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





OR




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





For the transition period
fromto





Commission File
No. 001-32679











International Coal Group,
Inc.


(Exact Name of Registrant as Specified
in Its Charter)







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




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





(304) 760-2400


(Registrant’s Telephone Number,
Including Area Code)





N/A


(Former Name, Former
Address and Former Fiscal Year, if Changed Since Last Report)








Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. YesxNo ̈





Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company. See definition of “accelerated filer,”
“large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):





Large accelerated
filerxAccelerated
filer ̈Non-accelerated
filer ̈Smaller
reporting company ̈





Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ̈Nox





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





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





APPLICABLE ONLY TO CORPORATE
ISSUERS:





Number of shares of the Registrant’s
Common Stock, $0.01 par value, outstanding as of November 1,
2008—153,308,845.












TABLE OF
CONTENTS




PagePART I—FINANCIAL INFORMATIONItem 1.
            
            Financial Statements
            
            3Item 2.
            
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            
            16Item 3.
            
            Quantitative and Qualitative Disclosures About Market
      Risk
            
            30Item 4.
            
            Controls and Procedures
            
            31PART II—OTHER INFORMATIONItem 1.
            
            Legal Proceedings
            
            31Item 1A.
            
            Risk Factors
            
            32Item 6.
            
            Exhibits
            
            33




2


Table of Contents





PART
I




Item 1.
            Financial
      Statements





INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


Condensed Consolidated Balance Sheets
(Unaudited)


(Dollars in thousands, except per share
amounts)




September30,
              2008
            
            
            December 31,
              2007ASSETSCURRENT
    ASSETS:Cash and cash
      equivalents
            
            $
            62,222
            
            
            $
            107,150Accounts receivable, net of
      allowances of $0and $539
            
            
            118,092
            
            
            
            83,765Inventories,
      net
            
            
            48,627
            
            
            
            40,679Deferred income
      taxes
            
            
            8,224
            
            
            
            5,000Prepaid
      insurance
            
            
            3,862
            
            
            
            10,618Income taxes
      receivable
            
            
            8,854
            
            
            
            8,854Prepaid expenses and
      other
            
            
            13,035
            
            
            
            9,138Total current
      assets
            
            
            262,916
            
            
            
            265,204PROPERTY, PLANT, EQUIPMENT AND
      MINE DEVELOPMENT, net
            
            
            1,044,610
            
            
            
            974,334DEBT ISSUANCE COSTS,
      net
            
            
            11,531
            
            
            
            13,466ADVANCE ROYALTIES,
      net
            
            
            12,600
            
            
            
            14,661GOODWILL
            
            
            30,237
            
            
            
            30,237OTHER NON-CURRENT
      ASSETS
            
            
            5,548
            
            
            
            5,661Total
assets
            
            $
            1,367,442
            
            
            $
            1,303,563LIABILITIES AND STOCKHOLDERS’
      EQUITYCURRENT
      LIABILITIES:Accounts
      payable
            
            $
            74,858
            
            
            $
            70,042Current portion of long-term
      debt
            
            
            7,404
            
            
            
            4,234Current portion of reclamation and
      mine closure costs
            
            
            6,327
            
            
            
            7,333Current portion of employee
      benefits
            
            
            2,925
            
            
            
            2,925Accrued expenses and
      other
            
            
            76,347
            
            
            
            62,723Total current
      liabilities
            
            
            167,861
            
            
            
            147,257LONG-TERM
    DEBT
            
            
            418,392
            
            
            
            408,096RECLAMATION AND MINE CLOSURE
      COSTS
            
            
            79,060
            
            
            
            78,587EMPLOYEE
      BENEFITS
            
            
            62,162
            
            
            
            55,132DEFERRED INCOME
      TAXES
            
            
            57,494
            
            
            
            52,355BELOW-MARKET COAL SUPPLY
      AGREEMENTS
            
            
            46,397
            
            
            
            39,668OTHER NON-CURRENT
      LIABILITIES
            
            
            5,234
            
            
            
            8,062Total
      liabilities
            
            
            836,600
            
            
            
            789,157MINORITY
      INTEREST
            
            
            38
            
            
            
            35COMMITMENTS AND
      CONTINGENCIES
            
            
            —
            
            
            
            —STOCKHOLDERS’
      EQUITY:Preferred stock– par value $0.01, 200,000,000 shares
      authorized, none issued
            
            
            —
            
            
            
            —Common stock–par value $0.01, 2,000,000,000
      shares authorized,
      153,298,842and
      152,992,109shares, respectively,issued and
      outstanding
            
            
            1,533
            
            
            
            1,530Additional paid-in
      capital
            
            
            643,089
            
            
            
            639,160Accumulated other comprehensive
      loss
            
            
            (5,702
            )
            
            
            (5,903
            )Retained
      deficit
            
            
            (108,116
            )
            
            
            (120,416
            )Total stockholders’
      equity
            
            
            530,804
            
            
            
            514,371Total liabilities and
      stockholders’ equity
            
            $
            1,367,442
            
            
            $
            1,303,563





See notes to condensed consolidated
financial statements.




3


Table of Contents





INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


Condensed Consolidated Statements of
Operations (Unaudited)


(Dollars in thousands, except per share
amounts)




Three months
      ended
              September30,
            
            
            Nine months ended
              September30,2008
            
            
            2007
            
            
            2008
            
            
            2007REVENUES:Coal sales
      revenues
            
            $
            282,250
            
            
            $
            191,088
            
            
            $
            761,963
            
            
            $
            592,081Freight and handling
      revenues
            
            
            12,339
            
            
            
            5,044
            
            
            
            35,492
            
            
            
            14,645Other
    revenues
            
            
            14,610
            
            
            
            11,697
            
            
            
            41,554
            
            
            
            37,467Total
    revenues
            
            
            309,199
            
            
            
            207,829
            
            
            
            839,009
            
            
            
            644,193COSTS AND
      EXPENSES:Cost of coal
      sales
            
            
            240,204
            
            
            
            188,356
            
            
            
            666,598
            
            
            
            557,787Freight and handling
      costs
            
            
            12,339
            
            
            
            5,044
            
            
            
            35,492
            
            
            
            14,645Cost of other
      revenues
            
            
            9,690
            
            
            
            7,600
            
            
            
            27,847
            
            
            
            27,139Depreciation, depletion and
      amortization
            
            
            24,227
            
            
            
            23,017
            
            
            
            70,878
            
            
            
            65,987Selling, general and
      administrative
            
            
            8,396
            
            
            
            9,026
            
            
            
            27,051
            
            
            
            25,868Gain on sale of assets,
      net
            
            
            (6,383
            )
            
            
            (35,444
            )
            
            
            (32,675
            )
            
            
            (37,798
            )Total costs and
      expenses
            
            
            288,473
            
            
            
            197,599
            
            
            
            795,191
            
            
            
            653,628Income (loss) from
      operations
            
            
            20,726
            
            
            
            10,230
            
            
            
            43,818
            
            
            
            (9,435
            )INTEREST AND OTHER INCOME
      (EXPENSE):Interest expense,
      net
            
            
            (8,837
            )
            
            
            (14,434
            )
            
            
            (29,019
            )
            
            
            (26,635
            )Other, net
            
            
            —
            
            
            
            429
            
            
            
            —
            
            
            
            1,301Total interest and other income
      (expense)
            
            
            (8,837
            )
            
            
            (14,005
            )
            
            
            (29,019
            )
            
            
            (25,334
            )Income (loss) before income
      taxes and minority interest
            
            
            11,889
            
            
            
            (3,775
            )
            
            
            14,799
            
            
            
            (34,769
            )INCOME TAX (EXPENSE)
      BENEFIT
            
            
            (2,183
            )
            
            
            2,355
            
            
            
            (2,496
            )
            
            
            14,672MINORITY
      INTEREST
            
            
            2
            
            
            
            137
            
            
            
            (3
            )
            
            
            512Net income
      (loss)
            
            $
            9,708
            
            
            $
            (1,283
            )
            
            $
            12,300
            
            
            $
            (19,585
            )Earnings per
      share:Basic
            
            $
            0.06
            
            
            $
            (0.01
            )
            
            $
            0.08
            
            
            $
            (0.13
            )Diluted
            
            $
            0.06
            
            
            $
            (0.01
            )
            
            $
            0.08
            
            
            $
            (0.13
            )Weighted-average common shares
      outstanding:Basic
            
            
            152,761,955
            
            
            
            152,413,924
            
            
            
            152,587,831
            
            
            
            152,262,828Diluted
            
            
            153,025,680
            
            
            
            152,413,924
            
            
            
            152,745,474
            
            
            
            152,262,828





See notes to condensed consolidated
financial statements.




4


Table of Contents





INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


Condensed Consolidated Statements of
Cash Flows (Unaudited)


(Dollars in
thousands)




Ninemonths ended
              September30,2008
            
            
            2007CASH FLOWS FROM OPERATING
      ACTIVITIES:Net income
      (loss)
            
            $
            12,300
            
            
            $
            (19,585
            )Adjustments to reconcile net
      income (loss) to net cash from operating
activities:Depreciation, depletion and
      amortization
            
            
            70,878
            
            
            
            65,987Amortization of deferred finance
      costs included in interest expense
            
            
            2,123
            
            
            
            7,579Minority
      interest
            
            
            3
            
            
            
            (512
            )Compensation expense on restricted
      stock and options
            
            
            3,216
            
            
            
            3,769Gain on sale of assets,
      net
            
            
            (32,675
            )
            
            
            (37,798
            )Deferred income
      taxes
            
            
            2,360
            
            
            
            (21,029
            )Provision for bad
      debt
            
            
            (522
            )
            
            
            503Amortization of accumulated
      postretirement benefit obligation
            
            
            323
            
            
            
            213Changes in assets and
      liabilities:Accounts
      receivable
            
            
            (33,337
            )
            
            
            1,650Inventories
            
            
            (7,172
            )
            
            
            (4,385
            )Prepaid expenses and
      other
            
            
            3,007
            
            
            
            15,222Other non-current
      assets
            
            
            1,969
            
            
            
            (1,346
            )Accounts
      payable
            
            
            5,625
            
            
            
            2,643Accrued expenses and
      other
            
            
            13,492
            
            
            
            7,710Reclamation and mine closure
      costs
            
            
            (1,961
            )
            
            
            3,181Other
      liabilities
            
            
            4,202
            
            
            
            5,160Net cash from operating
      activities
            
            
            43,831
            
            
            
            28,962CASH FLOWS FROM INVESTING
      ACTIVITIES:Proceeds from the sale of
      assets
            
            
            8,688
            
            
            
            44,992Additions to property, plant,
      equipment and mine development
            
            
            (92,995
            )
            
            
            (123,817
            )Cash paid related to acquisitions
      and net assets acquired
            
            
            (603
            )
            
            
            (11,773
            )Withdrawals of restricted
      cash
            
            
            18
            
            
            
            440Net cash from investing
      activities
            
            
            (84,892
            )
            
            
            (90,158
            )CASH FLOWS FROM FINANCING
      ACTIVITIES:Borrowings on short-term
      debt
            
            
            —
            
            
            
            26,082Repayments on short-term
      debt
            
            
            —
            
            
            
            (44,830
            )Borrowings on long-term
      debt
            
            
            —
            
            
            
            65,000Repayments on long-term
      debt
            
            
            (3,828
            )
            
            
            (67,514
            )Proceeds from senior notes
      offering
            
            
            —
            
            
            
            225,000Proceeds from stock options
      exercised
            
            
            149
            
            
            
            —Debt issuance
      costs
            
            
            (188
            )
            
            
            (9,328
            )Net cash from financing
      activities
            
            
            (3,867
            )
            
            
            194,410NET CHANGE IN CASH AND CASH
      EQUIVALENTS
            
            
            (44,928
            )
            
            
            133,214CASH AND CASH EQUIVALENTS,
      BEGINNING OF PERIOD
            
            
            107,150
            
            
            
            18,742CASH AND CASH EQUIVALENTS, END OF
      PERIOD
            
            $
            62,222
            
            
            $
            151,956Supplemental
      information:Cash paid for interest (net of
      amount capitalized)
            
            $
            35,859
            
            
            $
            21,290Cash received for income taxes,
      net
            
            $
            —
            
            
            $
            774Supplemental disclosure of
      non-cash items:Purchases of property, plant,
      equipment and mine development through accounts
    payable
            
            $
            13,481
            
            
            $
            2,465Purchases of property, plant,
      equipment and mine development through financing
      arrangements
            
            $
            17,294
            
            
            $
            10,971Assets acquired through the
      assumption of liabilities
            
            $
            17,464
            
            
            $
            1,586Assets acquired through the
      exchange ofproperty
            
            $
            22,608
            
            
            $
            —





See notes to condensed consolidated
financial statements.




5


Table of Contents





INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


September 30,
2008


(Dollars in thousands, except per share
amounts)





(1) Basis of
Presentation





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





The accompanying interim condensed
consolidated financial statements as of September 30, 2008 and for the
three and nine months ended September 30, 2008 and 2007, and the notes
thereto, are unaudited. However, in the opinion of management, these financial
statements reflect all normal, recurring adjustments necessary for a fair
presentation of the results of the periods presented. The balance sheet
information as of December 31, 2007 has been derived from the Company’s
audited consolidated balance sheet. These statements should be read in
conjunction with the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2007. The results of operations for the three and nine
months ended September 30, 2008 are not necessarily indicative of the
results to be expected for future quarters or for the year ending
December 31, 2008.





(2) Summary of Significant Accounting
Policies and General





Revenue Recognition—Coal revenues result from sales
contracts (long-term coal contracts or purchase orders) with electric utilities,
industrial companies or other coal-related organizations, primarily in the
easternUnited
States. Revenue is
recognized and recorded at the time of shipment or delivery to the customer,
prices are fixed or determinable and the title or risk of loss has passed in
accordance with the terms of the sales agreement. Under the typical terms of
these agreements, risk of loss transfers to the customers at the mine or port,
where coal is loaded to the rail, barge, truck or other transportation source
that delivers coal to its destination.





Coal
sales revenues also result from the sale of broker coal produced by others.
Revenue is recognized and recorded at the time of shipment or delivery to the
customer, prices are fixed or determinable and the title or risk of loss has
passed in accordance with the terms of the sale agreement. The revenues related
to broker coal sales are included in coal sales revenues on a gross basis and
the corresponding cost of the coal from the supplier is recorded in cost of coal
sales in accordance with Emerging Issues Task Force (“EITF”) 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent.





Fair Value
Measurements—In September
2006, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 157,Fair Value
Measurements(“SFAS
No. 157”). SFAS No. 157 clarifies the definition of fair value,
establishes a framework for measuring fair value and expands the disclosures on
fair value measurements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007. Adoption of SFAS No. 157 did not
have a material impact on the Company’s financial position, results of
operations or cash flows; however, adoption did result in additional information
being included in the footnotes accompanying the Company’s condensed
consolidated financial statements. See Note 8.





