trigger) upon the occurrence of any of the following events:
 
 
·
At any time from September 1, 2015 until December 1, 2015;

 
·
If the closing sale price 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 of the Notes in effect on the last trading day of the immediately preceding calendar quarter;

 
·
If the trading price of the Convertible Senior Notes for each trading day during any five consecutive business day period, as determined following a request of a holder of Notes, was equal to or less than 97% of the “Conversion Value” of the Notes on such trading day; or

 
·
If the Company elects to make certain distributions to the holders of its common stock or engage in certain corporate transactions.
 
Revolver
 
In January 2010, the Company amended and restated its existing Revolving Credit Agreement (as amended and restated the Revolving Credit Agreement is referred to as the Revolver).  The following is a summary of significant terms of the Revolver. 
 
 
F-13

 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
 
Maturity
February 2012
Interest/Usage Rate
Company’s option of Base Rate(a) plus 3.0% or LIBOR plus 4.0% per annum
Maximum Availability
Lesser of $65.0 million or the borrowing base(b)
Periodic Principal Payments
None 
 
 
(a)
Base rate is the higher of (1) the Federal Fund Rate plus 3.0%, (2) the prime rate and (3) a LIBOR rate plus 1.0%.
 
(b)
The Revolver’s borrowing base is based on the sum 85% of the Company’s eligible accounts receivable plus 65% of the eligible inventory minus reserves from time to time set by the administrative agent.  The eligible accounts receivable and inventories are further adjusted as specified in the agreement.  The Company’s borrowing base can also be increased by 95% of any cash collateral that the Company maintains in a cash collateral account.
 
The Revolver provides that the Company can use the Revolver availability to issue letters of credit. The Revolver provides for a 4.25% fee on any outstanding letters of credit issued under the Revolver and a 0.5% fee on the unused portion of the Revolver. The Revolver requires certain mandatory prepayments from certain asset sales, incurrence of indebtedness and excess cash flow. The Revolver includes financial covenants that require the Company to maintain a minimum Adjusted EBITDA and a maximum Leverage Ratio and limit capital expenditures, each as defined by the agreement. However, the minimum Adjusted EBITDA and maximum Leverage Ratio covenants are only applicable if the Company’s unrestricted cash balance falls below $75.0 million and would remain in effect until the Company’s unrestricted cash exceeds $75.0 million for 90 consecutive days.
 
As of December 31, 2010, the Company had used $58.8 million of the $65.0 million available under the Revolver to secure outstanding letters of credits.  As of December 31, 2010, the Company had $15.0 million of cash in a restricted cash collateral account to ensure that the Company has adequate capacity under the Revolver to support its outstanding letters of credit.
 
Prior Debt Agreements
 
As discussed above, the terms of the Prior Revolver were amended and restated in January 2010.  There were no amounts outstanding on the Prior Revolver as of December 31, 2009 or at the time it was amended.
 
The Company expensed $1.6 million in 2009 in connection with a fee to terminate a Prior Letter of Credit Facility and included the fee in charges associated with the repayment and amendment of debt in the consolidated financials statements for the year ended December 31, 2009.
 
In 2008, in connection with the repayment of a Prior Term Facility, the Company expensed approximately $2.4 million of unamortized financing charges on the Prior Term Facility in the year ended December 31, 2008.   In 2008, the Company expensed approximately $13.3 million of costs associated with the two credit amendments to its Prior Revolver and Prior Term Credit Agreement.  The write-off of the unamortized financing charges and the expenses associated with the amendments to the Credit Amendments are included in charges associated with the repayment and amendment of debt in the consolidated financials statements for the year ended December 31, 2008.
 
Interest Expense
 
During the years ended December 31, 2010, 2009 and 2008, the Company paid $22.1 million, $14.4 million, and $16.8 million in interest, respectively.
 
 
F-14

 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
Other
 
The Convertible Senior Notes rank equally with all of the Company’s existing and future senior unsecured indebtedness, including the Company’s unsecured Senior Notes.  The Convertible Senior Notes are not guaranteed by any of James River Coal Company’s subsidiaries, while the Company’s unsecured Senior Notes are guaranteed by certain of James River Coal Company’s subsidiaries.  The Convertible Senior Notes are effectively subordinated to all of the Company’s existing and future secured indebtedness (to the extent of the assets securing such indebtedness) and structurally subordinated to all existing and future liabilities of James River Coal Company’s subsidiaries, including their trade payables.  The Revolver is secured by substantially all of the Company’s assets. 
 
The Company was in compliance with all of the financial covenants under its outstanding debt instruments as of December 31, 2010. 
 
