Edgar Filing: James River Coal CO

jrcc_10q-093008.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2008

[_]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to __________________

Commission File Number 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

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 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 o (Do not check if a smaller reporting company)	Smaller 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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes ý No o

The number of shares of the registrant’s Common Stock, par value $.01 per share, outstanding as of October 15, 2008 was 27,401,703.

FORM 10-Q INDEX

		Page

PART I FINANCIAL INFORMATION		3

Item 1.	Financial Statements.	3

	Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007	3

	Condensed Consolidated Statements of Operations for the three months ended	5
	September 30, 2008 and 2007

	Condensed Consolidated Statements of Operations for the nine months ended	6
	September 30, 2008 and 2007

	Condensed Consolidated Statements of Changes in Shareholders’ Equity and	7
	Comprehensive Loss for the nine months ended September 30, 2008 and the year
	ended December 31, 2007

	Condensed Consolidated Statements of Cash Flows for the nine months ended	8
	September 30, 2008 and 2007

	Notes to Condensed Consolidated Financial Statements	9


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	18

Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	33

Item 4.	Controls and Procedures.	33

PART II OTHER INFORMATION		34

Item 1.	Legal Proceedings.	34

Item 1A.	Risk Factors.	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	46

Item 3.	Defaults Upon Senior Securities.

Item 4.	Submission of Matters to a Vote of Security Holders.	46

Item 5.	Other Information.	46

Item 6.	Exhibits.	46


	SIGNATURES	47

Certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002

-2-

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

JAMES RIVER COAL COMPANY

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands)


	September 30, 2008		December 31, 2007
Assets	(unaudited)

Current assets:
Cash and cash equivalents	$	45,070		5,413
Receivables:
Trade		34,980		40,544
Other		665		762
Total receivables		35,645		41,306
Inventories:
Coal		7,595		5,915
Materials and supplies		10,337		8,277
Total inventories		17,932		14,192
Prepaid royalties		4,649		3,817
Other current assets		5,381		4,180
Total current assets		108,677		68,908
Property, plant, and equipment, at cost:
Land		6,678		6,220
Mineral rights		229,841		191,586
Buildings, machinery and equipment		312,134		285,009
Mine development costs		38,515		31,923
Total property, plant, and equipment		587,168		514,738
Less accumulated depreciation, depletion, and amortization		238,675		195,534
Property, plant and equipment, net		348,493		319,204
Goodwill		26,492		26,492
Other assets		21,006		24,683
Total assets	$	504,668		439,287

See accompanying notes to condensed consolidated financial statements.

-3-

JAMES RIVER COAL COMPANY

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)

	September 30, 2008			December 31, 2007
Liabilities and Shareholders' Equity	(unaudited)

Current liabilities:
Current maturities of long-term debt (note 3)	$	29,775			1,600
Accounts payable		54,326			46,641
Accrued salaries, wages, and employee benefits		8,117			6,010
Workers' compensation benefits		9,450			9,450
Black lung benefits		2,050			2,050
Accrued taxes		5,266			4,234
Other current liabilities		13,986			7,394
Total current liabilities		122,970			77,379
Long-term debt, less current maturities		150,000			187,200
Other liabilities:
Noncurrent portion of workers' compensation benefits		45,970			44,142
Noncurrent portion of black lung benefits		23,533			22,084
Pension obligations		4,205			5,423
Asset retirement obligations		38,072			32,288
Other		1,158			997
Total other liabilities		112,938			104,934
Total liabilities		385,908			369,513

Commitments and contingencies (note 5)
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 27,401,703 and 21,906,265 shares
as of September 30, 2008 and December 31, 2007, respectively		274			219
Paid-in-capital		271,162			159,403
Accumulated deficit		(154,125	)		(91,719	)
Accumulated other comprehensive income		1,449			1,871
Total shareholders' equity		118,760			69,774

Total liabilities and shareholders' equity	$	504,668			439,287

See accompanying notes to condensed consolidated financial statements.