In
February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2, Effective Date of FASB Statement No.
157 (“FSP 157-2”). FSP 157-2 permits delayed adoption of SFAS 157 for
certain non-financial assets and liabilities, which are not recognized at fair
value on a recurring basis, until fiscal years, and interim periods within those
fiscal years, beginning after November 15, 2008. The Company is currently
evaluating the effect, if any, the adoption of FSP 157-2 will have on its
financial position, results of operations and cash flows.





Fair Value
Option—In February 2007,
the FASB issued SFAS No. 159,The Fair Value
Option for Financial Assets and Financial Liabilities – Including an amendment
of FASB Statement No. 115(“SFAS No. 159”). SFAS
No. 159 provides entities with an option to report selected financial
assets and liabilities at fair value and establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and liabilities.
SFAS No. 159 is effective as of the beginning of the first fiscal year that
begins after November 15, 2007. Adoption of SFAS No. 159 did not have
a material impact on the Company’s financial position, results of operations or
cash flows.





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





Convertible
Debt—In May 2008, the FASB
issued FSP No. APB 14-1,Accounting for
Convertible Debt Instruments That May be Settled in Cash Upon Conversion
(Including Partial Cash Settlement)(“FSP APB 14-1”). FSP APB 14-1 requires
the liability and equity components of convertible debt instruments that may be
settled in cash upon conversion to be separately accounted for in a manner that
reflects the issuer’s nonconvertible debt borrowing rate. To allocate the
proceeds from a convertible debt offering in this manner, a company would first
need to determine the carrying amount of the liability component, which would be
based on the fair value of a similar liability, excluding any embedded
conversion options. The resulting debt discount would be amortized over the
period during which the debt is expected to be outstanding as additional
non-cash interest expense. FSP APB 14-1 is effective for financial statements
for fiscal years beginning after December 15, 2008 and would be applied
retrospectively for all periods presented. The Company has determined its
non-convertible borrowing rate would have been 11.7% at issuance. The Company is
currently evaluating the effect the adoption of FSP APB 14-1 will have on its
financial position, results of operations and cash flows.





Business
Combinations—In December
2007, the FASB issued SFAS No. 141 (Revised 2007),Business
Combinations(“SFAS
No. 141(R)”). SFAS No. 141(R) will significantly change the accounting
for business combinations. Under SFAS No. 141(R), an acquiring entity will
be required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value with limited exceptions. SFAS
No. 141(R) will change the accounting treatment for certain specific
acquisition-related items including: (i) expensing acquisition-related
costs as incurred, (ii) valuing noncontrolling interests at fair value at
the acquisition date and (iii) expensing restructuring costs associated
with an acquired business. SFAS No. 141(R) also includes a substantial
number of new disclosure requirements. SFAS No. 141(R) is to be applied to
any business combination for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after
December 15, 2008. Upon adoption, SFAS No. 141(R) will impact the
accounting for the Company’s future business combinations.




6


Table of Contents





INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


September 30, 2008


(Dollars in thousands, except per share
amounts)




Noncontrolling
Interests—In December 2007,
the FASB issued SFAS No. 160,Noncontrolling
Interests in Consolidated Financial Statements(“SFAS No. 160”). SFAS
No. 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary
(minority interest) is an ownership interest in the consolidated entity that
should be reported as equity in the consolidated financial statements and
separate from the parent company’s equity. Among other requirements, this
statement requires consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the noncontrolling
interest. It also requires disclosure, on the face of the consolidated statement
of operations, of the amounts of consolidated net income attributable to the
parent and to the noncontrolling interest. SFAS No. 160 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. The Company is currently evaluating the effect, if
any, the adoption of SFAS No. 160 will have on its financial position,
results of operations and cash flows.





Derivative
Instruments—In March 2008,
the FASB issued SFAS No. 161,Disclosures about
Derivative Instruments and Hedging Activities – an amendment of FASB Statement
No. 133(“SFAS No. 161”). SFAS
No. 161 requires additional disclosures for derivative instruments and
hedging activities that include how and why an entity uses derivatives, how
these instruments and the related hedged items are accounted for under FASB
Statement No. 133,Accounting for
Derivative Instruments and Hedging Activities, and related interpretations and how
derivative instruments and related hedged items affect the entity’s financial
position, results of operations and cash flows. SFAS No. 161 is effective
for fiscal years, and interim periods within those fiscal years, beginning after
November 15, 2008. The Company does not expect the adoption of SFAS
No. 161 to have a material impact on its financial position, results of
operations or cash flows and it is currently evaluating the effect, if any,
adoption will have on the footnotes accompanying its condensed consolidated
financial statements.





GAAP
Hierarchy—In May 2008,
the FASB issued SFAS No. 162,The Hierarchy of
Generally Accepted Accounting Principles(“SFAS No. 162”). SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles. SFAS No. 162 directs the hierarchy to the
entity, rather than the independent auditors, as the entity is responsible for
selecting accounting principles for financial statements that are presented in
conformity with generally accepted accounting principles. SFAS No. 162 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. The Company does not expect the
adoption of SFAS No. 162 to have a material impact on its financial
position, results of operations or cash flows.





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





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





(3) Inventories





Inventories consisted of the
following:




September30,
              2008
            
            
            December 31,
              2007Coal
            
            $
            21,415
            
            
            $
            19,855Parts and
      supplies
            
            
            28,664
            
            
            
            21,602Reserve for obsolescence–parts and
      supplies
            
            
            (1,452
            )
            
            
            (778
            )Total
            
            $
            48,627
            
            
            $
            40,679





7


Table of Contents





INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


September 30, 2008


(Dollars in thousands, except per share
amounts)





(4) Property, Plant, Equipment and
Mine Development





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




September30,
              2008
            
            
            December 31,
              2007Coal lands and mineral
      rights
            
            $
            586,534
            
            
            $
            594,034Plant and
      equipment
            
            
            524,022
            
            
            
            442,530Mine
      development
            
            
            178,302
            
            
            
            133,181Land and land
      improvements
            
            
            23,562
            
            
            
            20,889Coalbed methane well development
      costs
            
            
            14,965
            
            
            
            14,2761,327,385
            
            
            
            1,204,910Less–accumulated depreciation,
      depletion and amortization
            
            
            (282,775
            )
            
            
            (230,576
            )Net property, plant, equipment and
      mine development
            
            $
            1,044,610
            
            
            $
            974,334





Depreciation, depletion and amortization
expense related to property, plant, equipment and mine development for the three
months ended September 30, 2008 and 2007 was $25,852 and $26,775,
respectively. Depreciation, depletion and amortization expense related to
property, plant, equipment and mine development for the nine months ended
September 30, 2008 and 2007 was $77,959 and $80,037,
respectively.





On June 23, 2008, the Company
exchanged certain coal reserves with a third-party. In addition to reserves, the
Company received $3,000 in cash. As a result, the Company recognized a pre-tax
gain of $24,633 based upon the fair value of the underlying assets received in
the exchange, which is included in gain on sale of assets in its statement of
operations for the nine months ended September 30, 2008. Additionally, on
September 29, 2008, the Company exchanged certain property resulting in the
recognition of a $975 pre-tax gain based upon the fair value of the underlying
assets given up in the exchange. The gain is included in gain on sale of assets
in the Company’s statement of operations for the three and nine months ended
September 30, 2008.




8





Table of Contents





INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


September 30, 2008


(Dollars in thousands, except per share
amounts)




(5) Long-term Debt





Long-term debt consisted of the
following:




September30,
              2008
            
            
            December 31,
              20079.00% Convertible Senior Notes,
      due 2012
            
            $
            225,000
            
            
            $
            225,00010.25% Senior Notes, due
      2014
            
            
            175,000
            
            
            
            175,000Equipment
    notes
            
            
            25,796
            
            
            
            12,330Total
            
            
            425,796
            
            
            
            412,330Less current
      portion
            
            
            (7,404
            )
            
            
            (4,234
            )Long-term
    debt
            
            $
            418,392
            
            
            $
            408,096





Convertible Senior
Notes—The Convertible
Senior Notes due 2012 (the “Convertible Notes”) bear interest at an annual rate
of 9.00%, payable semi-annually in arrears on February 1 and August 1
of each year.





The Convertible Notes became convertible
at the option of holders beginning July 1, 2008. The conversion
period expired on September 30, 2008 pursuant to the terms of the governing
indenture with no holders exercising their conversion rights. The Convertible Notes may become
convertible again in the future under certain conditions. Accordingly, the Company will reassess the
convertibility on a quarterly basis.





The principal amount of the Convertible
Notes is payable in cash and amounts above the principal amount, if any, will be
convertible into shares of the Company’s common stock or, at the Company’s
option, cash. The Convertible Notes are convertible at an initial conversion
price, subject to adjustment, of $6.10 per share (approximating 163.8136 shares
per one thousand dollar principal amount of the Convertible Notes).The
volume weighted-average price of the Company’s stock subsequent to the
expiration date of the conversion period was below $6.10 per share. Accordingly,
there were no potentially convertible shares at September 30, 2008. The Convertible Notes are convertible
upon the occurrence of certain events, including (i) prior to
February 12, 2012 during any calendar quarter after September 30,
2007, if the closing sale price per share of the Company’s common stock for each
of 20 or more trading days in a period of 30 consecutive trading days ending on
the last trading day of the immediately preceding calendar quarter exceeds 130%
of the conversion price in effect on the last trading day of the immediately
preceding calendar quarter; (ii) prior to February 12, 2012 during the
five consecutive business days immediately after any five consecutive trading
day period in which the average trading price for the notes on each day during
such five trading-day period was equal to or less than 97% of the closing sale
price of the Company’s common stock on such day multiplied by the then current
conversion rate; (iii) upon the occurrence of specified corporate
transactions; and (iv) at any time from, and including February 1,
2012 until the close of business on the second business day immediately
preceding August 1, 2012. In addition, upon events defined as a
“fundamental change” under the Convertible Notes indenture, the Company may be
required to repurchase the Convertible Notes at a repurchase price in cash equal
to 100% of the principal amount of the notes to be repurchased, plus any accrued
and unpaid interest to, but excluding, the fundamental change repurchase date.
As such, in the event of a fundamental change or the aforementioned average
pricing thresholds are met, the Company would be required to classify the entire
amount outstanding of the Convertible Notes as a current liability in the
following quarter. In addition, if conversion occurs in connection with certain
changes in control, the Company may be required to deliver additional shares of
the Company’s common stock (a “make whole” premium) by increasing the conversion
rate with respect to such notes.





Pursuant to EITF 90-19,Convertible Bonds
with Issuer Option to Settle for Cash upon Conversion,EITF 00-19,Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stockand
EITF 01-6,The Meaning of
Indexed to a Company’s Own Stock, the Convertible Notes are accounted
for as convertible debt in the accompanying consolidated balance sheet and the
embedded conversion option in the Convertible Notes has not been accounted for
as a separate derivative. For a discussion of the effects of the Convertible
Notes on earnings per share, see Note 9.





Credit
Facility—In June 2006,
the Company entered into a second amended and restated credit agreement (the
“Amended Credit Facility”) consisting of a revolving credit facility which
matures on June 23, 2011. In July 2007, the Company further amended the
Amended Credit Facility to decrease the maximum borrowings to $100,000, of which
a maximum of $80,000 may be used for letters of credit. The amendment, among
other things, modified the maximum permitted leverage ratio, the minimum
interest coverage ratio and the maximum amount of capital expenditures
permitted. Further, the amendment also revised certain interest rate thresholds
and unused commitment fee levels under the Amended Credit Facility. As of
September 30, 2008, the Company had no borrowings outstanding. Letters of
credit totaling $71,551 were outstanding, leaving $28,449 available for future
borrowings. Interest on the borrowings under the Amended Credit Facility is
payable, at the Company’s option, at either the base rate plus a margin of 1.25%
to 2.00% or LIBOR plus a margin of 2.25% to 3.00% based on the Company’s
leverage ratio as of September 30, 2008. The Company is in compliance with
the covenants under the Amended Credit Facility.





Equipment
Notes—The equipment notes,
having various maturity dates extending to September 2013, are collateralized by
mining equipment. At September 30, 2008, the equipment notes bore interest
at fixed rates that ranged from 5.10% to 7.45%.




9





Table of Contents





INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


September 30, 2008


(Dollars in thousands, except per share
amounts)




(6) Income Taxes





The effective income tax rate for the
three and nine months ended September 30, 2008 was calculated using an
estimated annual effective rate based on projected earnings for the year. The
effective income tax rate for the three months ended September 30, 2008
decreased to 18% compared to 62% for the three months ended September 30,
2007 and to 17% for the nine months ended September 30, 2008 from 42% for the
nine months ended September 30, 2007. The decreases were primarily a result
of the effect of income tax deductions for depletion of mineral rights on
projected earnings offset by an increase in other non-deductible expenses
and an adjustment to reflect the expected full year 2008 effective income
tax rate.





(7) Employee
Benefits





The following table details the
components of the net periodic benefit cost for postretirement benefits other
than pensions for the three and nine months ended September 30, 2008 and
2007.




Three months ended
              September30,
            
            
            Ninemonths ended
              September30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net periodic benefit
      cost:Service
cost
            
            $
            651
            
            
            $
            514
            
            
            $
            1,955
            
            
            $
            1,542Interest
    cost
            
            
            407
            
            
            
            263
            
            
            
            1,220
            
            
            
            789Amortization of net
      loss
            
            
            107
            
            
            
            71
            
            
            
            322
            
            
            
            213Benefit
cost
            
            $
            1,165
            
            
            $
            848
            
            
            $
            3,497
            
            
            $
            2,544





The plan is unfunded, therefore, no
contributions were made by the Company for the three and nine months ended
September 30, 2008 and 2007.





(8) Fair Value
Measurements





Effective January 1, 2008, the
Company adopted SFAS No. 157, which clarifies the definition of fair value,
establishes a framework for measuring fair value and expands the disclosures on
fair value measurements. SFAS No. 157 applies whenever other statements
require or permit assets or liabilities to be measured at fair value. SFAS
No. 157 requirements for certain non-financial assets and liabilities have
been deferred until the first quarter of 2009 in accordance with FSP
157-2.SFAS No. 157 establishes the
following fair value hierarchy that prioritizes the inputs used to measure fair
value:




•
            
            Level 1 –
            
            Unadjusted quoted prices for
      identical assets or liabilities in active
  markets.•
            
            Level 2 –
            
            Inputs other than Level 1 that are
      based on observable market data, either directly or indirectly. These
      include quoted prices for similar assets or liabilities in active markets,
      quoted prices for identical assets or liabilities in inactive markets,
      inputs that are observable that are not prices and inputs that are derived
      from or corroborated by observable markets.•
            
            Level 3 –
            
            Developed from unobservable data,
      reflecting an entity’s own
assumptions.