 (5)
Workers’ Compensation Benefits
 
As of December 31, 2010 and 2009, the workers’ compensation benefit obligation consisted of the following (in thousands):
 
   
2010
   
2009
 
Workers' compensation benefits
  $ 64,944       59,335  
Less current portion
    9,000       8,950  
Noncurrent portion of workers' compensation benefits
  $ 55,944       50,385  
 
Actuarial assumptions used in the determination of the liability for the self-insured portion of workers’ compensation benefits included a discount rate of 4.5% and 5.3% at December 31, 2010 and 2009, respectively.
 
(6)
Pneumoconiosis (Black Lung) Benefits
 
As of December 31, 2010 and 2009, the black lung benefit obligation consisted of the following (in thousands):
 
   
2010
   
2009
 
Black lung benefits
  $ 45,725       32,799  
Less current portion
    2,282       1,782  
Noncurrent portion of black lung benefits
  $ 43,443       31,017  
 
A reconciliation of the changes in the black lung benefit obligation is as follows (in thousands):
 
   
2010
   
2009
 
Beginning of the year black lung obligation
  $ 32,799       30,568  
Black lung actuarial liability adjustment
    10,320       575  
Service cost
    1,757       1,225  
Interest cost
    2,235       1,712  
Benefit payments
    (1,386 )     (1,281 )
End of year accumulated black lung obligation
  $ 45,725       32,799  
 
 
 
 
F-15

 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
The actuarial assumptions used in the determination of accumulated black lung obligations as of December 31, 2010 and 2009 included a discount rate of 5.4% and 5.8%, respectively. A 1.0% decrease in the discount rate used at December 31, 2010, would increase the black lung obligation by approximately $6.9 million.  For purposes of determining net periodic expense related to such obligations, the Company used a discount rate of 5.8%, 5.8%, and 6.5% for the years ended December 31, 2010, 2009 and 2008.
 
The components of net periodic benefit cost are as follows (in thousands):
 
   
2010
   
2009
   
2008
 
Service cost
  $ 1,757       1,225       480  
Interest cost
    2,235       1,712       1,962  
Amortization of actuarial losses (gains)
    412       -       (562 )
Net periodic benefit cost
  $ 4,404       2,937       1,880  
 
In March 2010, The Patient Protection and Affordable Care Act of 2010 (Act) was enacted into law and included a black-lung provision that creates a rebuttable presumption that a miner with at least 15 years of service, with totally disabling pulmonary or respiratory lung impairment and negative radiographic chest x-ray evidence would be disabled due to pneumoconiosis and be eligible for black lung benefits.  The new Act also makes it easier for widows of miners to become eligible for benefits.  In 2010, we estimated the impact of these changes on a limited population of current and potential future claimants, resulting in an estimated $9.8 million increase to the black lung obligation. This estimated increase in the black lung obligation was recorded along with an increase in the actuarial loss included in “Accumulated other comprehensive loss” on our balance sheet.   As of December 31, 2010, we are not able to estimate the impact of this legislation on the obligations related to future claims from older terminated miners and possible re-filed claims, due to significant uncertainty around the number of claims that will be filed and the effect the new award criteria will have on these claim populations.  We will continue to assess the impact of this legislation on our initial estimate as additional information becomes available and future regulations are issued.
 
As of December 31, 2010, the Company has a $10.3 million gross actuarial loss recorded in accumulated other comprehensive income (loss) on its black lung obligation.  The Company expects that it will amortize $0.6 million of this actuarial loss during the year ended December 31, 2011.
 
(7)
Equity
 
Preferred Stock and Shareholder Rights Agreement
 
The Company has authorized 10,000,000 shares of preferred stock, $1.00 par value per share, the rights and preferences of which are established by the Board of the Directors. The Company has reserved 500,000 of these shares as Series A Participating Cumulative Preferred Stock for issuance under a shareholder rights agreement (the Rights Agreement).
 
On May 25, 2004, the Company’s shareholders approved the Rights Agreement and declared a dividend of one preferred share purchase right (Right) for each two shares of common stock outstanding.  Each Right entitles the registered holder to purchase from the Company one one-hundredth (1/100) of a share of our Series A Participating Cumulative Preferred Stock, par value $1.00 per share, at a price of $200 per one one-hundredth of a Series A preferred share.  The Rights are not exercisable until a person or group of affiliated or associated persons (an Acquiring Person) has acquired or announced the intention to acquire 20% or more of the Company’s outstanding common stock.
 