-4-

JAMES RIVER COAL COMPANY

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

	Three Months			Three Months
	Ended			Ended
	September 30, 2008			September 30, 2007

Revenues	$	151,842			130,052
Cost of sales:
Cost of coal sold		138,873			119,251
Gain on curtailment of pension plan		-			(6,091	)
Depreciation, depletion and amortization		17,158			17,358
Total cost of sales		156,031			130,518
Gross profit (loss)		(4,189	)		(466	)
Selling, general and administrative expenses		9,057			8,062
Total operating loss		(13,246	)		(8,528	)
Interest expense (note 3)		4,625			5,250
Interest income		(55	)		(81	)
Charges associated with repayment and amendment of debt (note 3)		4,223			-
Miscellaneous income, net		(327	)		(84	)
Total other expense, net		8,466			5,085
Loss before income taxes		(21,712	)		(13,613	)
Income tax benefit		-			(3,917	)
Net loss	$	(21,712	)		(9,696	)
Loss per common share (note 6)
Basic loss per common share	$	(0.86	)		(0.60	)
Shares used to calculate basic loss per share		25,173			16,044
Diluted loss per common share	$	(0.86	)		(0.60	)
Shares used to calculate diluted loss per share		25,173			16,044


See accompanying notes to condensed consolidated financial statements

-5-

JAMES RIVER COAL COMPANY

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

	Nine Months			Nine Months
	Ended			Ended
	September 30, 2008			September 30, 2007

Revenues	$	427,733			394,423
Cost of sales:
Cost of coal sold		393,470			355,295
Gain on curtailment of pension plan		-			(6,091	)
Depreciation, depletion and amortization		52,000			54,621
Total cost of sales		445,470			403,825
Gross profit (loss)		(17,737	)		(9,402	)
Selling, general and administrative expenses		25,123			23,225
Total operating loss		(42,860	)		(32,627	)
Interest expense (note 3)		13,700			14,910
Interest income		(317	)		(403	)
Charges associated with repayment and amendment of debt (note 3)		7,236			2,421
Miscellaneous income, net		(1,073	)		(371	)
Total other expense, net		19,546			16,557
Loss before income taxes		(62,406	)		(49,184	)
Income tax benefit		-			(13,620	)
Net loss	$	(62,406	)		(35,564	)
Loss per common share (note 6)
Basic loss per common share	$	(2.62	)		(2.23	)
Shares used to calculate basic loss per share		23,793			15,983
Diluted loss per common share	$	(2.62	)		(2.23	)
Shares used to calculate diluted loss per share		23,793			15,983


See accompanying notes to condensed consolidated financial statements

-6-

JAMES RIVER COAL COMPANY

AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Shareholders’

Equity and Comprehensive Loss

(in thousands)

(unaudited)

	Common stock shares			Common stock par value			Paid-in- capital			Accumulated Deficit			Accumulated other comprehensive income (loss)			Total

Balances, December 31, 2006		16,669		$	167			124,191			(37,704	)		(257	)		86,397
Net loss		-			-			-			(54,015	)		-			(54,015	)
Amortization of black lung liability		-			-			-						(180	)		(180	)
Black lung obligation adjustment, net of $(812) of tax		-			-			-			-			4,909			4,909
Pension liability adjustment, net of $969 of tax		-			-			-			-			(2,601	)		(2,601	)
Comprehensive loss																	(51,887	)
Issuance on common stock net of offering
costs of $213		5,175			52			32,337			-			-			32,389
Issuance of restricted stock awards, net of forfeitures		135			1			(1	)		-			-			-
Repurchase of shares for tax withholding		(73	)		(1	)		(977	)		-			-			(978	)
Stock based compensation		-			-			3,853			-			-			3,853
Balances, December 31, 2007		21,906			219			159,403			(91,719	)		1,871			69,774
Net loss		-			-			-			(62,406	)		-			(62,406	)
Amortization of black lung liability		-			-			-			-			(422	)		(422	)
Comprehensive loss																	(62,828	)
Issuance on common stock, net of offering
costs of $289		4,913			49			93,906			-			-			93,955
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		(63	)		-			(2,297	)		-			-			(2,297	)
Exercise of Stock Options		20			-			542			-			-			542
Stock based compensation		-			-			3,614			-			-			3,614
Balances, September 30, 2008		27,402		$	274			271,162			(154,125	)		1,449			118,760





See accompanying notes to condensed consolidated financial statements.