The Company entered into an Interest
Rate Collar Agreement (the “Collar”) that expires on March 31, 2009. The
interest rate collar was designed as a cash flow hedge to offset the impact of
changes in the LIBOR interest rate above 5.92% and below 4.80%. At
September 30, 2008, a liability for the fair value of the Collar was
included in accrued expenses and other on the Company’s consolidated balance
sheet. The value of the interest rate collar is based on a forward LIBOR curve,
which is observable at commonly quoted intervals for the full term of the
agreement. The Company recognizes the change in the fair value of this agreement
in the period of change. For the three and nine months ended September 30,
2008, the Company recorded income of $455 and a loss of $1,044, respectively,
related to the change in fair value. The loss is included in interest expense in
the Company’s consolidated statement of operations.





The following table presents the fair
value hierarchy for financial liabilities measured at fair value on a recurring
basis:






Fair Value Measurements Using:Description
            
            September30,
              2008
            
            
            Quoted Prices
              in
Active
              Markets
      for
              Identical
              Assets
              (Level 1)
            
            
            Significant
              Other
              Observable
              Inputs
              (Level 2)
            
            
            Significant
              Unobservable
              Inputs
              (Level 3)Interest Rate Collar
      Agreement
            
            $
            1,246
            
            
            $
            —
            
            
            $
            1,246
            
            
            $
            —





10





Table of Contents





INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


September 30, 2008


(Dollars in thousands, except per share
amounts)




(9) Earnings Per
Share





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





Reconciliations of weighted-average
shares outstanding used to compute basic and diluted earnings per share for the
three and nine months ended September 30, 2008 and 2007 are as
follows:


Three months
      ended
                September30,
              
              
              Ninemonths ended
                September30,2008
              
              
              2007
              
              
              2008
              
              
              2007Net income
      (loss)
              
              $
              9,708
              
              
              $
              (1,283
              )
              
              $
              12,300
              
              
              $
              (19,585
              )Weighted-average common shares
      outstanding—basic
              
              
              152,761,955
              
              
              
              152,413,924
              
              
              
              152,587,831
              
              
              
              152,262,828Incremental shares arising from
      stock options
              
              
              172,624
              
              
              
              —
              
              
              
              27,249
              
              
              
              —Incremental shares arising from
      restricted shares
              
              
              91,101
              
              
              
              —
              
              
              
              130,394
              
              
              
              —Weighted-average common shares
      outstanding—diluted
              
              
              153,025,680
              
              
              
              152,413,924
              
              
              
              152,745,474
              
              
              
              152,262,828Earnings Per
      Share:Basic
              
              $
              0.06
              
              
              $
              (0.01
              )
              
              $
              0.08
              
              
              $
              (0.13
              )Diluted
              
              $
              0.06
              
              
              $
              (0.01
              )
              
              $
              0.08
              
              
              $
              (0.13
              )




Options to purchase 1,076,552 and
1,105,352 shares of common stock outstanding at September 30, 2008 have
been excluded from the computation of diluted net income per share for the three
and nine months ended September 30, 2008 because their effect would have
been anti-dilutive. Options to purchase 2,026,662 shares of common stock and
574,660 shares of restricted common stock outstanding at September 30, 2007
have been excluded from the computation of diluted net loss per share for the
three and nine months ended September 30, 2007 because their effect would
have been anti-dilutive.





In July 2007, the Company completed the
offering of its Convertible Notes. The principal amount of the Convertible Notes
is payable in cash and amounts above the principal amount, if any, will be
convertible into shares of the Company’s common stock or, at the Company’s
option,cash.The volume weighted-average
price of the Company’s stock subsequent to the expiration date of the conversion
period was below $6.10 per share. Accordingly, there were no potentially
dilutive shares at September 30, 2008.





(10) Acquisition





On May 27, 2008, the Company
entered into an agreement to purchase the membership interests of Powdul
Acquisition LLC. The purchase resulted in the Company acquiring the idlePowellMountainunderground mining operation and
related assets. The cost of the acquired entity totaled $18,067 which included
cash paid of $450, other related acquisition costs of $153 and total liabilities
of $17,464. Total liabilities include current liabilities of $132, asset
retirement obligations of $3,522 and a below-market contract valued at $13,810.
As a result of the purchase price allocation, the Company recorded current
assets of $1,335, mineral interests of $11,007, development costs of $1,922 and
property, plant and equipment of $3,803. Certain asset values assigned were
based upon management’s estimates and are subject to adjustment upon final
determination of the respective fair values. The acquisition would not have had
a material impact on the Company’s results of operations had it taken place on
January 1, 2008.




11





Table of Contents





INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


September 30, 2008


(Dollars in thousands, except per share
amounts)




(11) Commitments and
Contingencies





Guarantees
and Financial Instruments with Off-balance Sheet Risk—In the normal course of business, the
Company is a party to certain guarantees and financial instruments with
off-balance sheet risk, such as bank letters of credit and performance or surety
bonds. No liabilities related to these arrangements are reflected in the
Company’s condensed consolidated balance sheets. Management does not expect any
material losses to result from these guarantees or off-balance sheet financial
instruments. The Company has outstanding surety bonds with third parties
totaling approximately $116,235 as of September 30, 2008 to secure
reclamation and other performance commitments. As of September 30, 2008,
the Company has bank letters of credit outstanding of $71,551 under its
revolving credit facility.





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





Allegheny Energy Supply (“Allegheny”),
the sole customer of coal produced at the Company’s subsidiary Wolf Run Mining
Company’s (“Wolf Run”) Sycamore No. 2 mine, filed a lawsuit against Wolf
Run, Hunter Ridge Holdings, Inc. (“Hunter Ridge”), and the Company in state
court in Allegheny County, Pennsylvania on December 28, 2006, and amended
its complaint on April 23, 2007. Allegheny claims that the Company breached
a coal supply contract when it declared force majeure under the contract upon
idling the Sycamore No. 2 in the third quarter of 2006. The Sycamore
No. 2 mine was idled after encountering adverse geologic conditions and
abandoned gas wells that were previously unidentified and unmapped. The amended
complaint also alleges that the production stoppages constitute a breach of the
guarantee agreement by Hunter Ridge and breach of certain representations made
upon entering into the contract in early 2005, a claim that Allegheny has since
voluntarily dropped. Allegheny claims that it will incur costs in excess of
$100,000 to purchase replacement coal over the life of the contract.The Company, Wolf Run and
Hunter Ridge answered the amended complaint on August 13, 2007, disputing all of
the remaining claims. On November 3, 2008, the Company, Wolf Run and Hunter
Ridge filed an amended answer and counterclaim against the plaintiffs seeking to
void the coal supply agreement due to, among other things, fraudulent inducement
and conspiracy. The counterclaim alleges further that Allegheny breached a
confidentiality agreement with Hunter Ridge, which prohibited the solicitation
of its employees. After the coal supply agreement was executed, Allegheny hired
the then-president of Anker Coal Group, Inc. (now Hunter Ridge) who engaged in
negotiations on behalf of Wolf Run and Hunter Ridge. In addition to seeking a
declaratory judgment that the coal supply agreement and guaranty be deemed void
and unenforceable and rescission of the contracts, the counterclaim also seeks
compensatory and punitive damages.





On April 5, 2007, the City ofAnn Arbor
Employees’ Retirement
System filed a class action lawsuit in the U.S. District Court for the Southern
District of West Virginia against the Company and certain of its officers,
directors and underwriters. The amended complaint asserted claims under Sections
11, 12(a)(2) and 15 of the Securities Act of 1933 based on alleged false and
misleading statements in the registration statements filed in connection with
the Company’s November 2005 reorganization and December 2005 public offering of
common stock. The Company and the named officers and directors filed a motion to
dismiss the amended complaint on September 28, 2007, as did the
underwriters, and, on September 30, 2008, the court dismissed the action in its
entirety.The plaintiffs did not appeal the dismissal.





On December 6, 2007, the Kentucky
Waterways Alliance, Inc., and The Sierra Club sued the U.S. Army Corps of
Engineers (the “ACOE”) in the United States District Court for the Western
District of Kentucky, Louisville Division, asserting that a permit to construct
five valley fills was issued unlawfully to the Company’s Hazard subsidiary for
its Thunder Ridge Surface mine. The suit alleges that the ACOE failed to comply
with the requirements of both Section 404 of the Clean Water Act and the
National Environmental Policy Act. Hazard has intervened in the suit to protect
the Company’s interests. The ACOE suspended the Section 404 permit on
December 26, 2007 in order to evaluate the issues raised by the plaintiffs.
That evaluation is now in progress. If the ACOE reinstates the permit and the
Court subsequently finds that the permit is unlawful, production could be
materially affected at the Thunder Ridge Surface mine and the process of
obtaining ACOE permits for coal mining activities inKentuckycould become more
difficult.




12





Table of Contents





INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


September 30, 2008


(Dollars in thousands, except per share
amounts)




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





In May 2008, seven subsidiaries of the
Company reached settlements with the West Virginia Department of Environmental
Protection, Division of Water and Waste Management (the “WVDEP”) over past
violations of the Clean Water Act related to wastewater discharge permits. In
late 2007, the subsidiary companies voluntarily approached the WVDEP in an
effort to resolve any past violations and to identify and correct any
deficiencies in their routine monitoring and reporting programs. As a result,
WVDEP commenced administrative enforcement actions against each of the seven
subsidiaries, and after a thorough review of the relevant record and permit
terms, the parties agreed to individual consent orders dated May 19, 2008
(Juliana Mining Company, Inc., Vindex Energy Corporation, King Knob Coal Co.,
Inc., Patriot Mining Company, Inc., ICG Eastern, LLC, Hawthorne Coal Company,
Inc. and Wolf Run Mining Company). The consent orders require payment of a
penalty that is approximately $437 in the aggregate, each subsidiary to develop
and implement a comprehensive reporting plan for its water quality compliance
program and develop specific corrective action plans where
needed.





On
July 3, 2007, Taylor Environmental Advocacy Membership, Inc. (“T.E.A.M.”) filed
a petition to appeal the issuance of ICG Tygart Valley, LLC’s (“Tygart Valley”)
Surface Mine Permit U-2004-06 against the West Virginia Department of
Environmental Protection (the “WVDEP”) in an action before the West Virginia
Surface Mine Board (the “Board”). On December 10, 2007, the Board remanded the
permit to the WVDEP for revision to certain provisions related to pre-mining
water monitoring and cumulative hydrologic impacts. The WVDEP issued a
modification on April 1, 2008 addressing those issues. T.E.A.M. filed an appeal
of the WVDEP’s approval of the permit modification on April 30, 2008. On October
7, 2008, the Board issued an order remanding the permit to the WVDEP requiring
Tygart Valley to address a technical issue related to projected post-mining
water quality. Tygart Valley has prepared and submitted a permit modification to
alleviate the board’s concerns. All site development will be suspended until the
WVDEP has approved the permit modification. If the WVDEP issues the permit
as modified, there will be additional opportunity for appeal by
T.E.A.M.





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





(12) Related Party Transactions and
Balances





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





The Company has paid legal fees relating
to the representation of WLR and the Company’s Chairman, Mr. Wilbur L.
Ross, Jr., by counsel in connection with various litigation matters pending
against the Company, WLR and Mr. Ross related to the Sago mine accident.
During the three and nine months ended September 30, 2007, the Company recorded
expenses totaling approximately $171 and $505, respectively, relating to these
matters. The Company did not record any expense in 2008 relating to these
matters.





(13) Segment
Information





The Company extracts, processes and
markets steam and metallurgical coal from deep and surface mines for sale to
electric utilities and industrial customers, primarily in the easternUnited States. The Company operates only in theUnited Stateswith mines in the Central Appalachian,
Northern Appalachian andIllinoisBasinregions. The Company has three
reportable business segments: Central Appalachian, Northern Appalachian andIllinoisBasin. The Company’s Central Appalachian
operations are located in southernWest Virginia, easternKentuckyand westernVirginiaand include eight mining complexes. The
Company’s Northern Appalachian operations are located in northernWest VirginiaandMarylandand include four mining complexes. The
Company’sIllinoisBasinoperations include one mining complex.
The Company also has an Ancillary category, which includes the Company’s
brokered coal functions, corporate overhead, contract highwall mining services
and land activities.




13





Table of Contents





INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


September 30, 2008


(Dollars in thousands, except per share
amounts)




Reportable segment results for
continuing operations for the three and nine months ended September 30,
2008 and 2007 and segment assets as of September 30, 2008 and 2007 were as
follows:





Three months endedSeptember30, 2008:




Central
              Appalachian
            
            
            Northern
              Appalachian
            
            
            Illinois
              Basin
            
            
            Ancillary
            
            
            ConsolidatedRevenue
            
            $
            207,452
            
            
            $
            57,589
            
            
            $
            21,114
            
            
            $
            23,044
            
            
            $
            309,199Adjusted
    EBITDA
            
            
            36,779
            
            
            
            3,796
            
            
            
            3,924
            
            
            
            454
            
            
            
            44,953Depreciation, depletion and
      amortization
            
            
            16,004
            
            
            
            5,078
            
            
            
            1,658
            
            
            
            1,487
            
            
            
            24,227Capital
      expenditures
            
            
            32,741
            
            
            
            9,420
            
            
            
            2,898
            
            
            
            1,270
            
            
            
            46,329Total
assets
            
            
            743,324
            
            
            
            186,255
            
            
            
            35,831
            
            
            
            402,032
            
            
            
            1,367,442Goodwill
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            30,237
            
            
            
            30,237





Three months endedSeptember30, 2007:




Central
              Appalachian
            
            
            Northern
              Appalachian
            
            
            Illinois
              Basin
            
            
            Ancillary
            
            
            ConsolidatedRevenue
            
            $
            135,623
            
            
            $
            32,565
            
            
            $
            17,706
            
            
            $
            21,935
            
            
            $
            207,829Adjusted
    EBITDA
            
            
            7,391
            
            
            
            (8,233
            )
            
            
            3,790
            
            
            
            30,728
            
            
            
            33,676Depreciation, depletion and
      amortization
            
            
            14,917
            
            
            
            3,204
            
            
            
            1,436
            
            
            
            3,460
            
            
            
            23,017Capital
      expenditures
            
            
            35,405
            
            
            
            8,021
            
            
            
            688
            
            
            
            664
            
            
            
            44,778Total
assets
            
            
            811,540
            
            
            
            161,306
            
            
            
            39,505
            
            
            
            498,277
            
            
            
            1,510,628Goodwill
            
            
            169,601
            
            
            
            —
            
            
            
            —
            
            
            
            30,095
            
            
            
            199,696





Revenue in the Ancillary category
consists primarily of $12,423and $11,992relating to the Company’s brokered coal
sales and $5,799and $5,520relating to contract highwall mining
activities for the three months endedSeptember30, 2008 and 2007, respectively.
Capital expenditures include non-cash amounts of $24,935for the three months endedSeptember30, 2008.Capital expenditures do not include
$16,673 paid duringthe three months ended September 30,
2008 related to capital expenditures accrued in prior periods. Capital
expenditures do not include $10,240 paid during the three months ended September
30, 2007 related to capital expenditures accrued in prior
periods.