In the event that the Company is acquired in a merger or other business combination transaction or 50% or more of the Company’s consolidated assets or earning power is sold after a person or group has become an Acquiring Person, each holder of a Right, other than the Rights beneficially owned by the Acquiring Person (which will thereafter be void), will receive, upon the exercise of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right.  In the event that any person becomes an Acquiring Person, each Right holder, other than the Acquiring Person (whose Rights will become void), will have the right to receive upon exercise that number of shares of common stock having a market value of two times the exercise price of the Right.
 
 
F-16

 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
The rights will expire May 25, 2014, unless that expiration date is extended. The Board of Directors may redeem the Rights at a price of $0.001 per Right at any time prior to the time that a person or group becomes an Acquiring Person. 
 
Equity Based Compensation
 
Under the 2004 Equity Incentive Plan (the Plan), participants may be granted stock options (qualified and nonqualified), stock appreciation rights (SARs), restricted stock, restricted stock units, and performance shares. The total number of shares that may be awarded under the Plan is 2,400,000, and no more than 1,000,000 of the shares reserved under the Plan may be granted in the form of incentive stock options.  The Company currently has the following types of equity awards outstanding under the Plan.
 
Restricted Stock Awards
 
Pursuant to the Plan certain directors and employees have been awarded restricted common stock with such shares vesting over two to five years. The related expense is amortized over the vesting period.
  
Stock Option Awards
 
Pursuant to the Plan certain directors and employees have been awarded options to purchase common stock with such options vesting ratably over three to five years. The Company’s stock options have been issued at exercise prices equal to or greater than the fair value of the Company’s stock at the date of grant.
 
Shares awarded or subject to purchase under the Plan that are not delivered or purchased, or revert to the Company as a result of forfeiture or termination, expiration or cancellation of an award or that are used to exercise an award or for tax withholding, will be again available for issuance under the Plan. At December 31, 2010, there were 594,343 shares available under the Plan for future awards.
 
The following table highlights the expense related to share-based payment for the periods ended December 31 (in thousands):
 
   
2010
   
2009
   
2008
 
Restricted stock
  $ 5,095       5,655       4,813  
Stock options
    305       312       317  
Stock based compensation
  $ 5,400       5,967       5,130  
 
 
The fair value of the restricted stock issued and outstanding is equal to the value of shares at the grant date.  At this time, the Company does not expect any of its restricted shares or options to be forfeited before vesting. The fair value of stock options was estimated using the Black-Scholes option pricing model.  The Company used the following assumptions to value the stock options issued during the periods indicated below:
 
 
2010
2009
2008
Dividend yield
0.0%
0.0%
0.0%
Expected volatility factor(1)
90.0%
90.0%
70.0%
Weighted average expected volatility
90.0%
90.0%
70.0%
Risk-free interest rate(2)
3.9%
2.6%
3.4%
Expected term (in years)
6.5
6.5
6.5
 
 
 
(1)
The Company used historical experience to estimate its volatility.
 
(2)
The risk-free interest rate for periods is based on U.S. Treasury yields in effect at the time of grant.
 
 
F-17

 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
The following is a summary of restricted stock and stock option awards:
 
   
Restricted Stock
   
Stock Options
 
         
Weighted
         
Weighted
 
   
Number of
   
Average
   
Number of
   
Average
 
   
Shares
   
Fair Value
   
Shares
   
Exercise
 
   
Outstanding
   
at Issue
   
Outstanding
   
Price
 
January 1, 2008
    676,307     $ 15.84       264,334     $ 15.79  
Granted
    244,140       35.68       20,000       36.30  
Exercised/Vested
    (212,598 )     15.62       (20,000 )     27.12  
Canceled
    (5,800 )     19.16       (3,334 )     14.84  
December 31, 2008
    702,049       22.78       261,000       16.51  
Granted
    234,311       13.87       20,000       13.87  
Exercised/Vested
    (218,708 )     16.27       (5,000 )     15.00  
Canceled
    -       -       -       -  
December 31, 2009
    717,652       21.86       276,000       16.34  
Granted
    287,622       17.01       20,000       17.01  
Exercised/Vested
    (158,788 )     26.69       (5,000 )     14.60  
Canceled
    (3,600 )     19.36       -       -  
December 31, 2010
    842,886     $ 19.30       291,000     $ 16.42  
 
The following table summarizes additional information about the stock options outstanding at December 31, 2010.
 