-7-

JAMES RIVER COAL COMPANY

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Nine Months Ended			Nine Months Ended
	September 30, 2008			September 30, 2007
Cash flows from operating activities:
Net loss	$	(62,406	)		(35,564	)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation, depletion, and amortization		52,000			54,621
Accretion of asset retirement obligations		2,018			1,559
Amortization of deferred financing costs		1,118			1,172
Amortization of deferred stock-based compensation		3,614			2,856
Deferred income tax benefit		-			(13,317	)
(Gain)/loss on sale or disposal of property, plant, and equipment		(163	)		21
Gain on curtailment of pension plan		-			(6,091	)
Write-off of deferred financing costs		2,383			2,421
Changes in operating assets and liabilities:
Receivables		5,661			(716	)
Inventories		(3,740	)		(5,373	)
Prepaid royalties and other current assets		(2,033	)		(1,222	)
Other assets		662			(3,666	)
Accounts payable		5,958			3,217
Accrued salaries, wages, and employee benefits		2,107			2,128
Accrued taxes		(1,265	)		(1,951	)
Other current liabilities		6,327			3,519
Workers' compensation benefits		1,828			3,031
Black lung benefits		1,027			1,099
Pension obligations		(1,218	)		(2,063	)
Asset retirement obligation		(978	)		(1,342	)
Other liabilities		161			29
Net cash provided by operating activities		13,061			4,368
Cash flows from investing activities:
Additions to property, plant, and equipment		(59,498	)		(36,945	)
Proceeds from sale of property, plant, and equipment		1,108			15
Net cash used in investing activities		(58,390	)		(36,930	)
Cash flows from financing activities:
Proceeds from borrowings under long-debt		-			40,000
Repayments of long-term debt		(22,025	)		(800	)
Repayments under revolver		(8,500	)		(24,493	)
Proceeds from borrowings under revolver		21,500			22,044
Net proceeds from issuance of common stock		93,955			-
Proceeds from stock options exercised		542			-
Principal payments under capital lease obligations		-			(252	)
Capitalized deferred financing costs		(486	)		(4,649	)
Net cash provided by financing activities		84,986			31,850
Increase (decrease) in cash		39,657			(712	)
Cash at beginning of period		5,413			1,807
Cash at end of period	$	45,070			1,095

See accompanying notes to condensed consolidated financial statements

-8-

JAMES RIVER COAL COMPANY

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(1)	Summary of Significant Accounting Policies and Other Information

Description of Business and Principles of Consolidation

The Company mines, processes and sells bituminous, steam and industrial-grade coal through five operating complexes located throughout eastern Kentucky and one in southern Indiana. Substantially all coal sales and accounts receivable relate to the electric utility and industrial markets.

The interim condensed consolidated financial statements include the accounts of the Company. The interim condensed consolidated financial statements of James River Coal Company and subsidiaries presented in this report are unaudited. All significant intercompany balances and transactions have been eliminated in consolidation. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2007. The balances presented as of or for the year ended December 31, 2007 are derived from the Company’s audited consolidated financial statements.

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 condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles. 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. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring accruals, which are necessary to present fairly the consolidated financial position of the Company and the consolidated results of its operations and cash flows for all periods presented.

Recent Accounting Pronouncements

In 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157), which defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. In February 2008, the FASB deferred the effective date of SFAS 157 by one year for certain non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). On January 1, 2008, the Company adopted the provisions of SFAS 157, except as it applies to those non-financial assets and non-financial liabilities for which the effective date has been delayed by one year. The adoption of SFAS 157 did not have a material effect on the Company’s financial position or results of operations.

In June 2008, the FASB issued FASB Staff Position Emerging Issues Task Force No. 03-6-1 Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the earnings allocation in computing earnings per share under the two-class method as described in SFAS No. 128, “Earnings per Share.” Under the guidance of FSP EITF 03-6-1, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The Company’s unvested restricted stock awards are considered “participating securities” because they contain non-forfeitable rights to dividends. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all prior-period earnings per share data presented shall be adjusted retrospectively. Early application is not permitted. The Company is currently evaluating the impact of FSP EITF 03-6-1 on its consolidated financial statements and will adopt FSP EITF 03-6-1 effective January 1, 2009.

-9-

(2)	Acquisition of Mineral Rights

In July 2008, the Company closed a transaction under an Asset Purchase Agreement to acquire certain coal reserves and permits from Cheyenne Resources, Inc. The acquired assets include 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 September 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)	Long Term Debt and Interest Expense

Long-term debt is as follows (amounts in thousands):

	September 30, 2008		December 31, 2007
Senior Notes	$	150,000	$	150,000
Term Facility (a)		16,775		38,800
Revolver (a)		13,000		-
Total long-term debt		179,775		188,800
Less amounts classified as current (a)		29,775		1,600
Total long-term debt, less current maturities	$	150,000	$	187,200

(a)

As of September 30, 2008, the Company has classified the balances of the Term Facility and the Revolver as current portion of long term debt. As discussed below, the outstanding balance of the Term Facility was repaid in full in October 2008.

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 on or after June 1, 2009 at redemption prices ranging from 104.86% in 2009 to 100% in 2011.