Ninemonths endedSeptember30, 2008:




Central
              Appalachian
            
            
            Northern
              Appalachian
            
            
            Illinois
              Basin
            
            
            Ancillary
            
            
            ConsolidatedRevenue
            
            $
            536,956
            
            
            $
            172,923
            
            
            $
            60,399
            
            
            $
            68,731
            
            
            $
            839,009Adjusted
    EBITDA
            
            
            98,924
            
            
            
            15,321
            
            
            
            10,167
            
            
            
            (9,716
            )
            
            
            114,696Depreciation, depletion and
      amortization
            
            
            47,569
            
            
            
            12,639
            
            
            
            5,420
            
            
            
            5,250
            
            
            
            70,878Capital
      expenditures
            
            
            71,159
            
            
            
            31,074
            
            
            
            3,474
            
            
            
            4,812
            
            
            
            110,519Total
assets
            
            
            743,324
            
            
            
            186,255
            
            
            
            35,831
            
            
            
            402,032
            
            
            
            1,367,442Goodwill
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            30,237
            
            
            
            30,237





Ninemonths endedSeptember30, 2007:





Central
              Appalachian
            
            
            Northern
              Appalachian
            
            
            Illinois
              Basin
            
            
            Ancillary
            
            
            ConsolidatedRevenue
            
            $
            399,472
            
            
            $
            96,897
            
            
            $
            52,537
            
            
            $
            95,287
            
            
            $
            644,193Adjusted
    EBITDA
            
            
            41,163
            
            
            
            (21,772
            )
            
            
            11,217
            
            
            
            27,245
            
            
            
            57,853Depreciation, depletion and
      amortization
            
            
            45,604
            
            
            
            7,419
            
            
            
            4,625
            
            
            
            8,339
            
            
            
            65,987Capital
      expenditures
            
            
            100,678
            
            
            
            31,885
            
            
            
            1,627
            
            
            
            12,365
            
            
            
            146,555Total
assets
            
            
            811,540
            
            
            
            161,306
            
            
            
            39,505
            
            
            
            498,277
            
            
            
            1,510,628Goodwill
            
            
            169,601
            
            
            
            —
            
            
            
            —
            
            
            
            30,095
            
            
            
            199,696




Revenue in the Ancillary category
consists primarily of $39,513and $64,147relating to the Company’s brokered coal
sales and $15,577and $14,790relating to contract highwall mining
activities for theninemonths endedSeptember30, 2008 and 2007, respectively.
Capital expenditures include non-cash amounts of $30,775and $13,436for theninemonths endedSeptember30, 2008 and 2007,
respectively.Capital
expenditures do not include $14,290 paid duringthe nine months ended September 30, 2008
related to capital expenditures accrued in prior periods.




14





Table of Contents





INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


September 30, 2008


(Dollars in thousands, except per share
amounts)




Adjusted EBITDA represents earnings
before deducting interest expense, income taxes, depreciation, depletion,
amortization and minority interest. Adjusted EBITDA is presented because it is
an important supplemental measure of the Company’s performance used by the
Company’s chief operating decision maker.





Reconciliation of net income (loss) to
Adjusted EBITDA for the three and nine months ended September 30, 2008 and
2007 is as follows:





Three months
      ended
              September30,
            
            
            Ninemonths ended
              September30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net income
      (loss)
            
            $
            9,708
            
            
            $
            (1,283
            )
            
            $
            12,300
            
            
            $
            (19,585
            )Depreciation, depletion and
      amortization
            
            
            24,227
            
            
            
            23,017
            
            
            
            70,878
            
            
            
            65,987Interest expense,
      net
            
            
            8,837
            
            
            
            14,434
            
            
            
            29,019
            
            
            
            26,635Income tax expense
      (benefit)
            
            
            2,183
            
            
            
            (2,355
            )
            
            
            2,496
            
            
            
            (14,672
            )Minority
      interest
            
            
            (2
            )
            
            
            (137
            )
            
            
            3
            
            
            
            (512
            )Adjusted
    EBITDA
            
            $
            44,953
            
            
            $
            33,676
            
            
            $
            114,696
            
            
            $
            57,853





(14) Supplementary Guarantor
Information





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





The Notes and the Convertible Notes are
senior obligations of the Parent Company and are guaranteed on a senior basis by
the Guarantors and rank senior in right of payment to the Parent Company’s and
Guarantors’ future subordinated indebtedness. Amounts borrowed under the Amended
Credit Facility are secured by substantially all of the assets of the Parent
Company and the Guarantors on a priority basis, so the Notes and Convertible
Notes are effectively subordinated to amounts borrowed under the Amended Credit
Facility. Other than for corporate related purposes or interest payments
required by the Notes or Convertible Notes, the Amended Credit Facility
restricts the Guarantors’ abilities to make loans or pay dividends to the Parent
Company in excess of $25,000 per year (or at all upon an event of default) and
restricts the ability of the Parent Company to pay
dividends.





The Parent Company and Guarantors are
subject to certain covenants under the indenture for the Notes. Under these
covenants, the Parent Company and Guarantors are subject to limitations on the
incurrence of additional indebtedness, payment of dividends and the incurrence
of liens, however, the indenture contains no restrictions on the ability of the
Guarantors to pay dividends or make payments to the Parent
Company.





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




15





Table of Contents





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





Cautionary Note Regarding
Forward-Looking Statements





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




•
            market demand for coal,
      electricity and steel;•
            availability of qualified
      workers;•
            future economic or capital market
      conditions;•
            weather conditions or catastrophic
      weather-related damage;•
            our production
      capabilities;•
            consummation of financing,
      acquisition or disposition transactions and the effect thereof on our
      business;•
            a significant number of
      conversions of our Convertible Senior Notes prior to
      maturity;•
            our plans and objectives for
      future operations and expansion or
consolidation;•
            our relationships with, and other
      conditions affecting, our customers;•
            availability and costs of key
      supplies or commodities such as diesel fuel, steel, explosives and
      tires;•
            availability and costs of capital
      equipment;•
            prices of fuels which compete with
      or impact coal usage, such as oil and natural
  gas;•
            timing of reductions or increases
      in customer coal inventories;•
            long-term coal supply
      arrangements;•
            risks in or related to coal mining
      operations, including risks relating to third-party suppliers and carriers
      operating at our mines or complexes;•
            unexpected maintenance and
      equipment failure;•
            environmental, safety and other
      laws and regulations, including those directly affecting our coal mining
      and production, and those affecting our customers’ coal
      usage;•
            ability to obtain and maintain all
      necessary governmental permits and
  authorizations;•
            competition among coal and other
      energy producers in theUnited Statesand
      internationally;•
            railroad, barge, trucking and
      other transportation availability, performance and
      costs;•
            employee benefits costs and labor
      relations issues;•
            replacement of our
      reserves;•
            our assumptions concerning
      economically recoverable coal reserve estimates;•
            availability and costs of credit,
      surety bonds and letters of credit;•
            title defects or loss of leasehold
      interests in our properties which could result in unanticipated costs or
      inability to mine these properties;•
            future legislation and changes in
      regulations or governmental policies or changes in interpretations
      thereof, including with respect to safety enhancements and environmental
      initiatives relating to global warming;•
            impairment of the value of our
      goodwill and long-lived assets;•
            ongoing effects of the Sago mine
      accident;•
            our liquidity, results of
      operations and financial condition;•
            adequacy and sufficiency of our
      internal controls; and•
            legal and administrative
      proceedings, settlements, investigations and claims and the availability
      of related insurance
coverage.




You should keep in mind that any
forward-looking statement made by us in this Quarterly Report on Form 10-Q
speaks only as of the date on which we make it. New risks and uncertainties
arise from time-to-time, and it is impossible for us to predict these events or
how they may affect us. We have no duty to, and do not intend to, update or
revise the forward-looking statements in this report after the date of this
report, except as may be required by law. In light of these risks and
uncertainties, you should keep in mind that any forward-looking statement made
in this report might not occur. When considering these forward-looking
statements, you should keep in mind the cautionary statements in this document
and in our other SEC filings, including the more detailed discussion of these
factors, as well as other factors that could affect our results, contained in
Item 3, “Quantitative and Qualitative Disclosures About Market Risk,” as
well as in the “Risks Relating to Our Business” section of Item 1A of our
2007 Annual Report on Form 10-K.




16





Table of Contents





RESULTS OF CONTINUING
OPERATIONS





Three months ended September 30,
2008 compared to the three months ended September 30,
2007





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








The following table depicts revenues for
the three months ended September 30, 2008 and 2007 for the indicated
categories:





Three months
      ended
              September30,
            
            
            Increase
              (Decrease)2008
            
            
            2007
            
            
            $or Tons
            
            
            %(in thousands, except percentagesand per ton data)Coal sales
      revenues
            
            $
            282,250
            
            
            $
            191,088
            
            
            $
            91,162
            
            
            
            48
            %Freight and handling
      revenues
            
            
            12,339
            
            
            
            5,044
            
            
            
            7,295
            
            
            
            145
            %Other
    revenues
            
            
            14,610
            
            
            
            11,697
            
            
            
            2,913
            
            
            
            25
            %Total
    revenues
            
            $
            309,199
            
            
            $
            207,829
            
            
            $
            101,370
            
            
            
            49
            %Tons
      sold
            
            
            4,794
            
            
            
            4,518
            
            
            
            276
            
            
            
            6
            %Coal
      sales revenue per ton
            
            $
            58.87
            
            
            $
            42.29
            
            
            $
            16.58
            
            
            
            39
            %




The following table depicts coal sales
revenues by operating segment for the three months ended September 30, 2008
and 2007:





Three months
      ended
              September30,
            
            
            Increase
              (Decrease)2008
            
            
            2007
            
            
            $
            
            
            
            %(in thousands, except percentages)Central
      Appalachian
            
            $
            198,812
            
            
            $
            133,621
            
            
            $
            65,191
            
            
            
            49
            %Northern
      Appalachian
            
            
            52,531
            
            
            
            29,734
            
            
            
            22,797
            
            
            
            77
            %IllinoisBasin
            
            
            18,530
            
            
            
            15,742
            
            
            
            2,788
            
            
            
            18
            %Ancillary
            
            
            12,377
            
            
            
            11,991
            
            
            
            386
            
            
            
            3
            %Total coal sales
      revenues
            
            $
            282,250
            
            
            $
            191,088
            
            
            $
            91,162
            
            
            
            48
            %





The following table depicts tons sold by
operating segment for the three months endedSeptember30, 2008 and
2007:




Three months ended
              September30,
            
            
            Increase
              (Decrease)2008
            
            
            2007
            
            
            Tons
            
            
            %(in thousands, except percentages)Central
      Appalachian
            
            
            3,022
            
            
            
            2,906
            
            
            
            116
            
            
            
            4
            %Northern
      Appalachian
            
            
            918
            
            
            
            795
            
            
            
            123
            
            
            
            15
            %IllinoisBasin
            
            
            619
            
            
            
            525
            
            
            
            94
            
            
            
            18
            %Ancillary
            
            
            235
            
            
            
            292
            
            
            
            (57
            )
            
            
            (20
            )%Total tons
    sold
            
            
            4,794
            
            
            
            4,518
            
            
            
            276
            
            
            
            6
            %








Coal
sales revenues—Coal sales
revenues are derived from sales of produced coal and brokered coal contracts.
The increase in coal sales revenues was primarily due to a 39% increase in sales
realization per ton resulting from increased spot market and short-term contract
sales entered into in order to capitalize on favorable market conditions.
Further impacting the increase in coal sales revenue was a 6% increase in tons
sold compared to the same period in 2007.





Central Appalachian.Coal sales revenues from
our Central Appalachian segment for the three months ended September 30,
2008 increased over the same period in 2007 primarily due to an increase of
$19.80 per ton, which was driven by higher average prices of our coal sold
pursuant to coal supply agreements and from increased sales of metallurgical
coal.





17





Table of Contents





Northern
Appalachian.For the three
months ended September 30, 2008, our Northern Appalachian coal sales
revenues increased due to an increase in coal sales revenues of $19.82 per ton
resulting from higher average prices of coal sold pursuant to coal supply
agreements and from an increase in sales of metallurgical coal. Additionally, we
experienced an increase in tons sold at certain of our complexes. The increase
in tons sold is due to the ramp up of production at the formerly idled Harrison
operation, as well as increased production resulting from investments in capital
improvements made during preceding periods.





IllinoisBasin.The increase in coal sales revenues from
our Illinois Basin segment was due to an 18% increase in tons sold resulting
from increased short-term contract sales.





Ancillary.Our Ancillary segment’s
coal sales revenues are comprised of coal sold under brokered coal contracts. We
experienced an $11.59 per ton increase in the price of brokered coal sold due to
improved market conditions. This increase was partially offset by a decrease in
tons sold due to the expiration of certain brokered coal
contracts.





Freight
and handling revenues—Freight and handling revenues represent
reimbursement of freight and handling costs for certain shipments for which we
initially pay the costs and are then reimbursed by the customer. Freight and
handling revenues and costs increased primarily due to increased fuel surcharges
and transportation rates. Additionally, we have entered into new sales contracts
that have increased freight and handling revenues and costs.





Other
revenues—The increase in
other revenues for the three months ended September 30, 2008 was primarily due
to increases in ash disposal income, royalty income and revenue generated from
coalbed methane wells owned jointly by our subsidiary CoalQuest and CDX Gas, LLC
(“CDX”). Partially offsetting the increase in revenue was a decrease in shop
sales revenue from our ADDCAR subsidiary.




18





Table of Contents





Cost and expenses





The following table reflects cost of
operations for the three months ended September 30, 2008 and
2007:




Three months
      ended
              September30,
            
            
            Increase
              (Decrease)2008
            
            
            2007
            
            
            $
            
            
            
            %(in thousands, except percentagesand per ton data)Cost of coal
      sales
            
            $
            240,204
            
            
            $
            188,356
            
            
            $
            51,848
            
            
            
            28
            %Freight and handling
      costs
            
            
            12,339
            
            
            
            5,044
            
            
            
            7,295
            
            
            
            145
            %Cost of other
      revenues
            
            
            9,690
            
            
            
            7,600
            
            
            
            2,090
            
            
            
            28
            %Depreciation, depletion and
      amortization
            
            
            24,227
            
            
            
            23,017
            
            
            
            1,210
            
            
            
            5
            %Selling, general and
      administrative expenses
            
            
            8,396
            
            
            
            9,026
            
            
            
            (630
            )
            
            
            (7
            )%Gain on sale of
      assets
            
            
            (6,383
            )
            
            
            (35,444
            )
            
            
            29,061
            
            
            
            82
            %Total costs and
      expenses
            
            $
            288,473
            
            
            $
            197,599
            
            
            $
            90,874
            
            
            
            46
            %Cost of coal sales per ton
      sold
            
            $
            50.10
            
            
            $
            41.69
            
            
            $
            8.41
            
            
            
            20
            %




The following table depicts cost of coal
sales by operating segment for the three months ended September 30, 2008
and 2007:





Three months
      ended
              September30,
            
            
            Increase
              (Decrease)2008
            
            
            2007
            
            
            $
            
            
            
            %(in thousands, except percentages)Central
      Appalachian
            
            $
            164,193
            
            
            $
            125,896
            
            
            $
            38,297
            
            
            
            30
            %Northern
      Appalachian
            
            
            50,494
            
            
            
            37,967
            
            
            
            12,527
            
            
            
            33
            %IllinoisBasin
            
            
            15,921
            
            
            
            12,360
            
            
            
            3,561
            
            
            
            29
            %Ancillary
            
            
            9,596
            
            
            
            12,133
            
            
            
            (2,537
            )
            
            
            (21
            )%Totalcost of coal
      sales
            
            $
            240,204
            
            
            $
            188,356
            
            
            $
            51,848
            
            
            
            28
            %








Cost
of coal sales—For the three
months ended September 30, 2008, our total cost of coal sales increased
primarily as a result of a 20% increase in cost per ton, as well as a 6%
increase in tons sold as described above.