   
Range of
Exercise Price
Shares
 
Weighted
Average
Exercise
 Price
Weighted Average
 Remaining
 Contractual Life
 (Years)
Aggregate
Intrinsic
Value (1)
  (in 000's)
                     
Outstanding at December 31, 2010
 
$10.80-$36.30
291,000
 
$16.42
 
4.8
 
 $ 3,052
                     
Exercisable at December 31, 2010
 
$10.80-$36.30
251,004
 
$15.98
 
4.1
 
 $ 2,732
                     
Vested and expected to vest at December 31, 2010
291,000
 
$16.42
 
4.8
 
 $  3,052
 
(1) 
The difference between a stock award's exercise price and the underlying stock's market price at December 31, 2010.
No value is assigned to stock awards whose option price exceeds the stock's market price at December 31, 2010.
 
 
F-18

 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
 
The following table summarizes the Company’s total unrecognized compensation cost related to stock based compensation as of December 31, 2010.
 
         
Remaining Period
 
   
Unearned
   
Of Expense
 
   
Compensation
   
Recognition
 
   
(in 000's)
   
(in years)
 
Stock Options
  $ 380      1.8  
Restricted Stock
    9,578      2.8  
Total
  $ 9,958          
 
 
(8)
Income Taxes
 
Income tax expense (benefit) consists of the following (in thousands):
 
   
2010
   
2009
   
2008
 
Current:
                 
Federal
  $ (1,354 )     1,354       -  
State
    24       25       (277 )
      (1,330 )     1,379       (277 )
Deferred:
                       
Federal
    (20,720 )     165       53  
State
    (1,516 )     15       (49 )
      (22,236 )     180       4  
    $ (23,566 )     1,559       (273 )
 
A reconciliation of income taxes computed at the statutory federal income tax rate to the expense (benefit) for income taxes included in the consolidated statements of operations is presented below:
 
   
2010
   
2009
   
2008
 
                   
Federal income taxes at statutory rates
    35.0 %     34.0 %     (34.0 ) %
Percentage depletion
    (20.4 )     (25.8 )     (3.8 )
Effect of state and federal tax rate change, net
    1.7       (0.2 )     (0.1 )
Change in valuation allowance
    (60.9 )     (6.2 )     39.2  
State income taxes, net of federal
    (1.8 )     0.4       (2.4 )
Other, net
    3.2       0.8       0.8  
      (43.2 ) %     3.0 %     (0.3 ) %
 
 
 
F-19

 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2010 and 2009 are presented below (in thousands):
 
   
2010
   
2009
 
Deferred tax assets:
           
Accruals for financial reporting purposes, principally  workers' compensation and black lung obligations
  $ 60,520       55,001  
Net operating loss carryforwards
    75,182       73,504  
Accumulated comprehensive income, principally pension
    8,258       4,718  
Other
    104       1,405  
Total gross deferred tax assets
    144,064       134,628  
Less valuation allowance
    -       33,247  
Gross deferred tax assets net of valuation
    144,064       101,381  
Deferred tax liabilities:
               
Discount on Senior Convertible Notes
    14,120       15,824  
Other - principally property, plant and equipment due to differences in depreciation, depletion and amortization
    99,097       80,486  
Total gross deferred tax liability
    113,217       96,310  
Net deferred tax asset
  $ 30,847       5,071  
 
The net deferred tax asset is included in other assets.  In connection with the completion of our forecasts for future taxable income in the fourth quarter of 2010 and considering other relevant factors, including a history of positive operating results, the Company concluded that the deferred tax assets that were previously being reduced by a valuation allowance are more likely than not to be realizable.  As a result, the 2010 income taxes include a $33.2 million income tax benefit related to the reversal of the income tax valuation allowance.   This $33.2 million income tax benefit consists of the year end reversal of $22.1 million of the valuation allowance in connection with the conclusion that the deferred tax assets will be more likely than not to be realized and the reversal of $11.1 million of the valuation during the year in connection with the utilization of net operating losses.
 
At December 31, 2010, the Company has consolidated NOLs for federal income tax purposes of approximately $206 million that expire beginning in 2023 and consolidated Kentucky net operating loss carryforwards of approximately $80 million which expire beginning in 2023. These net operating loss carryforwards generate a combined federal and state tax benefit of approximately $75.2 million.
 
The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions.  The Company has identified its federal tax return and its state tax returns in Virginia, Kentucky and Indiana as “major” tax jurisdictions. The only periods subject to examination for the Company’s federal return are the 2007 through 2010 tax years. The periods subject to examination for the Company’s state returns in Virginia are years 2007 through 2010; Kentucky are years 2006 through 2010 and Indiana are years 2007 through 2010. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its consolidated financial position.  Therefore, no reserves for uncertain income tax positions have been recorded.
 