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.

Senior Secured Credit Facilities

In 2007, the Company entered into a $35.0 million Revolving Credit Agreement (the Revolver) and a Term Credit Agreement (collectively the Facilities). The Term Credit Agreement consists of a term facility (the Term Facility) and a $60.0 million letter of credit facility (the Letter of Credit Facility). The Letter of Credit Facility does not constitute a loan to the Company and accordingly is not available for borrowing by the Company. The Letter of Credit Facility supports the issuance of up to $60 million of letters of credit by the Company. As discussed below, the Company repaid the full balance of the Term Facility in October 2008. In May 2008, the Company entered into the Third Amendment to the Term Credit Agreement and the Second Amendment to the Revolving Credit Agreement and in November 2008, the Company entered into the Fourth Amendment to the Term Credit Agreement and the Third Amendment to the Revolving Credit Agreement (collectively the Credit Amendments). The Credit Amendments waived defaults under the Facilities as of March 31, 2008 and September 30, 2008, respectively, prospectively waived or modified certain existing financial covenants under the Facilities, increased the fee on the unused portion of the Revolver to 0.75% and increased the usage rates of the Letter of Credit Facility by amounts ranging from 3.0% to 7.0% at designated periods from October 1, 2008 to the Letter of Credit Facility’s maturity date. The Company expensed approximately $4.9 million of the costs associated with the Credit Amendments and included these in charges associated with amendments and repayment of debt in the Company’s condensed consolidated financials statements for the nine months ended September 30, 2008 ($2.2 million of these costs were unpaid as of September 30, 2008 and will be paid in the fourth quarter of 2008). The Company also had $2.9 million of fees in connection with the November 2008 amendments that are due in the fourth quarter of 2008 and a supplemental amendment fee of $5.5 million that is due in February 2009. The fees associated with the November 2008 credit amendments will be expensed in the fourth quarter of 2008. Additionally, in connection with the repayment of the Term Facility during 2008, the Company wrote off $2.4 million of capitalized financing costs which are included in charges associated with amendments and repayment of debt in the Company’s condensed consolidated financial statements.

-10-

The following is a summary of significant terms of the Facilities, as amended, as of September 30, 2008.

	Revolver	Term Facility	Letter of Credit Facility
Maturity	February 2012	February 2013	February 2013
Interest/Usage Rate	Company’s option of Base Rate(a) plus 1.75% or LIBOR plus 2.75% per annum	Company’s option of Base Rate(a) plus 4.50% or LIBOR plus 5.50% per annum	5.50% per annum (c)
Maximum Availability	Lesser of $35.0 million and the borrowing base (b)	$16.8 million outstanding as of September 30, 2008. The outstanding balance of the Term Facility was repaid in October 2008 and no amounts remain available for borrowing.	$60.0 million
Periodic Principal Payments	None	The outstanding balance of the Term Facility was repaid in October 2008.	Not applicable

(a)

Base rate is the higher of (1) the Federal Fund Rate plus 0.5% and (2) the prime rate.

(b)

The Revolver’s borrowing base is the sum of up to 85% of the eligible accounts receivable plus the lesser of (1) up to 60% of eligible inventory and (2) up to 85% of the net orderly liquidation value of eligible inventory; minus reserve from time to time set by administrative agent. Amount available is also subject to a minimum liquidity covenant.

(c)

In connection with the credit amendment that was completed in November 2008 (see above), the usage rate on the Letter of Credit Facility was raised to 7.5% effective, October 1, 2008; 10.0%, effective January 1, 2009; and 12.5% effective April 1, 2009 to the Letter of Credit Facility’s maturity date.

The Revolver provides that the Company can use up to $10.0 million of the Revolver availability to issue letters of credit. The Revolver provides for a 2.75% fee on any outstanding letters of credit issued under the Revolver and a 0.75% fee on the unused portion of the Revolver. The Facilities require certain mandatory prepayments from certain asset sales, incurrence of indebtedness and excess cash flow. The Facilities include financial covenants that require the Company to maintain a minimum EBITDA and a maximum leverage ratio and limit capital expenditures, each as defined by the agreement. The Facilities are secured by substantially all of the Company’s assets.

As of September 30, 2008, $15.0 million of the Revolver was available to the Company. We are required to maintain minimum liquidity as defined under our credit agreements of $10 million. As a result of the Credit Amendments, the Company was in compliance with all of the financial covenants under the Facilities and Senior Notes as of September 30, 2008.