Central
Appalachian.Cost of coal sales from our Central
Appalachian segment increased to $54.32 per ton for the three months ended
September 30, 2008 from $43.32 per ton for the same period in 2007 primarily as
a result of increases in labor and benefit costs and diesel fuel costs. Labor
and benefit costs have increased due to a tightening labor market resulting in
the need to offer more competitive compensation packages. Diesel fuel costs have
increased over 2007 as a result of higher per gallon fuel costs and additional
gallons being used. Further impacting the increase in cost of coal sales were
increases in repairs and maintenance expense, blasting supplies, roof control
supplies, royalties, contract miner costs, severance tax expense and trucking
costs.





Northern
Appalachian.Our Northern Appalachian segment cost of
coal sales per ton increased to $55.00 per ton for the three months ended
September 30, 2008 from $47.76 per ton for the same period in 2007 due to
increases in labor and benefit costs resulting from a tight labor market
requiring competitive compensation packages, diesel fuel costs due to higher per
gallon prices, repairs and maintenance expense related to several high-dollar
repairs, royalties expense, contract mining and trucking
costs.





IllinoisBasin.For the three months ended September 30,
2008, ourIllinoisBasincost of coal sales increased $2.20 per
ton primarily due to an increase in repairs and maintenance costs and roof
control supplies. Partially offsetting the increases was a decrease in the cost
for certain types of employee insurance coverage.





Ancillary.Cost of coal sales from our Ancillary
segment decreased for the three months ended September 30, 2008 primarily due to
decreased purchased coal related to the expiration of certain brokered coal
contracts.





Cost
of other revenues—The
increase in cost of other revenues was primarily due to increases in ash
disposal transportation costs and gathering fees related to coalbed methane
wells owned jointly by our subsidiary, CoalQuest, and CDX.





Depreciation,
depletion and amortization—Depreciation, depletion and
amortization expense increased for the three months ended September 30,
2008 compared to the same period in 2007. The principal component of the
increase was due to decreased amortization income on below-market coal
agreements and an increase in depreciation and amortization expense on coal
mining property and equipment. The increases were partially offset by a decrease
in depreciation of coalbed methane well development costs.





Selling,
general and administrative expenses—The decrease in selling, general and
administrative expenses for the three months ended September 30, 2008
compared the same period in 2007 was primarily due to a decreases in legal and
professional fees and labor and benefit costs. The decrease was partially offset
by increases in bad debt expense, sales commissions and computer
expenses.





Gain
on sale of assets—Gain on
sale of assets decreased for the three months ended September 30, 2008 from
the comparable period in 2007.The gain for the third quarter of 2008
related primarily to the sale of a used highwall mining system, a real estate
exchange and the disposition of other assets. The gain recognized in the
comparable period of 2007 was primarily attributable to the sale of theDenmarkproperty.




19





Table of Contents





Adjusted EBITDA by
Segment





Adjusted EBITDA represents net income or
loss before deducting interest expense, income taxes, depreciation, depletion,
amortization and minority interest. Adjusted EBITDA is presented because it is
an important supplemental measure of our performance used by our chief operating
decision maker in such areas as capital investment and allocation of resources.
It is considered “adjusted” as we adjust EBITDA for minority interest. Other
companies in our industry may calculate Adjusted EBITDA differently than we do,
limiting its usefulness as a comparative measure. Adjusted EBITDA is reconciled
to its most comparable GAAP measure on page 21 and in the notes to our condensed
consolidated financial statements for the three months ended September 30,
2008 appearing elsewhere in this Quarterly Report on Form
10-Q.





The following table depicts segment
Adjusted EBITDA for the three months ended September 30, 2008 and
2007:





Three months
      ended
              September30,
            
            
            Increase
              (Decrease)2008
            
            
            2007
            
            
            $
            
            
            
            %(in thousands, except percentages)Central
      Appalachian
            
            $
            36,779
            
            
            $
            7,391
            
            
            $
            29,388
            
            
            
            398
            %Northern
      Appalachian
            
            
            3,796
            
            
            
            (8,233
            )
            
            
            12,029
            
            
            
            146
            %IllinoisBasin
            
            
            3,924
            
            
            
            3,790
            
            
            
            134
            
            
            
            4
            %Ancillary
            
            
            454
            
            
            
            30,728
            
            
            
            (30,274
            )
            
            
            (99
            )%TotalAdjusted
    EBITDA
            
            $
            44,953
            
            
            $
            33,676
            
            
            $
            11,277
            
            
            
            33
            %








Adjusted EBITDA from our Central
Appalachian segment increased for the three months ended September 30, 2008
compared to the three months ended September 30, 2007 due an increase in
profit margins of $8.80 per ton and an increase in 116,000 tons
sold.





The increase in Adjusted EBITDA from our
Northern Appalachian segment for the three months ended September 30, 2008
was due to a combination of an increase in sales realizations of $19.82 per ton,
resulting in increased profit margins of $12.57 per ton, as well as an increase
of approximately 123,000 tons sold.





Adjusted EBITDA from ourIllinoisBasinsegment increased during the three
months ended September 30, 2008 primarily due to increased sales of
approximately 94,000 tons. The increase was partially offset by a decrease in
profit margins of $2.22 per ton.





The decrease in Adjusted EBITDA from our
Ancillary segment was primarily due to the sale of theDenmarkproperty that occurred during the
quarter ended September 30, 2007. The decrease was partially offset by an
increase in profit margins of $12.31 per ton on brokered coal
sales.




20





Table of Contents





Reconciliation of Adjusted EBITDA to Net
income (loss) by Segment





The following tables reconcile Adjusted
EBITDA to net income (loss) by segment for the three months ended
September 30, 2008 and 2007:





Three months
      ended
              September30,
            
            
            Increase
              (Decrease)2008
            
            
            2007
            
            
            $
            
            %(in thousands, except percentages)Central
      AppalachianNet income(loss)
            
            $
            20,280
            
            
            $
            (7,920
            )
            
            $
            28,200
            
            356
            %Depreciation, depletion and
      amortization
            
            
            16,004
            
            
            
            14,917
            
            
            
            1,087
            
            7
            %Interest expense,
      net
            
            
            495
            
            
            
            394
            
            
            
            101
            
            26
            %Adjusted
    EBITDA
            
            $
            36,779
            
            
            $
            7,391
            
            
            $
            29,388
            
            398
            %








Three months ended
              September30,
            
            
            Increase
              (Decrease)2008
            
            
            2007
            
            
            $
            
            %(in thousands, except percentages)Northern
      AppalachianNetloss
            
            $
            (1,467
            )
            
            $
            (11,431
            )
            
            $
            9,964
            
            87
            %Depreciation, depletion and
      amortization
            
            
            5,078
            
            
            
            3,204
            
            
            
            1,874
            
            58
            %Interest expense,
      net
            
            
            187
            
            
            
            131
            
            
            
            56
            
            43
            %Minority
      interest
            
            
            (2
            )
            
            
            (137
            )
            
            
            135
            
            99
            %Adjusted
    EBITDA
            
            $
            3,796
            
            
            $
            (8,233
            )
            
            $
            12,029
            
            146
            %








Three months ended
              September30,
            
            
            Increase
              (Decrease)2008
            
            
            2007
            
            
            $
            
            %(in thousands, except percentages)IllinoisBasinNet income
            
            $
            2,204
            
            
            $
            2,295
            
            
            $
            (91
            )
            (4
            )%Depreciation, depletion and
      amortization
            
            
            1,658
            
            
            
            1,436
            
            
            
            222
            
            15
            %Interest expense,
      net
            
            
            62
            
            
            
            59
            
            
            
            3
            
            5
            %Adjusted
    EBITDA
            
            $
            3,924
            
            
            $
            3,790
            
            
            $
            134
            
            4
            %








Three months ended
              September30,
            
            
            Increase
              (Decrease)2008
            
            
            2007
            
            
            $
            
            %(in thousands, except percentages)AncillaryNetincome (loss)
            
            $
            (11,309
            )
            
            $
            15,773
            
            
            $
            (27,082
            )
            (172
            )%Depreciation, depletion and
      amortization
            
            
            1,487
            
            
            
            3,460
            
            
            
            (1,973
            )
            (57
            )%Interest expense,
      net
            
            
            8,093
            
            
            
            13,850
            
            
            
            (5,757
            )
            (42
            )%Income tax expense
      (benefit)
            
            
            2,183
            
            
            
            (2,355
            )
            
            
            4,538
            
            193
            %Adjusted
    EBITDA
            
            $
            454
            
            
            $
            30,728
            
            
            $
            (30,274
            )
            (99
            )%








Three months ended
              September30,
            
            
            Increase
              (Decrease)2008
            
            
            2007
            
            
            $
            
            %(in thousands, except percentages)ConsolidatedNet income
      (loss)
            
            $
            9,708
            
            
            $
            (1,283
            )
            
            $
            10,991
            
            857
            %Depreciation, depletion and
      amortization
            
            
            24,227
            
            
            
            23,017
            
            
            
            1,210
            
            5
            %Interest expense,
      net
            
            
            8,837
            
            
            
            14,434
            
            
            
            (5,597
            )
            (39
            )%Income tax expense
      (benefit)
            
            
            2,183
            
            
            
            (2,355
            )
            
            
            4,538
            
            193
            %Minority
      interest
            
            
            (2
            )
            
            
            (137
            )
            
            
            135
            
            99
            %Adjusted
    EBITDA
            
            $
            44,953
            
            
            $
            33,676
            
            
            $
            11,277
            
            33
            %





21





Table of Contents





Nine months ended September 30,
2008 compared to the nine months ended September 30,
2007





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





The following table depicts revenues for
the nine months ended September 30, 2008 and 2007 for the indicated
categories:




Ninemonths ended
              September30,
            
            
            Increase
              (Decrease)2008
            
            
            2007
            
            
            $ or Tons
            
            
            %(in thousands, except percentages and per ton data)Coal sales
      revenues
            
            $
            761,963
            
            
            $
            592,081
            
            
            $
            169,882
            
            
            
            29
            %Freight and handling
      revenues
            
            
            35,492
            
            
            
            14,645
            
            
            
            20,847
            
            
            
            142
            %Other
    revenues
            
            
            41,554
            
            
            
            37,467
            
            
            
            4,087
            
            
            
            11
            %Total
    revenues
            
            $
            839,009
            
            
            $
            644,193
            
            
            $
            194,816
            
            
            
            30
            %Tons sold
            
            
            14,502
            
            
            
            13,945
            
            
            
            557
            
            
            
            4
            %Coal sales revenue per
      ton
            
            $
            52.54
            
            
            $
            42.46
            
            
            $
            10.08
            
            
            
            24
            %





The following table depicts coal sales
revenues by operating segment for the nine months ended September 30, 2008
and 2007:




Ninemonths ended
              September30,
            
            
            Increase
              (Decrease)2008
            
            
            2007
            
            
            $
            
            
            
            %(in thousands, except percentages)Central
      Appalachian
            
            $
            512,537
            
            
            $
            393,527
            
            
            $
            119,010
            
            
            
            30
            %Northern
      Appalachian
            
            
            157,528
            
            
            
            87,734
            
            
            
            69,794
            
            
            
            80
            %IllinoisBasin
            
            
            52,619
            
            
            
            46,727
            
            
            
            5,892
            
            
            
            13
            %Ancillary
            
            
            39,279
            
            
            
            64,093
            
            
            
            (24,814
            )
            
            
            (39
            )%Total coal sales
      revenues
            
            $
            761,963
            
            
            $
            592,081
            
            
            $
            169,882
            
            
            
            29
            %





The following table depicts tons sold by
operating segment for theninemonths endedSeptember30, 2008 and
2007:




Ninemonths ended
              September30,
            
            
            Increase
              (Decrease)2008
            
            
            2007
            
            
            Tons
            
            
            %(in thousands, except percentages)Central
      Appalachian
            
            
            8,908
            
            
            
            8,545
            
            
            
            363
            
            
            
            4
            %Northern
      Appalachian
            
            
            2,969
            
            
            
            2,422
            
            
            
            547
            
            
            
            23
            %IllinoisBasin
            
            
            1,762
            
            
            
            1,563
            
            
            
            199
            
            
            
            13
            %Ancillary
            
            
            863
            
            
            
            1,415
            
            
            
            (552
            )
            
            
            (39
            )%Total tons
    sold
            
            
            14,502
            
            
            
            13,945
            
            
            
            557
            
            
            
            4
            %





Coal
sales revenues—Coal sales
revenues are derived from sales of produced coal and brokered coal contracts.
Coal sales revenues increased for the nine months ended September 30, 2008
compared to the same period in 2007 due to a 24% increase in sales realization
per ton resulting from increased spot market and short-term contract sales
entered into in order to capitalize on favorable market conditions. Further
impacting the increase in coal sales revenue was a 4% increase in tons sold
compared to the same period of 2007. Partially offsetting the impact of improved
realization per ton and the increase in tons sold was a decrease in coal sales
revenues attributable to the expiration of certain brokered coal
contracts.





Central
Appalachian. Coal sales
revenues from our Central Appalachian segment for theninemonths endedSeptember30, 2008 increased over the same
period in 2007 primarily due to an increase of $11.48per ton, which was driven by higheraverage pricesofourcoal sold pursuant to coal supply
agreementsand from
increased sales of metallurgical coal.





Northern
Appalachian. For theninemonths endedSeptember30, 2008, our Northern Appalachian
coal sales revenues increased due to an increase in coal sales of $16.83per ton resulting fromhigher average prices of coal sold
pursuant tocoal supply
agreements and from an increase in sales of metallurgical coal. Additionally, we
experienced an increase in tons sold atcertain ofour complexes.The increase in tons sold was mainly
attributable to our Sentinel complex continuing to increase production output to
target levels, to the ramp up of production at the formerly idled Harrison
operation during the nine months ended September 30, 2008 and to increased
production resulting from investments in capital improvements made during
preceding periods.