During the year ended December 31, 2010, the Company paid no income taxes.   During the year ended December 31, 2009, the Company paid income taxes of $1.6 million.  The Company received $0.1 million of income tax refunds during 2008.  The income tax benefit (expense) includes no interest and penalties for the years ended December 31, 2010, 2009 and 2008.
 
 
 
F-20

 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
(9)
Employee Benefit Plans
 
Defined Benefit Pension Plan
 
In 2007, the Company froze pension plan benefit accruals for all employees covered under its qualified non-contributory defined benefit pension plan.  The Company’s funding policy is to contribute annually an amount at least equal to the minimum funding requirements actuarially determined in accordance with the Employee Retirement Income Security Act of 1974.
 
The plan assets for the qualified defined benefit pension plan are held by an independent trustee. The plan’s assets include investments in cash and cash equivalents and mutual funds holding corporate and government bonds and preferred and common stocks. The Company has an internal investment committee that sets investment policy, selects and monitors investment managers and monitors asset allocation.
 
The investment policy for the pension plan assets includes the objectives of providing growth of capital and income while achieving a target annual rate of return of 7.5% over a full market cycle, approximately 5 to 7 years. Diversification of assets is employed to reduce risk. The current target asset allocation is 70% for equity securities (including 45% Large Cap, 15% Small Cap, 10% International) and 30% for cash and interest bearing securities. The investment policy is based on the assumption that the overall portfolio volatility will be similar to that of the target allocation.  Given the volatility of the capital markets, strategic adjustments in various asset classes may be required to rebalance asset allocation back to its target policy. Investment fund managers are not permitted to invest in certain securities and transactions as outlined by the investment policy statements specific to each investment category without prior investment committee approval.
 
To develop the expected long-term rate of return on assets assumption, the Company performs a periodic analysis which considers the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio.  This evaluation resulted in the selection of the 7.5% long-term rate of return on assets assumption for the year ended December 31, 2010.
 
The Company utilizes a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.  The plan assets are valued using unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.  The fair value of the major categories of qualified defined benefit pension plan assets includes the following (in thousands):
 
    2010     2009  
   
Amount
   
Percentage
   
Amount
   
Percentage
 
Mutual funds - equity
  $ 35,547       61.9 %   $ 28,987       57.6 %
Mutual funds - international equity
    5,113       8.9 %     4,980       9.9 %
Mutual funds - fixed income/taxable
    16,507       28.7 %     16,097       32.0 %
Money market funds and cash
    309       0.5 %     270       0.5 %
    $ 57,476       100.0 %   $ 50,334       100.0 %

 
 
 
F-21

 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
The following table sets forth changes in the plan’s benefit obligations, changes in the fair value of plan assets, and funded status at December 31, 2010 and 2009 (in thousands):
 
   
2010
   
2009
 
Change in benefit obligation:
           
Projected benefit obligation at beginning of year
  $ 65,161       62,242  
Interest cost
    3,760       3,660  
Actuarial loss
    3,103       1,582  
Benefits paid
    (2,580 )     (2,323 )
Projected benefit obligation at end of year
  $ 69,444       65,161  
Change in plan assets:
               
Fair value of plan assets at beginning of year
  $ 50,334       42,549  
Actual return on plan assets
    6,624       10,085  
Employer contributions
    3,098       23  
Benefits paid
    (2,580 )     (2,323 )
Fair value of plan assets at end of year
  $ 57,476       50,334  
Reconciliation of funded status:
               
Funded status
  $ (11,968 )     (14,827 )
Net amount recognized
  $ (11,968 )     (14,827 )
Amounts recognized in the consolidated balance sheets consist of:
               
Accrued benefit liability
  $ (11,968 )     (14,827 )
 
The accumulated benefit obligation of the plan was $69.4 million and $65.2 million as of December 31, 2010 and 2009, respectively. Company contributions in 2011 are expected to be approximately $1.8 million.
 
The components of net periodic benefit cost and benefits paid by period are as follows (in thousands):
 
   
2010
   
2009
   
2008
 
Interest cost
  $ 3,760       3,660       3,645  
Expected return on plan assets
    (3,689 )     (3,099 )     (4,358 )
Recognized net actuarial loss
    783       1,606       -  
Net periodic benefit cost
  $ 854       2,167       (713 )
                         
Benefits paid
  $ 2,580       2,323       2,847  
 
As of December 31, 2010 and 2009 the Company had a $12.2 million and a $12.8 million gross actuarial loss recorded in accumulated other comprehensive loss on its defined benefit plan.  The Company expects to recognize $0.8 million of the net actuarial loss in the year ended December 31, 2011.
 