During the fourth quarter of 2007 and the first quarter of 2008, the Company raised a total of approximately $82.4 million through the issuance of common shares. As required by the Term Facility, the Company offered a portion of the proceeds from the issuances of the common shares in excess of $40 million to the holders of the Term Facility to redeem amounts outstanding. In April 2008, the mandatory tender offer was accepted by the holders of the Term Facility and the Company repaid $21.3 million on the Term Facility. During the third quarter of 2008, the Company raised an additional $43.9 million through the issuance of common shares. As required by the Term Facility and Letter of Credit Facility, the Company offered a portion of the proceeds from the issuance of the common shares to the holders of the Term Facility and Letter of Credit Facility to redeem amounts outstanding. In October 2008, the mandatory tender offer was accepted by the holders of the Term Facility and Letter of Credit Facility and the Company repaid the outstanding balance of $16.8 million on the Term Facility and used $5.2 million of its cash to secure letters of credit under the Letter of Credit Facility. As a result of the repayment in October 2008, the outstanding balance of the Term Facility is classified in current maturities of long-term debt on the accompanying condensed consolidated balance sheet as of September 30, 2008. In addition, in connection with these mandatory repayments, the Company wrote-off approximately $1.3 million and $2.4 million of unamortized financing charges on the Term Facility in the three and nine months ended September 30, 2008, respectively. The write-off of the unamortized financing charges is included in charges associated with repayment and amendment of debt in the Company’s condensed consolidated financial statements.

-11-

Prior Senior Secured Credit Facility

The Company wrote off $2.4 million of financing charges in connection with the repayment of the Company’s Prior Senior Secured Credit Facility on February 26, 2007. The write off of the financing charges is classified as charges associated with repayment and amendment of debt in the accompanying condensed consolidated financial statements.

Interest Expense and Other

During the three and nine months ended September 30, 2008, the Company paid approximately $0.7 million and $9.3 million, respectively, in interest. During the three and nine months ended September 30, 2007, the Company paid approximately $1.2 million and $10.0 million, respectively, in interest.

(4)

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.

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 1,650,000, 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. Restricted shares subject to continuing vesting requirements are included in diluted shares outstanding.

Stock Option Awards

Pursuant to the Plan certain directors and employees have been awarded options to purchase common stock with such shares 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.

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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 September 30, 2008, there were 251,991 shares available under the Plan for future awards.

The Company 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.

The following table highlights the expense related to share-based payment for the periods ended September 30 (in thousands):

	Three months ended				Nine months ended
	2008		2007		2008		2007
Restricted stock	$	1,415		894		3,376		2,617
Stock options		79		84		238		239
Stock based compensation	$	1,494		978		3,614		2,856

The fair value of the restricted stock outstanding and issued 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 a risk free rate of 3.4% and a volatility of 70% for options issued during 2008. The Company uses historical experience to estimate its volatility. The Company has assumed no dividends would be issued in valuing its options.

The following is a summary of restricted stock and stock option awards for the nine months ended September 30, 2008:

	Restricted Stock					Stock Options
				Weighted					Weighted
				Average					Average
	Number of			Fair Value		Number of			Exercise
	Shares			at Issue		Shares			Price
December 31, 2007		676,307		$	15.84		264,334		$	15.79
Granted		243,140			35.68		20,000			36.30
Exercised/Vested		(186,198	)		13.52		(20,000	)		27.12
Canceled		(5,800	)		19.16		(3,334	)		14.84
September 30, 2008		727,449			23.04		261,000			16.51

The following table summarizes additional information about the stock options outstanding at September 30, 2008.

	Range of Exercise Price	Shares	Weighted Average Exercise Price	Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value (1) (in 000's)

Oustanding at September 30, 2008	$10.80-$36.30	261,000	$16.51	6.4	$2,062

Exercisable at September 30, 2008	$10.80-$33.57	189,337	$15.08	6.0	$1,604

Vested and expected to vest at September 30, 2008	$10.80-$36.30	261,000	$16.51	6.4	$2,062

(1)

The difference between a stock award's exercise price and the underlying stock's market price at September 30, 2008.

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The following table summarizes the Company’s total unearned compensation cost related to stock based compensation as of September 30, 2008.

			Weighted Average
			Remaining Period
	Unearned		Of Expense
	Compensation		Recognition
	(in 000's)		(in years)
Stock Options	$	584		1.9
Restricted Stock		13,654		2.7
Total	$	14,238

(5)	Commitments and Contingencies

The Company has established irrevocable letters of credit totaling $59.9 million as of September 30, 2008 to guarantee performance under certain contractual arrangements. The letters of credit were issued under the Company’s Letter of Credit Facility (see note 3).