IllinoisBasin. The increase in coal sales revenues
from ourIllinoisBasinsegment was duetoa13% increase in tons soldresulting from increased short-term
contract sales.





Ancillary. Our Ancillary segment’s coal sales
revenues are comprised of coal sold under brokered coal contracts. We
experienced a decrease in tons sold due to the expiration of certain brokered
coal contracts. The
decrease was partially offset by a $0.20 per ton increase inthe average sales price of coal sold
under contract.





22


Table of Contents





Freight
and handling revenues—Freight and handling revenues represent
reimbursement of freight and handling costs for certain shipments for which we
initially pay the costs and are then reimbursed by the customer. Freight and
handling revenues and costs increased for the nine months ended
September 30, 2008 compared to the same period in 2007 primarily due to
increased fuel surcharges and transportation rates. Additionally, we have
entered into new sales contracts during 2008 that have increased freight and
handling revenues and costs.





Other
revenues—The increase in
other revenues for the nine months ended September 30, 2008 compared to the
same period in 2007 was due to increases in revenue generated from coalbed
methane wells owned jointly by our subsidiary, CoalQuest, and CDX, additional
ash disposal income, royalty income and sales of scrap materials. The increases
were partially offset by a decrease in revenue from our ADDCAR subsidiary,
primarily related to the sale of a narrow bench highwall mining system in the
comparable period of 2007.




23





Table of Contents





Cost and expenses





The following table reflects cost of
operations for the nine months ended September 30, 2008 and
2007:





Ninemonths ended
              September30,
            
            
            Increase
              (Decrease)2008
            
            
            2007
            
            
            $
            
            
            
            %(in thousands, except percentagesand per ton data)Cost of coal
      sales
            
            $
            666,598
            
            
            $
            557,787
            
            
            $
            108,811
            
            
            
            20
            %Freight and handling
      costs
            
            
            35,492
            
            
            
            14,645
            
            
            
            20,847
            
            
            
            142
            %Cost of other
      revenues
            
            
            27,847
            
            
            
            27,139
            
            
            
            708
            
            
            
            3
            %Depreciation, depletion and
      amortization
            
            
            70,878
            
            
            
            65,987
            
            
            
            4,891
            
            
            
            7
            %Selling, general and
      administrative expenses
            
            
            27,051
            
            
            
            25,868
            
            
            
            1,183
            
            
            
            5
            %Gain on sale of
      assets
            
            
            (32,675
            )
            
            
            (37,798
            )
            
            
            5,123
            
            
            
            14
            %Total costs and
      expenses
            
            $
            795,191
            
            
            $
            653,628
            
            
            $
            141,563
            
            
            
            22
            %Cost of coal sales per ton
      sold
            
            $
            45.96
            
            
            $
            40.00
            
            
            $
            5.96
            
            
            
            15
            %





The following table depicts cost of coal
sales by operating segment for the nine months ended September 30, 2008 and
2007:





Ninemonths ended
              September30,
            
            
            Increase
              (Decrease)2008
            
            
            2007
            
            
            $
            
            
            
            %(in thousands, except percentages)Central
      Appalachian
            
            $
            443,452
            
            
            $
            354,149
            
            
            $
            89,303
            
            
            
            25
            %Northern
      Appalachian
            
            
            147,488
            
            
            
            111,943
            
            
            
            35,545
            
            
            
            32
            %IllinoisBasin
            
            
            44,547
            
            
            
            36,755
            
            
            
            7,792
            
            
            
            21
            %Ancillary
            
            
            31,111
            
            
            
            54,940
            
            
            
            (23,829
            )
            
            
            (43
            )%Totalcost ofcoal sales
            
            $
            666,598
            
            
            $
            557,787
            
            
            $
            108,811
            
            
            
            20
            %





Cost
of coal sales—For the nine
months ended September 30, 2008, our total cost of coal sales increased
compared to the nine months ended September 30, 2007 primarily as a result
of a 15% increase in cost per ton, as well as a 4% increase in tons sold as
described above.





Central
Appalachian. Cost of coal
sales from our Central Appalachian segment increased to $49.78per ton for theninemonths endedSeptember30, 2008 from $41.45per ton for theninemonths endedSeptember30, 2007 primarily as a result of
increased labor and diesel fuel costs. Labor and benefit costs have increased
due to a tightening labor market resulting in the need to offer more competitive
compensation packages. Diesel fuel costs have increased over prior period as a
result of higher per gallon fuel costsand additional gallons being
used. Further impacting the
increase in cost of coal sales were increases in repairs and maintenance costs,contract labor costs,royalties and severance tax
expense.





Northern
Appalachian. Our Northern
Appalachian segment cost of coal sales per ton increased to $49.67for theninemonths endedSeptember30, 2008 from $46.22for the comparable period of 2007 due
to increaseddiesel fuel
andrepairs and maintenance
costsresulting from
certain high-dollar repairs
performed during the secondand thirdquartersof2008. Additionally, contract labor and
royaltycosts increased at
our Northern Appalachian segment. Partially offsetting these increases was an
overall decrease in costs per ton at our Sentinel complex which
benefited from a ramp up in production subsequent to the second quarter of
2007.





IllinoisBasin. For theninemonths endedSeptember30, 2008, ourIllinoisBasincost of coal sales increased by
$1.77per ton primarily due to a decrease in
stockpile inventories.Additionally, repairs and maintenance
costs have increased due to several repairs on underground mining equipment in
the third quarter of 2008.Partially offsetting the aforementioned
increaseswas a decrease in cost for certain
types of employee insurance coverage.





Ancillary. Cost of coal sales from our Ancillary
segment decreased for theninemonths endedSeptember30, 2008 primarily duetodecreased purchased coalrelated tothe expiration of certain brokered coal
contracts, as well astoa decrease in the volume
of coal purchased at less favorable rates to satisfy continuing brokered coal
contracts.





Cost
of other revenues—For theninemonths endedSeptember30, 2008, cost of other revenuesincreased primarily due to increases in
ash disposaltransportationcosts andgathering fees related tocoalbed methane wells owned jointly by our subsidiary,
CoalQuest, and CDX.Partially offsetting theincreaseswasthe sale of a narrow bench highwall
mining system by our subsidiary ADDCAR in the comparable period of
2007, as well
asdecreases in labor and
benefit costs, lease
expense, contract labor costsand repairs and maintenance
costs.





Depreciation,
depletion and amortization—The principal component of the increase
in depreciation, depletion and amortization expense was decreased amortization
income on below-market coal agreements. This increase was partially offset by
decreases in depreciation and amortization expense of coal mining property and
equipment and coalbed methane well development costs.





Selling,
general and administrative expenses—Selling, general and administrative
expenses for theninemonths endedSeptember30, 2008 increased primarily due to
increases in labor and benefit costs, bad debt expense, contract
labor, sales commissions
and information systems costs.Partially offsetting the increases was a decrease
inlegal and professional
fees.





Gain
on sale of assets—Gain on sale of assets decreased for the
nine months ended September 30, 2008 from the comparable period in 2007.
The gain for 2008 related primarily to the sale of a used highwall mining
system, exchanges of property and the disposition of other assets. The gain
recognized in the comparable period of 2007 was primarily attributable to the
sale of theDenmarkproperty.





24





Table of Contents





Adjusted EBITDA by
Segment





Adjusted EBITDA represents net income or
loss before deducting interest expense, income taxes, depreciation, depletion,
amortization and minority interest. Adjusted EBITDA is presented because it is
an important supplemental measure of our performance used by our chief operating
decision maker in such areas as capital investment and allocation of resources.
It is considered “adjusted” as we adjust EBITDA for minority interest. Other
companies in our industry may calculate Adjusted EBITDA differently than we do,
limiting its usefulness as a comparative measure. Adjusted EBITDA is reconciled
to its most comparable GAAP measure on page 26 and in the notes to our condensed
consolidated financial statements for the nine months ended September 30,
2008 appearing elsewhere in this Quarterly Report on Form
10-Q.





The following table depicts segment
Adjusted EBITDA for the nine months ended September 30, 2008 and
2007:




Ninemonths ended
              September30,
            
            
            Increase
              (Decrease)2008
            
            
            2007
            
            
            $
            
            %(in thousands, except percentages)Central
      Appalachian
            
            $
            98,924
            
            
            $
            41,163
            
            
            $
            57,761
            
            140
            %Northern
      Appalachian
            
            
            15,321
            
            
            
            (21,772
            )
            
            
            37,093
            
            170
            %IllinoisBasin
            
            
            10,167
            
            
            
            11,217
            
            
            
            (1,050
            )
            (9
            )%Ancillary
            
            
            (9,716
            )
            
            
            27,245
            
            
            
            (36,961
            )
            (136
            )%Total Adjusted
      EBITDA
            
            $
            114,696
            
            
            $
            57,853
            
            
            $
            56,843
            
            98
            %





Adjusted EBITDA from our Central
Appalachian segment for the nine months ended September 30, 2008 increased
compared to the nine months ended September 30, 2007 primarily due to a
$24.6 million pre-tax gain on an exchange of coal reserves. The increase was
further impacted by an increase of approximately 363,000 tons sold and an
increase in profit margin of $3.15 per ton more than during the comparable
period of 2007.





The increase in Adjusted EBITDA from our
Northern Appalachian segment was due to a combination of an increase in sales
realizations of $16.83 per ton, resulting in increased profit margins of $13.38
per ton, as well as an increase of approximately 547,000 tons
sold.





Adjusted EBITDA from ourIllinoisBasinsegment decreased during the nine
months ended September 30, 2008 related to increases in operating costs
without a corresponding increase in sales realizations. The increased costs
resulted in a decrease in profit margins of $1.80 per ton compared to the same
period of 2007. Increased sales of approximately 199,000 tons partially offset
the decrease resulting from lower margins.





The decrease in Adjusted EBITDA from our
Ancillary segment was primarily due to the sale of theDenmarkproperty that occurred during the
quarter ended September 30, 2007 and a decrease 552,000 tons sold related to the
expiration of brokered coal contracts. The decrease was partially offset by an
increase in profit margins of $2.99 per ton.




25





Table of Contents





Reconciliation of Adjusted EBITDA to Net
income (loss) by Segment





The following tables reconcile Adjusted
EBITDA to net income (loss) by segment for the nine months ended
September 30, 2008 and 2007:








Ninemonths ended
              September30,
            
            
            Increase
              (Decrease)2008
            
            
            2007
            
            
            $
            
            %(in thousands, except percentages)Central
      AppalachianNet income(loss)
            
            $
            49,961
            
            
            $
            (5,460
            )
            
            $
            55,421
            
            *Depreciation, depletion and
      amortization
            
            
            47,569
            
            
            
            45,604
            
            
            
            1,965
            
            4
            %Interest expense,
      net
            
            
            1,394
            
            
            
            1,019
            
            
            
            375
            
            37
            %Adjusted
    EBITDA
            
            $
            98,924
            
            
            $
            41,163
            
            
            $
            57,761
            
            140
            %








Ninemonths ended
              September30,
            
            
            Increase
              (Decrease)2008
            
            
            2007
            
            
            $
            
            %(in thousands, except percentages)Northern
      AppalachianNet income
      (loss)
            
            $
            2,194
            
            
            $
            (29,016
            )
            
            $
            31,210
            
            108
            %Depreciation, depletion and
      amortization
            
            
            12,639
            
            
            
            7,419
            
            
            
            5,220
            
            70
            %Interest expense,
      net
            
            
            485
            
            
            
            337
            
            
            
            148
            
            44
            %Minority
      interest
            
            
            3
            
            
            
            (512
            )
            
            
            515
            
            101
            %Adjusted
    EBITDA
            
            $
            15,321
            
            
            $
            (21,772
            )
            
            $
            37,093
            
            170
            %








Ninemonths ended
              September30,
            
            
            Increase
              (Decrease)2008
            
            
            2007
            
            
            $
            
            %(in thousands, except percentages)IllinoisBasinNet income
            
            $
            4,569
            
            
            $
            6,421
            
            
            $
            (1,852
            )
            (29
            )%Depreciation, depletion and
      amortization
            
            
            5,420
            
            
            
            4,625
            
            
            
            795
            
            17
            %Interest expense,
      net
            
            
            178
            
            
            
            171
            
            
            
            7
            
            4
            %Adjusted
    EBITDA
            
            $
            10,167
            
            
            $
            11,217
            
            
            $
            (1,050
            )
            (9
            )%








Ninemonths ended
              September30,
            
            
            Increase
              (Decrease)2008
            
            
            2007
            
            
            $
            
            %(in thousands, except percentages)AncillaryNetincome (loss)
            
            $
            (44,424
            )
            
            $
            8,470
            
            
            $
            (52,894
            )
            (624
            )%Depreciation, depletion and
      amortization
            
            
            5,250
            
            
            
            8,339
            
            
            
            (3,089
            )
            (37
            )%Interest expense,
      net
            
            
            26,962
            
            
            
            25,108
            
            
            
            1,854
            
            7
            %Income tax expense
      (benefit)
            
            
            2,496
            
            
            
            (14,672
            )
            
            
            17,168
            
            117
            %Adjusted
    EBITDA
            
            $
            (9,716
            )
            
            $
            27,245
            
            
            $
            (36,961
            )
            (136
            )%








Ninemonths ended
              September30,
            
            
            Increase
              (Decrease)2008
            
            
            2007
            
            
            $
            
            %(in thousands, except percentages)ConsolidatedNet income
      (loss)
            
            $
            12,300
            
            
            $
            (19,585
            )
            
            $
            31,885
            
            163
            %Depreciation, depletion and
      amortization
            
            
            70,878
            
            
            
            65,987
            
            
            
            4,891
            
            7
            %Interest expense,
      net
            
            
            29,019
            
            
            
            26,635
            
            
            
            2,384
            
            9
            %Income tax expense
      (benefit)
            
            
            2,496
            
            
            
            (14,672
            )
            
            
            17,168
            
            117
            %Minority
      interest
            
            
            3
            
            
            
            (512
            )
            
            
            515
            
            101
            %Adjusted
    EBITDA
            
            $
            114,696
            
            
            $
            57,853
            
            
            $
            56,843
            
            98
            %





*  Not
meaningful.





26








Table of Contents





Liquidity and Capital
Resources





Our business is capital intensive and
requires substantial capital expenditures for, among other things, purchasing,
upgrading and maintaining equipment used in developing and mining our coal
lands, as well as remaining in compliance with environmental laws and
regulations. Our principal liquidity requirements are to finance our coal
production, fund capital expenditures and service our debt and reclamation
obligations. We may also engage in acquisitions from time-to-time. Our primary
sources of liquidity to meet these needs are cash flows from sales of our coal,
other income, borrowings under our senior credit facility, the proceeds of our
convertible notes offering and capital equipment financing
arrangements.