The weighted-average assumptions used to determine the pension benefit obligations are as follows:
 
     
2010
 
2009
Discount rate
 
5.4%
 
5.9%
Expected return on plan assets
7.5%
 
7.5%
 
 
 
F-22

 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
The weighted-average assumptions used to determine the net periodic benefit cost are as follows:
 
   
2010
 
2009
 
2008
Discount rate
5.9%
 
6.0%
 
5.8%
Expected return on plan assets
7.5%
 
7.5%
 
7.5%
 
 
The following benefit payments are expected to be paid (based on the assumptions described above (in thousands)).
 
Year ended December 31:
     
2011
  $ 3,028  
2012
    3,182  
2013
    3,315  
2014
    3,544  
2015
    3,669  
2016-2020
    20,711  
 
 
Savings and Profit Sharing Plan
 
The Company sponsors defined contribution pension plans and profit sharing plans.  All U.S. employees are eligible for at least one of the Company’s plans. The Company’s contributions vary depending on the plan and cannot exceed the maximum allowable for tax purposes.  The Company recognized approximately $2.8 million, $3.3 million and $3.7 million of expense relating to these plans for the years ended December 31, 2010, 2009 and 2008, respectively.
 
(10)
Major Customers
 
During 2010, approximately 71% of total revenues were from two customers in the CAPP segment, the largest of which represented 39% of total revenues, and an additional 11% of our total revenues were from one customer in the Midwest segment.   During 2009, approximately 76% of total revenues were from two customers in the CAPP segment, the largest of which represented 39% of revenues.  During 2008, approximately 48% of total revenues were from two customers in the CAPP segment, the largest of which represented 36% of revenues.  The segment revenues are included in Note 15.
 
 
 
F-23

 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
(11)
Leases
 
The Company leases equipment and various other properties under non-cancelable long-term leases, expiring at various dates. Certain leases contain options that would allow the Company to extend the lease or purchase the leased asset at the end of the base lease term. Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2010 were as follows (in thousands):
 
   
Operating
 
   
leases
 
Year ended December 31:
     
2011
  $ 7,393  
2012
    3,280  
2013
    1,329  
2014
    728  
2015
    -  
    $ 12,730  
 
The Company incurred rent expense on equipment and office space of approximately $11.2 million, $10.8 million and $10.7 million for the years ended December 31, 2010, 2009 and 2008, respectively.
 
(12)
Commitments and Contingencies
 
Future minimum royalty commitments under coal lease agreements at December 31, 2010 were as follows (in thousands):
 
   
Royalty
 
   
commitments
 
Year ended December 31:
     
2011
  $ 25,042  
2012
    23,897  
2013
    23,123  
2014
    21,405  
2015
    20,831  
2016 and thereafter
    100,651  
    $ 214,949  
 
 
 
(a)
Certain coal leases do not have set expiration dates but extend until completion of mining of all merchantable and mineable coal reserves.  For purposes of this table, we have generally assumed that minimum royalties on such leases will be paid for a period of ten years.
 
 
(b)
Certain coal leases require payment based on minimum tonnage, for these contracts an average sales price of $90.00 per ton was used to project the future commitment.
 
The Company has established irrevocable letters of credit totaling $58.8 million as of December 31, 2010 to guarantee performance under certain contractual arrangements.  The letters of credit have been issued under the Company’s Revolver (see Note 4).
 
The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.
 
 
 
F-24

 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
(13)
Earnings (Loss) Per Share
 
Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. 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 and restricted common stock subject to continuing vesting requirements, pursuant to the treasury stock method.
 
The following table provides a reconciliation of the number of shares used to calculate basic and diluted earnings (loss) per share (in thousands):
 
   
2010
   
2009
   
2008
 
Basic earnings per common share:
                 
Net income (loss)
  $ 78,165       50,954       (95,993 )
Income allocated to participating securities
    (2,336 )     (1,395 )     -  
Net income (loss) available to common shareholders
  $ 75,829       49,559       (95,993 )
                         
                         
Weighted average number of common and common equivalent shares outstanding:
                       
Basic number of common shares outstanding
    26,883       26,765       24,520  
Dilutive effect of unvested restricted stock (participating securities)
    830       754       -  
Dilutive effect of stock options
    54       49       -  
Diluted number of common shares and common equivalent shares outstanding
    27,767       27,568       24,520  
                         
Basic earnings (loss) per common share
  $ 2.82       1.85       (3.91 )
                         
                         
Diluted net income per common share:
                       