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.

(6)	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, excluding restricted common stock subject to continuing vesting requirements. Diluted earnings per share is calculated based on the weighted average number of common shares outstanding during the period and, when dilutive, potential common shares from the exercise of stock options 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 loss per share (in thousands):

	Three Months Ended		Nine Months Ended
	September 30,	September 30,	September 30,	September 30,
	2008	2007	2008	2007
Weighted average number of common shares
outstanding:
Basic	25,173	16,044	23,793	15,983
Effect of dilutive instruments	-	-	-	-
Diluted	25,173	16,044	23,793	15,983

For periods in which there was a loss, the Company has excluded from its diluted loss per share calculation options to purchase shares with underlying exercise prices less than the average market prices 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 shares by approximately 0.9 and 0.8 million for the three months and nine months ended September 30, 2008, respectively, and 0.6 million and 0.7 million for the three months and nine months ended September 30, 2007, respectively.

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(7)	Pension Expense

Effective September 30, 2007, the Company froze pension plan benefit accruals for all employees covered under its qualified non-contributory defined benefit pension plan. The components of net periodic benefit cost are as follows (amounts in thousands):

	Three Months Ended			Three Months Ended
	September 30, 2008			September 30, 2007

Service cost	$	—			724
Interest cost		911			900
Expected return on plan assets		(1,089	)		(1,027	)
Net periodic (benefit) cost	$	(178	)		597


	Nine Months Ended			Nine Months Ended
	September 30, 2008			September 30, 2007

Service cost	$	—			2,173
Interest cost		2,734			2,700
Expected return on plan assets		(3,268	)		(3,082	)
Net periodic (benefit) cost	$	(534	)		1,791

(8)	Pneumoconiosis (Black Lung) Benefits

The expense for black lung benefits consists of the following (amounts in thousands):

	Three Months Ended			Three Months Ended
	September 30, 2008			September 30, 2007

Service cost	$	120			142
Interest cost		491			397
Amortization of actuarial loss		(141	)		(45	)
Total expense	$	470			494


	Nine Months Ended			Nine Months Ended
	September 30, 2008			September 30, 2007

Service cost	$	360			426
Interest cost		1,472			1,192
Amortization of actuarial loss		(422	)		(135	)
Total expense	$	1,410			1,483

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(9)	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).

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Revenues
CAPP	$	123,691			106,519			353,388			326,424
Midwest		28,151			23,533			74,345			67,999
Corporate		-			-			-			-
Total	$	151,842			130,052			427,733			394,423

Depreciation, depletion and amortization
CAPP	$	13,700			13,583			41,087			43,062
Midwest		3,441			3,729			10,848			11,456
Corporate		17			46			65			103
Total	$	17,158			17,358			52,000			54,621

Total operating loss
CAPP	$	(6,756	)		(4,226	)		(20,035	)		(19,601	)
Midwest		(1,773	)		(28	)		(9,171	)		(1,056	)
Corporate		(4,717	)		(4,274	)		(13,654	)		(11,970	)
Total	$	(13,246	)		(8,528	)		(42,860	)		(32,627	)

Net loss (1)
CAPP	$	(6,756	)		(4,226	)		(20,035	)		(19,601	)
Midwest		(1,773	)		(28	)		(9,171	)		(1,056	)
Corporate		(13,183	)		(5,442	)		(33,200	)		(14,907	)
Total	$	(21,712	)		(9,696	)		(62,406	)		(35,564	)

(1)	Income and expense items that are not included in loss from operations are not allocated to the segments.

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	September 30,		December 31,
	2008		2007
Total Assets
CAPP	$	345,255		326,571
Midwest		88,933		93,982
Corporate		70,480		18,734
Total	$	504,668		439,287

Goodwill
CAPP	$	-		-
Midwest		26,492		26,492
Corporate		-		-
Total	$	26,492		26,492

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, the Condensed Consolidated Financial Statements and accompanying notes contained herein and the Company’s annual report on Form 10-K for the year ended December 31, 2007.

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 74% of our total revenues (contract and spot) in the nine months ended September 30, 2008 from coal sales to electric utility customers and the remaining 26% from coal sales to industrial and other companies.