We believe the principal indicators of
our liquidity are our cash position and remaining availability under our credit
facility. As of September 30, 2008, our available liquidity was $90.6
million, including cash of $62.2 million and $28.4 million available for
borrowing under our $100 million senior credit facility. Total debt represented
45% of our total capitalization at September 30, 2008. Our total
capitalization represents our current and long-term debt combined with our total
stockholders’ equity.





The
recent and unprecedented disruption in the current credit markets has had a
significant adverse impact on a number of financial institutions. At this time,
our liquidity has not been materially impacted by the current credit environment
and we do not expect that it will be materially impacted in the
near-future. We will continue to closely monitor our liquidity and the
credit markets. However, we cannot predict with any certainty the impact to us
of any further disruption in the credit environment.





Our Convertible Senior Notes (the
“Convertible Notes”) became convertible at the option of holders beginning
July 1, 2008. The conversion period expired on September 30, 2008
pursuant to the terms of the governing indenture with no holders exercising
their conversion rights. The Convertible Notes may become
convertible again in the future under certain conditions. Accordingly, wewill reassess the convertibility on a
quarterly basis.





We currently expect our total capital
expenditures will be approximately $179 million in 2008, primarily for
investments in new equipment and development of mining operations. Cash paid for
capital expenditures was approximately $93.6 million for the nine months ended
September 30, 2008. We have funded and will continue to fund these capital
expenditures from our internal operations and with proceeds from our convertible
notes offering in 2007. We believe that these sources of capital, as well as
available borrowing capacity on our credit facility and our $50.0 million
equipment revolving credit facility with Caterpillar Financial Services
Corporation, will be sufficient to fund our anticipated capital expenditures
under our current budget plan through the end of 2009. The need and timing of
seeking additional capital in the future will be subject to market conditions
and, to the extent necessary, managementbelieves itcan control the timing of the cash
requirements by managing the pace of capital spending.





Approximately $66.0 million of 2008 cash
paid for capital expenditures were attributable to Central Appalachian
operations. This amount represents investments of approximately $41.4 million in
ourBeckleymining complex, as well as additional
investments of $24.6 million for upgrades and maintenance at the remaining
Central Appalachian operations. We paid approximately $21.5 million at our
Northern Appalachian operations in the nine months ended September 30,
2008, approximately $13.7 million of which was for development of our Sentinel
and Tygart properties. Expenditures of approximately $1.3 million for ourIllinoisBasinoperations were for ongoing operations
improvements. Approximately $4.8 million of cash paid for capital expenditures
for the nine months ended September 30, 2008 was within our Ancillary
segment for safety equipment, as well as for maintenance upgrades at various
other subsidiaries.





As a result of recent accidents in the
mining industry, additional regulatory requirements were promulgated that will
require additional capital expenditures to meet enhanced safety standards. For
the nine months ended September 30, 2008, we spent $3.4 million to meet
these standards and anticipate spending an additional $1.7 million for the
remainder of 2008.




27





Table of Contents





Cash Flows





Net cash provided by operating
activities was $43.8 million for the nine months ended September 30, 2008,
an increase of $14.9 million from the same period in 2007. This increase is
attributable to an increase in net income of $58.9 million after adjustment for
non-cash charges offset by a decrease in net operating assets and liabilities of
$44.0 million.





For the nine months ended
September 30, 2008, net cash used in investing activities was $84.9 million
compared to $90.2 million for the nine months ended September 30, 2007. For
the first nine months of 2008, $93.6 million of cash was used for development
and acquisition of new mining complexes and to support existing mining
operations compared to $132.7 million in the same period 2007. Additionally, we
collected proceeds from asset sales of $8.7 million during the nine months ended
September 30, 2008 versus $45.0 million during the comparable period of
2007.





Net cash used by financing activities of
$3.9 million for the nine months ended September 30, 2008 was due to
repayments on our long-term debt of $3.8 million and deferred finance costs of
$0.2 million. These amounts were partially offset by proceeds from stock options
exercised of $0.1 million.





Credit Facility and Long-term Debt
Obligations





As of September 30, 2008 our total
long-term indebtedness consisted of the following (in
thousands):




September30,
              20089.00% Convertible Senior Notes,
      due 2012
            
            $
            225,00010.25% Senior Notes, due
      2014
            
            
            175,000Equipment
    notes
            
            
            25,796Total
            
            
            425,796Less–current
      portion
            
            
            (7,404
            )Long-term
    debt
            
            $
            418,392




28





Table of Contents





Other





As a regular part of our business, we
review opportunities for, and engage in discussions and negotiations concerning,
the acquisition of coal mining assets and interests in coal mining companies,
and acquisitions of, or combinations with, coal mining companies. When we
believe that these opportunities are consistent with our growth plans and our
acquisition criteria, we will make bids or proposals and/or enter into letters
of intent and other similar agreements, which may be binding or nonbinding, that
are customarily subject to a variety of conditions and usually permit us to
terminate the discussions and any related agreement if, among other things, we
are not satisfied with the results of our due diligence investigation. Any
acquisition opportunities we pursue could materially affect our liquidity and
capital resources and may require us to incur indebtedness, seek equity capital
or both. There can be no assurance that additional financing will be available
on terms acceptable to us, or at all.





Additionally, we have other long-term
liabilities, including, but not limited to, mine reclamation and mine closure
costs, below-market coal supply agreements and “black lung” costs, and some of
our subsidiaries have long-term liabilities relating to retiree health and other
employee benefits.





Our ability to meet our long-term debt
obligations will depend upon our future performance, which in turn, will depend
upon general economic, financial and business conditions, along with
competition, legislation and regulation—factors that are largely beyond our
control. We believe that cash flow from operations, together with other
available sources of funds, including additional borrowings under our credit
facility, will be adequate at least through the end of 2009 for making required
payments of principal and interest on our indebtedness and for funding
anticipated capital expenditures and working capital requirements. To the extent
necessary, managementbelieves itcan control the
timing of the cash requirements by managing the pace of capital spending.
However, we cannot assure you that our operating results, cash flow and capital
resources will be sufficient for repayment of our debt obligations in the
future.





Recent Accounting
Pronouncements





Fair Value
Measurements.In September
2006, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 157,Fair Value
Measurements(“SFAS
No. 157”). SFAS No. 157 clarifies the definition of fair value,
establishes a framework for measuring fair value and expands the disclosures on
fair value measurements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007. Adoption of SFAS No. 157 did not
have a material impact on our financial position, results of operations or cash
flows; however, adoption did result in additional information being included in
the footnotes accompanying our condensed consolidated financial
statements.





In
February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2, Effective Date of FASB Statement No.
157 (“FSP 157-2”). FSP 157-2 permits delayed adoption of SFAS 157 for
certain non-financial assets and liabilities, which are not recognized at fair
value on a recurring basis, until fiscal years, and interim periods within those
fiscal years, beginning after November 15, 2008. We are currently
evaluating the effect, if any, the adoption of FSP 157-2 will have on our
financial position, results of operations and cash flows.





Fair Value
Option.In February 2007,
the FASB issued SFAS No. 159,The Fair Value
Option for Financial Assets and Financial Liabilities—Including an amendment of
FASB Statement No. 115(“SFAS No. 159”). SFAS
No. 159 provides entities with an option to report selected financial
assets and liabilities at fair value and establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and liabilities.
SFAS No. 159 is effective as of the beginning of the first fiscal year that
begins after November 15, 2007. The adoption of SFAS No. 159 did not
have a material impact on our financial position, results of operations or cash
flows.





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





Convertible
Debt.In May 2008, the FASB
issued FSP No. APB 14-1,Accounting for
Convertible Debt Instruments That May be Settled in Cash Upon Conversion
(Including Partial Cash Settlement)(“FSP APB 14-1”). FSP APB 14-1 requires
the liability and equity components of convertible debt instruments that may be
settled in cash upon conversion to be separately accounted for in a manner that
reflects the issuer’s nonconvertible debt borrowing rate. To allocate the
proceeds from a convertible debt offering in this manner, a company would first
need to determine the carrying amount of the liability component, which would be
based on the fair value of a similar liability (excluding any embedded
conversion options). The resulting debt discount would be amortized over the
period during which the debt is expected to be outstanding as additional
non-cash interest expense. FSP APB 14-1 is effective for financial statements
for fiscal years beginning after December 15, 2008 and would be applied
retrospectively for all periods presented. We have determined our
non-convertible borrowing rate would have been 11.7% at issuance. We are
currently evaluating the effect the adoption of FSP APB 14-1 will have on our
financial position, results of operations and cash flows.





Business
Combinations.In December
2007, the FASB issued SFAS No. 141 (Revised 2007),Business
Combinations(“SFAS
No. 141(R)”). SFAS No. 141(R) will significantly change the accounting
for business combinations. Under SFAS No. 141(R), an acquiring entity will
be required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value with limited exceptions. SFAS
No. 141(R) will change the accounting treatment for certain specific
acquisition-related items including: (i) expensing acquisition-related
costs as incurred, (ii) valuing noncontrolling interests at fair value at
the acquisition date and (iii) expensing restructuring costs associated
with an acquired business. SFAS No. 141(R) also includes a substantial
number of new disclosure requirements. SFAS No. 141(R) is to be applied to
any business combination for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after
December 15, 2008. Upon adoption, SFAS No. 141(R) will impact the
accounting for our future business combinations.





Noncontrolling
Interests.In December
2007, the FASB issued SFAS No. 160,Noncontrolling
Interests in Consolidated Financial Statements(“SFAS No. 160”). SFAS
No. 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary
(minority interest) is an ownership interest in the consolidated entity that
should be reported as equity in the consolidated financial statements and
separate from the parent company’s equity. Among other requirements, this
statement requires consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the noncontrolling
interest. It also requires disclosure, on the face of the consolidated statement
of operations, of the amounts of consolidated net income attributable to the
parent and to the noncontrolling interest. SFAS No. 160 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. We are currently evaluating the effect, if any,
that the adoption of SFAS No. 160 will have on our financial position,
results of operations and cash flows.




29





Table of Contents


Derivative
Instruments.In March 2008,
the FASB issued SFAS No. 161,Disclosures about
Derivative Instruments and Hedging Activities – an amendment of FASB Statement
No. 133(“SFAS
No. 161”). SFAS No. 161 requires additional disclosures for derivative
instruments and hedging activities that include how and why an entity uses
derivatives, how these instruments and the related hedged items are accounted
for under FASB Statement No. 133,Accounting for
Derivative Instruments and Hedging Activities, and related interpretations and how
derivative instruments and related hedged items affect the entity’s financial
position, results of operations and cash flows. SFAS No. 161 is effective
for fiscal years, and interim periods within those fiscal years, beginning after
November 15, 2008. We do not expect the adoption of SFAS No. 161 to
have a material impact on our financial position, results of operations or cash
flows and we are currently evaluating the effect, if any, adoption will have on
the footnotes accompanying our condensed consolidated financial
statements.





GAAP
Hierarchy.In May 2008, the FASB issued SFAS
No. 162,The Hierarchy of
Generally Accepted Accounting Principles(“SFAS No. 162”). SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles. SFAS No. 162 directs the hierarchy to the
entity, rather than the independent auditors, as the entity is responsible for
selecting accounting principles for financial statements that are presented in
conformity with generally accepted accounting principles. SFAS No. 162 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 31, 2008. We do not expect the adoption of SFAS
No. 162 to have a material impact on our financial position, results of
operations or cash flows.





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





Financial Instruments.In June 2008, the FASB
ratified EITF 07-5, Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF
07-5”). EITF 07-5 provides that an entity should use a two step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument’s contingent
exercise and settlement provisions. It also clarifies the impact of foreign
currency denominated strike prices and market-based employee stock option
valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years
beginning after December 15, 2008. We do not expect the adoption of EITF 03-6-1
to have a material impact on our financial position, results of operations or
cash flows.





Critical Accounting
Policies, Estimates and Assumptions





The preparation of financial statements
in conformity with accounting principles generally accepted in theUnited Statesrequires management to make estimates
and assumptions that affect reported amounts. These estimates and assumptions
are based on information available as of the date of the financial statements.
Accounting measurements at interim dates inherently involve greater reliance on
estimates than at year-end. The results of operations for the three and nine
month periods ended September 30, 2008 is not necessarily indicative of
results that can be expected for the full year. Please refer to the section
entitled “Critical Accounting Policies and Estimates” of Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” in our Annual Report on Form 10-K for the year ended
December 31, 2007 for a discussion of our critical accounting policies and
estimates.





Revenue
Recognition





Coal revenues result from sales
contracts (long-term coal contracts or purchase orders) with electric utilities,
industrial companies or other coal-related organizations, primarily in the
eastern United States. Revenue is recognized and recorded at the time of
shipment or delivery to the customer, prices are fixed or determinable and the
title or risk of loss has passed in accordance with the terms of the sales
agreement. Under the typical terms of these agreements, risk of loss transfers
to the customers at the mine or port, where coal is loaded to the rail, barge,
truck or other transportation source that delivers coal to its
destination.





Coal
sales revenues also result from the sale of broker coal produced by others.
Revenue is recognized and recorded at the time of shipment or delivery to the
customer, prices are fixed or determinable and the title or risk of loss has
passed in accordance with the terms of the sale agreement. The revenues related
to broker coal sales are included in coal sales revenues on a gross basis and
the corresponding cost of the coal from the supplier is recorded in cost of coal
sales in accordance with Emerging Issues Task Force (“EITF”) 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent.




Item 3.
            Quantitative and
      Qualitative Disclosures About Market
Risk





Interest rate
risk. In May 2006, we
entered into an Interest Rate Collar Agreement, which became effective on
March 31, 2007 and expires March 31, 2009, to hedge our interest risk
on $200 million notional amount of revolving debt. The interest rate collar was
designed as a cash flow hedge to offset the impact of changes in the LIBOR
interest rate above 5.92% and below 4.80%. This agreement was entered into in
conjunction with our renegotiated credit facility dated June 23, 2006. We
recognize the change in the fair value of this agreement in the income statement
in the period of change.





Market price
risk. We are exposed to
market price risk in the normal course of mining and selling coal. As of
September 30, 2008, 99% of 2008 planned production is committed for sale,
leaving approximately 1% uncommitted for sale. A hypothetical decrease of $1.00
per ton in the market price for coal would reduce pre-tax income by
approximately $0.2 million for 2008.




30





Table of Contents





Item 4.
            Controls and
      Procedures





Disclosure Controls and
Procedures





We maintain a set of disclosure controls
and procedures designed to provide reasonable assurance that information
required to be disclosed by us in reports that we file or submit under the
Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. Our disclosure controls and procedures are
also designed to provide reasonable assurance that information required to be
disclosed in the reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including the Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure. As of the end of the period covered by this Quarterly
Report on Form 10-Q, an evaluation of the effectiveness of our disclosure
controls and procedures was carried out under the supervision and with the
participation of our management, including the Chief Executive Officer and Chief
Financial Officer. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures are effective.