Net income (loss)
  $ 78,165       50,954       (95,993 )
Income allocated to participating securities
    -       -       -  
Net income (loss) available to potential common shareholders
  $ 78,165       50,954       (95,993 )
                         
Diluted net earnings (loss) per share
  $ 2.82       1.85       (3.91 )
 
For periods in which there was a loss, the Company excludes from its diluted loss per share calculation options to purchase shares and the unvested portion of time vested restricted shares, as inclusion of these securities would have reduced the net loss per share.  The excluded instruments would have increased the diluted weighted average number of common and common equivalent shares outstanding by approximately 0.8 million for the year ended December 31, 2008.  In addition, in periods of net losses, the Company has not allocated any portion of such losses to participating securities holders for its basic loss per share calculation as such participating securities holders are not contractually obligated to fund such losses.
 
The Company’s Convertible Senior Notes are convertible at the option of the holders upon the occurrence of certain events (Note 4).  As of December 31, 2010, the 4.5% Convertible Senior Notes had not reached the specified threshold for conversion.
 
 
F-25

 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
(14)
Fair Value of Financial Instruments
 
The estimated fair value of financial instruments has been determined by the Company using available market information. As of December 31, 2010 and 2009, except for long-term debt obligations, the carrying amounts of all financial instruments approximate their fair values due to their short maturities.
 
The carrying value and fair value of our Senior Notes and Convertible Senior Notes are as follows (in thousands)
 
   
2010
   
2009
 
   
Carrying Value
   
Fair Value
   
Carrying Value
   
Fair Value
 
Senior Notes
  $ 150,000     $ 153,000     $ 150,000     $ 153,750  
Convertible Senior Notes (excludes discount)
    172,500       210,880       172,500       171,650  
 
 
The fair values of our Senior Notes and Convertible Senior Notes are based on available market data at the date presented.  The carrying value of the Convertible Senior Notes reflected in long-term debt in the table above reflects the full face amount of $172.5 million, which has been adjusted in the Consolidated Balance Sheets for a discount related to its convertible feature (Note 4).
 
(15)
Segment Information
 
The Company has two segments based on the coal basins in which the Company operates. These basins are located in Central Appalachia (CAPP) and in the Midwest (Midwest). The Company’s CAPP operations are located in eastern Kentucky and the Company’s Midwest operations are located in southern Indiana. Coal quality, coal seam height, transportation methods and regulatory issues are generally consistent within a basin. Accordingly, market and contract pricing have been developed by coal basin. The Company manages its coal sales by coal basin, not by individual mine complex. Mine operations are evaluated based on their per-ton operating costs. Operating segment results are shown below (in thousands).
 
 
 
F-26

 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
   
Years Ended
 
   
December 31,
 
   
2010
   
2009
   
2008
 
Revenues
                 
CAPP
  $ 585,064       579,108       467,609  
Midwest
    116,052       102,450       100,898  
Corporate
    -       -       -  
Total
  $ 701,116       681,558       568,507  
                         
Depreciation, depletion and amortization
                 
CAPP
  $ 53,467       49,380       55,979  
Midwest
    10,840       12,646       14,218  
Corporate
    61       52       80  
Total
  $ 64,368       62,078       70,277  
                         
Total operating income (loss)
                       
CAPP
  $ 96,237       98,485       (35,861 )
Midwest
    7,537       (4,909 )     (10,296 )
Corporate
    (19,888 )     (22,704 )     (18,493 )
Total
  $ 83,886       70,872       (64,650 )
                         
Interest Income (1)
                       
Corporate
  $ (683 )     (60 )     (469 )
Total
  $ (683 )     (60 )     (469 )
                         
Interest Expense (1)
                       
Corporate
  $ 29,943       17,057       17,746  
Total
  $ 29,943       17,057       17,746  
                         
Income tax expense (benefit) (1)
                       
Corporate
  $ (23,566 )     1,559       (273 )
Total
  $ (23,566 )     1,559       (273 )
                         
Net earnings (loss) (1)
                       
CAPP
  $ 96,237       98,485       (35,861 )
Midwest
    7,537       (4,909 )     (10,296 )
Corporate
    (25,609 )     (42,622 )     (49,836 )
Total
  $ 78,165       50,954       (95,993 )
                         
(1) The Company does not allocate interest income, interest expense or income taxes to its segments.
 