CAPP Segment

In Central Appalachia, 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. We have been providing coal to customers in the South Atlantic region since our formation in 1988. For the nine months ended September 30, 2008, CAPP produced 6.3 million tons of coal (including contract coal and purchased coal). Of the CAPP tons produced, 78% came from Company operated underground mines. For the nine months ended September 30, 2008, we shipped 6.3 million tons of coal and generated coal sale revenues of $353.4 million from our CAPP segment. For the nine months ended September 30, 2008, Georgia Power Company and South Carolina Public Service Authority were our largest customers, representing approximately 34% and 12% of our total revenues, respectively. No other CAPP customer accounted for more than 10% of our total revenues.

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. For the nine months ended September 30, 2008, our Midwest mines produced 2.3 million tons of coal. Of the Midwest tons produced, 78% came from Company operated surface mines. For the nine months ended September 30, 2008, we shipped 2.3 million tons of coal and generated coal sale revenues of $74.3 million from our Midwest segment. For the nine months ended September 30, 2008, our Midwest segment’s largest customer represented approximately 5% of our total revenues.

Results of Operations

Three Months Ended September 30, 2008 Compared with the Three Months Ended September 30, 2007

The following tables show selected operating results for the three months ended September 30, 2008 compared to the three months ended September 30, 2007 (in thousands except per ton amounts).

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	Three Months Ended September 30
	2008						2007						Percentage
	Total			Per Ton			Total			Per Ton			Change
Volume shipped (tons)		2,777						3,039						-9	%
Revenues
Coal sales	$	151,842			54.68		$	128,457			42.27			18	%
Synfuel handling		-						1,595
Cost of coal sold		138,873			50.01			119,251			39.24			16	%
Gain on curtailment of pension plan		-			-			(6,091	)		(2.00	)
Depreciation, depletion and amortization		17,158			6.18			17,358			5.71			-1	%
Gross profit (loss)		(4,189	)		(1.51	)		(466	)		(0.15	)		799	%
Selling, general and administrative		9,057			3.26			8,062			2.65			12	%

Volume and Revenues by Segment

	Three Months Ended September 30,
	2008				2007

	CAPP		Midwest		CAPP		Midwest

Volume (tons)		1,932		845		2,224		815

Coal sales revenue	$	123,691		28,151		104,924		23,533

Average sales price per ton	$	64.02		33.31		47.18		28.87

Coal sales revenue for the three months ended September 30 increased from $128.5 million in 2007 to $151.8 million in 2008. This increase was due to an increase in the average sales price per ton in both the CAPP and Midwest regions partially offset by a decrease in the volume of tons shipped in the CAPP region.

For the three months ended September 30, 2008, the CAPP region sold approximately 1.1 million tons of coal under long-term contracts (56% of total CAPP sales volume) at an average selling price of $52.08 per ton. For the three months ended September 30, 2007, the CAPP region sold approximately 1.9 million tons of coal under long-term contracts (85% of total CAPP sales volume) at an average selling price of $46.14 per ton. For the three months ended September 30, 2008, the CAPP region sold 845,000 tons of coal (44% of total CAPP sales volume) under short term contracts (includes spot sales) at an average selling price of $78.97 per ton. For the three months ended September 30, 2007, the CAPP region sold 340,000 tons of coal (15% of total CAPP sales volume) under short term contracts (includes spot sales) at an average selling price of $59.26 per ton.

The Midwest region’s sales of coal were under long term contracts for both the 2008 and 2007 periods. For the three months ended September 30, 2008, the Midwest region sold 845,000 tons at an average sales price of $33.31. For the three months ended September 30, 2007, the Midwest region sold 815,000 tons at an average sales price of $28.87.

Operating Costs by Segment

	Three Months Ended September 30,
	2008						2007

	CAPP		Midwest		Corporate		CAPP		Midwest		Corporate

Cost of coal sold	$	113,187		25,686		-		99,979		19,272		-

Per ton		58.59		30.40		-		44.95		23.65		-

Depreciation, depletion and amortization		13,700		3,441		17		13,583		3,729		46

Per ton		7.09		4.07		-		6.11		4.58		-

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Cost of Coal Sold

For the three months ended September 30, the cost of coal sold, excluding depreciation, depletion and amortization, increased from $119.3 million in 2007 to $138.9 million in 2008. Our cost per ton of coal sold in the CAPP region increased from $44.95 per ton in the 2007 period to $58.59 per ton in the 2008 period. This $13.64 increase in cost per ton of coal sold was primarily the result of increased regulatory scrutiny, adverse geological conditions, a tight labor market and rising commodity prices including diesel fuel and steel. As a result of these factors, the Company’s labor and benefit costs increased by $3.60 per ton and variable costs increased $4.25 per ton. Our sales related costs resulted in an additional $2.04 per ton increase due to the increase in our average sales prices. 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 $6.75 per ton to $30.40 per ton in the 2008 period. The increase in cost per ton of coal sold was primarily due to an increase of $3.70 per ton in variable costs. The increase in the variable costs was due to increased costs for diesel fuel and explosives. Our labor and benefit costs and trucking costs also increased $0.60 and $0.71 per ton, respectively. The increase in labor costs was due to an increase in wages as compared to prior year and trucking costs increased due to an increase in rates.