 
 
 
F-27

 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
   
December 31,
 
   
2010
   
2009
 
Total Assets
           
CAPP
  $ 551,762       421,825  
Midwest
    114,939       88,815  
Corporate
    117,868       158,672  
   Total
  $ 784,569       669,312  
                 
Goodwill
               
CAPP
  $ -       -  
Midwest
    26,492       26,492  
Corporate
    -       -  
   Total
  $ 26,492       26,492  
 
 
 
   
Years Ended
 
   
December 31,
 
Capital Expenditures
 
2010
   
2009
   
2008
 
CAPP
  $ 75,795       58,147       66,467  
Midwest
    19,631       13,840       8,167  
Corporate
    -       172       63  
   Total
  $ 95,426       72,159       74,697  
 
(16)  Subsequent Event
 
On March 6, 2011, the Company signed a definitive agreement to purchase International Resource Partners LP (“IRP”) and its subsidiary companies for $475 million in an all-cash transaction.  IRP mines, processes and sells metallurgical and steam coal through its mining complexes in Southern West Virginia and Eastern Kentucky.  IRP, through its wholly owned subsidiary Logan & Kanawha, also conducts coal brokering and trading operations.

The Company has secured $375 million in committed bridge financing from Deutsche Bank AG Cayman Islands Branch and UBS Loan Finance LLC  which in addition to existing cash balances, is expected to be sufficient to finance the purchase price for IRP.  The bridge financing, if drawn upon, would have interest at variable rates reset monthly based on certain liquidity measures of the combined company.  Any funding under the bridge financing would be required to be prepaid, if the Company were to raise certain alternate financing, as defined in the agreement.  Additionally the bridge financing provides for conversion to term financing if the Company does not raise alternate financing, as specified by the agreement, within one year of any funding under the bridge financing.

The purchase agreement contains customary representations, warranties, covenants and conditions, as well as indemnification provisions subject to specified limitations.  The closing of the acquisition is subject to the termination or expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, certain third party consents and other customary closing conditions.  The acquisition is expected to close in the first half of 2011.
 
 
F-28

 
JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
 
(17)  Quarterly Information (Unaudited)
 
Set forth below is the Company’s quarterly financial information for the previous two fiscal years (in thousands, except per share amounts):
 
   
Three Months Ended
 
   
March 31,
   
June 30,
   
September 30,
   
December 31,
 
    2010     2010     2010     2010  
                         
Total revenue
  $ 184,601       183,045       171,420       162,050  
Gross profit
    38,926       38,098       25,500       19,709  
Income from operations
    29,607       28,275       15,695       10,309  
Income before taxes
    22,272       20,594       8,755       2,978  
Net income
    23,245       19,850       9,200       25,870  
Basic Earnings per share
  $ 0.84       0.72       0.33       0.93  
Diluted Earning per share
    0.84       0.71       0.33       0.93  
 
 
   
Three Months Ended
 
   
March 31,
   
June 30,
   
September 30,
   
December 31,
 
   
2009
   
2009
     2009    
2009
 
                         
Total revenue
  $ 192,121     $ 171,649     $ 168,320     $ 149,468  
Gross profit
    44,941       28,006       24,387       13,258  
Income from operations
    35,654       17,447       14,121       3,650  
Income (loss) before taxes
    31,680       13,748       10,246       (3,161 )
Net income (loss)
    28,171       16,178       9,808       (3,203 )
Earning (loss) per share (Basic and Diluted):
  $ 1.03       0.59       0.36       (0.12 )


 
F-29

 

 
 
SIGNATURES
 
           Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 9th day of March, 2011.
 
 
JAMES RIVER COAL COMPANY
   
 
By:     /s/  Peter T. Socha                                        
 
Peter T. Socha
 
Chairman of the Board,
 
President and Chief Executive Officer
 
(principal executive officer)
   

 
Know all men by these presents, that each person whose signature appears below constitutes and appoints Peter T. Socha and Samuel M. Hopkins, II, or either of them, as attorneys-in-fact, with power of substitution, for him in any and all capacities, to sign any amendments to this annual report on Form 10-K, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on the 9th day of March, 2011.
 
Signature
Title
 
/s/  Peter T. Socha

Peter T. Socha
 
Chairman of the Board, President and Chief Executive Officer (principal executive officer)
 
/s/  Samuel M. Hopkins, II   

Samuel M. Hopkins, II
 
Vice President and Chief Accounting Officer (principal financial officer and principal accounting officer)
 
/s/  Alan F. Crown

   Alan F. Crown
 
Director
 
/s/  Ronald J. FlorJancic

Ronald J. FlorJancic
 
Director
 
/s/  Leonard J. Kujawa

Leonard J. Kujawa
 
Director
 
/s/  Joseph H. Vipperman

Joseph H. Vipperman
 
Director


 
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