Depreciation, depletion and amortization

For the three months ended September 30, depreciation, depletion and amortization decreased from $17.4 million in 2007 to $17.2 million in 2008. In the CAPP region, depreciation, depletion and amortization increased $0.1 million to $13.7 million or $7.09 per ton. In the Midwest, depreciation, depletion and amortization decreased $0.3 million to $3.4 million or $4.07 per ton.

Selling, general and administrative

Selling, general and administrative expenses increased from $8.1 million for the three months ended September 30, 2007 to $9.1 million for the three months ended September 30, 2008. The increase was primarily due to increases in property taxes and employee stock compensation.

Income Taxes

Our effective income tax rate is impacted primarily by the amount of the valuation allowance recorded and percentage depletion. For the three months ended September 30, 2008, we recorded no tax benefit based on the conclusion that the benefit of the expected 2008 net operating loss is not more likely than not to be realized. The criteria for recording a valuation allowance are described in “Critical Accounting Estimates – Income Taxes.” As of September 30, 2008, we had a $34.2 million valuation allowance against gross deferred tax assets. Our effective tax rate for the three months ended September 30, 2007 was 29%. 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.

Nine Months Ended September 30, 2008 Compared with the Nine Months Ended September 30, 2007

The following tables show selected operating results for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 (in thousands except per ton amounts).

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	Nine Months Ended September 30
	2008						2007						Percentage
	Total			Per Ton			Total			Per Ton			Change
Volume shipped (tons)		8,591						9,135						-6	%
Revenues
Coal sales	$	427,733			49.79		$	388,959			42.58			10	%
Synfuel handling		-						5,464
Cost of coal sold		393,470			45.80			355,295			38.89			11	%
Gain on curtailment of penson plan		-			-			(6,091	)		(0.67	)
Depreciation, depletion and amortization		52,000			6.05			54,621			5.98			-5	%
Gross profit (loss)		(17,737	)		(2.06	)		(9,402	)		(1.03	)		89	%
Selling, general and administrative		25,123			2.92			23,225			2.54			8	%

Volume and Revenues by Segment

	Nine Months Ended September 30,
	2008				2007

	CAPP		Midwest		CAPP		Midwest

Volume (tons)		6,290		2,301		6,775		2,360

Coal sales revenue	$	353,388		74,345		320,960		67,999

Average sales price per ton	$	56.18		32.31		47.37		28.81

Coal sales revenue for the nine months ended September 30 increased from $389.0 million in 2007 to $427.7 million in 2008. This increase was due to an increase in the average sales price per ton in both the CAPP and Midwest regions, partially offset by a decrease in the volume of tons shipped.

For the nine months ended September 30, 2008, the CAPP region sold approximately 3.2 million tons of coal under long-term contracts (52% of total CAPP sales volume) at an average selling price of $50.65 per ton. For the nine months ended September 30, 2007, the CAPP region sold approximately 6.0 million tons of coal under long-term contracts (89% of total CAPP sales volume) at an average selling price of $46.22 per ton. For the nine months ended September 30, 2008, the CAPP region sold 3.1 million tons of coal (48% of total CAPP sales volume) under short term contracts (includes spot sales) at an average selling price of $62.01 per ton. For the nine months ended September 30, 2007, the CAPP region sold 777,000 tons of coal (11% of total CAPP sales volume) under short term contracts (includes spot sales) at an average selling price of $56.43 per ton.

The Midwest region’s sales of coal were under long term contracts for both the 2008 and 2007 periods. For the nine months ended September 30, 2008, the Midwest region sold 2.3 million tons at an average sales price of $32.31. For the nine months ended September 30, 2007, the Midwest region sold 2.4 million tons at an average sales price of $28.81.

Operating Costs by Segment

	2008						2007

	CAPP		Midwest		Corporate		CAPP		Midwest		Corporate

Cost of coal sold	$	322,549		70,921		-		299,801		55,494		-

Per ton		51.28		30.82		-		44.25		23.51		-