Changes in Internal Control Over
Financial Reporting





There have been no changes in our
internal control over financial reporting during the third quarter of fiscal
2008 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.





PART
II




Item 1.
            Legal
      Proceedings





On August 23, 2006, a survivor of
the Sago mine accident, Randal McCloy, filed a complaint in the Kanawha Circuit
Court inKanawha
County,West Virginia. The claims brought by Randal McCloy
and his family against us and certain of its subsidiaries, and against W.L.
Ross & Co., and Wilbur L. Ross, Jr., individually, were dismissed on
February 14, 2008, after the parties reached a confidential settlement.
Sixteen other complaints have been filed in Kanawha Circuit Court by the
representatives of many of the miners who died in the Sago mine accident, and
several of these plaintiffs have filed amended complaints to expand the group of
defendants in the cases. The complaints allege various causes of action against
us and our subsidiary, Wolf Run Mining Company, one of our shareholders, W.L.
Ross & Co., and Wilbur L. Ross Jr., individually, related to the
accident and seek compensatory and punitive damages. In addition, the plaintiffs
also allege causes of action against other third parties, including claims
against the manufacturer of Omega block seals used to seal the area where the
explosion occurred and against the manufacturer of self-contained self-rescuer
(“SCSR”) devices worn by the miners at the Sago mine. Some of these third
parties have been dismissed from the actions upon settlement. The amended
complaints add other of our subsidiaries to the cases, including ICG, Inc., ICG,
LLC and Hunter Ridge Coal Company, unnamed parent, subsidiary and affiliate
companies of us, W.L. Ross & Co., and Wilbur L. Ross Jr., and other
third parties, including a provider of electrical services and a supplier of
components used in the SCSR devices. We believe that it is appropriately insured
for these and other potential claims, and it has fully paid its deductible
applicable to its insurance policies. In addition to the dismissal of the McCloy
claim, we have settled and dismissed two other actions and have reached an
agreement in principle to settle two other claims. These settlements require
that we are released, as well as the release of our subsidiaries, W. L.
Ross & Co., and Wilbur L. Ross, Jr. Some of the plaintiffs involved in
one of the dismissed actions have sought permission from the Supreme Court of
Appeals ofWest
Virginiato appeal the
settlement, alleging that the settlement negotiated by the decedent’s estate
should not have been approved by the trial court The trial court
overruled those plaintiffs’ objections to the settlement, and, although the West
Virginia Supreme Court of Appeals refused to stay the effectiveness of the
settlement, the plaintiffs’ petition for appeal to the West Virginia Supreme
Court of Appeals was recently presented to the court. The court has not yet
ruled whether it will accept the petition for appeal or decline to hear the
appeal. We will vigorously defend
ourselves against the remaining complaints and any appeal of any prior
settlements.





Allegheny Energy Supply (“Allegheny”),
the sole customer of coal produced at our subsidiary Wolf Run Mining Company’s
(“Wolf Run”) Sycamore No. 2 mine, filed a lawsuit against Wolf Run, Hunter
Ridge Holdings, Inc. (“Hunter Ridge”), and us in state court in Allegheny
County, Pennsylvania on December 28, 2006, and amended its complaint on
April 23, 2007. Allegheny claims that we breached a coal supply contract
when we declared force majeure under the contract upon idling the Sycamore
No. 2 in the third quarter of 2006. The Sycamore No. 2 mine was idled
after encountering adverse geologic conditions and abandoned gas wells that were
previously unidentified and unmapped. The amended complaint also alleges that
the production stoppages constitute a breach of the guarantee agreement by
Hunter Ridge and breach of certain representations made upon entering into the
contract in early 2005, a claim that Allegheny has since voluntarily dropped.
Allegheny claims that it will incur costs in excess of $100.0 million to
purchase replacement coal over the life of the contract. We,Wolf Run and Hunter Ridge answered the
amended complaint on August 13, 2007, disputing all of the remaining claims. On
November 3, 2008,we, Wolf Run and Hunter Ridge filed an
amended answer and counterclaim against the plaintiffs seeking to void the coal
supply agreement due to, among other things, fraudulent inducement and
conspiracy. The counterclaim alleges further that Allegheny breached a
confidentiality agreement with Hunter Ridge, which prohibited the solicitation
of its employees. After the coal supply agreement was executed, Allegheny hired
the then-president of Anker Coal Group, Inc. (now Hunter Ridge) who engaged in
negotiations on behalf of Wolf Run and Hunter Ridge. In addition to seeking a
declaratory judgment that the coal supply agreement and guaranty be deemed void
and unenforceable and rescission of the contracts, the counterclaim also seeks
compensatory and punitive damages.





On April 5, 2007, the City ofAnn Arbor
Employees’ Retirement
System filed a class action lawsuit in the U.S. District Court for the Southern
District of West Virginia against us and certain of our officers, directors and
underwriters. The amended complaint asserted claims under Sections 11, 12(a)(2)
and 15 of the Securities Act of 1933 based on alleged false and misleading
statements in the registration statements filed in connection with our November
2005 reorganization and December 2005 public offering of common stock. We and
the named officers and directors filed a motion to dismiss the amended complaint
on September 28, 2007, as did the underwriters, and, on September 30, 2008,
the court dismissed the action in its entirety.The plaintiffs did not
appeal the dismissal.





On December 6, 2007, the Kentucky
Waterways Alliance, Inc., and The Sierra Club sued the U.S. Army Corps of
Engineers (the “ACOE”) in the United States District Court for the Western
District of Kentucky, Louisville Division, asserting that a permit to construct
five valley fills was issued unlawfully to our Hazard subsidiary for its Thunder
Ridge Surface mine. The suit alleges that the ACOE failed to comply with the
requirements of both Section 404 of the Clean Water Act and the National
Environmental Policy Act. Hazard has intervened in the suit to protect our
interests. The ACOE suspended the Section 404 permit on December 26,
2007 in order to evaluate the issues raised by the plaintiffs. That evaluation
is now in progress. If the ACOE reinstates the permit and the Court subsequently
finds that the permit is unlawful, production could be materially affected at
the Thunder Ridge Surface mine and the process of obtaining ACOE permits for
coal mining activities inKentuckycould become more
difficult.




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On January 7, 2008, Saratoga
Advantage Trust filed a class action lawsuit in the U.S. District Court for the
Southern District of West Virginia against us and certain of our officers and
directors. The complaint asserts claims under Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder,
based on alleged false and misleading statements in the registration statements
filed in connection with our November 2005 reorganization and December 2005
public offering of common stock. In addition, the complaint challenges other of
our public statements regarding our operating condition and safety record. We
intend to vigorously defend the action.





In May 2008, seven of our subsidiaries
reached settlements with the West Virginia Department of Environmental
Protection, Division of Water and Waste Management (the “WVDEP”) over past
violations of the Clean Water Act related to wastewater discharge permits. In
late 2007, the subsidiary companies voluntarily approached the WVDEP in an
effort to resolve any past violations and to identify and correct any
deficiencies in their routine monitoring and reporting programs. As a result,
WVDEP commenced administrative enforcement actions against each of the seven
subsidiaries, and after a thorough review of the relevant record and permit
terms, the parties agreed to individual consent orders dated May 19, 2008
(Juliana Mining Company, Inc., Vindex Energy Corporation, King Knob Coal Co.,
Inc., Patriot Mining Company, Inc., ICG Eastern, LLC, Hawthorne Coal Company,
Inc. and Wolf Run Mining Company). The consent orders require payment of a
penalty that is approximately $0.4 million in the aggregate, each subsidiary to
develop and implement a comprehensive reporting plan for its water quality
compliance program and develop specific corrective action plans where
needed.





On
July 3, 2007, Taylor Environmental Advocacy Membership, Inc. (“T.E.A.M.)” filed
a petition to appeal the issuance of ICG Tygart Valley, LLC’s (“Tygart Valley”)
Surface Mine Permit U-2004-06 against the West Virginia Department of
Environmental Protection (the “WVDEP”) in an action before the West Virginia
Surface Mine Board (the “Board”). On December 10, 2007, the Board remanded the
permit to the WVDEP for revision to certain provisions related to pre-mining
water monitoring and cumulative hydrologic impacts. The WVDEP issued a
modification on April 1, 2008 addressing those issues. T.E.A.M. filed an appeal
of the WVDEP’s approval of the permit modification on April 30, 2008. On October
7, 2008, the Board issued an order remanding the permit to the WVDEP requiring
Tygart Valley to address a technical issue related to projected post-mining
water quality. Tygart Valley has prepared and submitted a permit modification to
alleviate the board’s concerns. All site development will be suspended until the
WVDEP has approved the permit modification. If the WVDEP issues the permit
as modified, there will be additional opportunity for appeal by
T.E.A.M.





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





Item 1A.
            Risk
      Factors





Listed
below is a risk factor that has been added to those disclosed in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2007:





We
may not be able to repurchase our Convertible Senior Notes if noteholders
convert prior to maturity.





Upon
the occurrence of specific events, our Convertible Senior Notes may become
convertible, requiring us to settle in cash the principal amount of the note,
and any excess conversion value may be settled in cash or in shares of our
common stock, at our option, as provided by the terms of the indenture governing
the Convertible Senior Notes. The Convertible Senior Notes are convertible at an
initial conversion price, subject to adjustment, of $6.10 per share
(approximately 163.8136 shares per $1,000 principal amount of the Convertible
Senior Notes). If we elect to settle any excess conversion value of the
Convertible Senior Notes in cash, the holder will receive, for each $1,000
principal amount, the conversion rate multiplied by a 20-day average closing
price of the common stock as set forth in the indenture beginning on the third
trading day after the Convertible Senior Notes are surrendered. We have $225.0
million of principal amount of Convertible Senior Notes outstanding. In the
event that a holder elects to convert its Convertible Senior Note, we would need
to seek a waiver or amendment from our lenders to fund any cash settlement of
any such conversion from working capital and/or borrowings under our amended
credit facility in excess of $25.0 million per year. There is no assurance we
will have sufficient cash on hand or available to fund the $225.0 million or
that we would receive a waiver or amendment, especially in light of the current
credit environment. In addition, if a significant number of noteholders were to
convert their notes prior to maturity, we may not have enough available funds at
any particular time to make the required repayments. Our failure to repurchase
converted notes at a time when noteholders have the right to convert would
constitute a default under the indenture. This default would, in turn,
constitute an event of default under our amended and restated credit facility
and could constitute an event of default under our Senior Notes, any of which
could cause repayment of the related debt to be accelerated after any applicable
notice or grace periods. If debt repayment were to be accelerated, we may not
have sufficient funds to repurchase the Convertible Senior Notes or repay the
debt. Alternatively, upon conversion, we may issue additional stock to satisfy
the payment obligation related to any excess conversion value which could lead
to immediate and potentially substantial dilution in net tangible book value per
share.





The
global financial crisis may have an impact on our business and financial
conditions in ways that we currently cannot predict.





The
continued credit crisis and related turmoil in the global financial system may
impact our business and our financial condition. In light of the current
economic condition in the financial markets, there can be no assurance the
lenders participating in our credit facility will be willing and able to provide
financing to us in accordance with their legal obligations under the credit
facility.Our ability
to access the capital markets may be severely restricted at a time when we would
like, or need, to do so, which could have an impact on our flexibility to react
to changing economic and business conditions.





While
we have committed and priced the vast majority of our planned shipments of coal
production for next year, 38%, or approximately 900,000 tons, of our uncommitted
tonnage for 2009 is metallurgical coal. Visibility into the domestic and
international metallurgical coal markets is difficult because of recently
announced price and production cuts by steel producers in several countries,
including the U.S. The depth and duration of this imminent slowdown in the steel
sector has yet to be defined and a reduction in global steel production could
adversely impact overall demand for our metallurgical coal, which could have a
negative effect on our revenues.




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Item 6.
            Exhibits





10-Q EXHIBIT INDEX




2.1
            
            Business Combination Agreement
      among International Coal Group, Inc. (n/k/a ICG, Inc.), ICG Holdco, Inc.
      (n/k/a International Coal Group, Inc.), ICG Merger Sub, Inc., Anker Merger
      Sub, Inc. and Anker Coal Group, Inc., dated as of March 31,
      2005
            
            (A
            )2.2
            
            First Amendment to the Business
      Combination Agreement among International Coal Group, Inc. (f/k/a ICG
      Holdco, Inc.), ICG, Inc. (f/k/a International Coal Group, Inc.), ICG
      Merger Sub, Inc., Anker Merger Sub, Inc. and Anker Coal Group, Inc., dated
      as of May 10, 2005
            
            (A
            )2.3
            
            Second Amendment to the Business
      Combination Agreement among International Coal Group, Inc. (f/k/a ICG
      Holdco, Inc.), ICG, Inc. (f/k/a International Coal Group, Inc.), ICG
      Merger Sub, Inc., Anker Merger Sub, Inc. and Anker Coal Group, Inc.,
      effective as of June 29, 2005
            
            (B
            )2.4
            
            Business Combination Agreement
      among International Coal Group, Inc. (n/k/a ICG, Inc.), ICG Holdco, Inc.
      (n/k/a International Coal Group, Inc.), CoalQuest Merger Sub LLC,
      CoalQuest Development LLC and the members of CoalQuest Development LLC,
      dated as of March 31, 2005
            
            (A
            )2.5
            
            First Amendment to the Business
      Combination Agreement among International Coal Group, Inc. (f/k/a ICG
      Holdco, Inc.), ICG, Inc. (f/k/a International Coal Group, Inc.), CoalQuest
      Merger Sub LLC, CoalQuest Development LLC and the members of CoalQuest
      Development LLC, dated as of May 10, 2005
            
            (A
            )2.6
            
            Second Amendment to the Business
      Combination Agreement among International Coal Group, Inc. (f/k/a ICG
      Holdco, Inc.), ICG, Inc. (f/k/a International Coal Group, Inc.), CoalQuest
      Merger Sub LLC, CoalQuest Development LLC and the members of CoalQuest
      Development LLC, effective as of June 29, 2005
            
            (B
            )3.1
            
            Form of Second Amended and
      Restated Certificate of Incorporation of International Coal Group,
      Inc.
            
            (E
            )3.2
            
            Form of Second Amended and
      Restated By-laws of International Coal Group, Inc.
            
            (F
            )4.1
            
            Form of certificate of
      International Coal Group, Inc. common stock
            
            (C
            )4.2
            
            Registration Rights Agreement by
      and between International Coal Group, Inc., WLR Recovery Fund II, L.P.,
      Contrarian Capital Management LLC, Värde Partners, Inc., Greenlight
      Capital, Inc., and Stark Trading, Shepherd International Coal Holdings
      Inc.
            
            (A
            )4.4
            
            Indenture, dated June 23,
      2006, by and among ICG, the guarantors party thereto and The Bank of New
      York Trust Company, N.A., as trustee
            
            (G
            )4.5
            
            Form of 10.25%
      Note
            
            (G
            )4.6
            
            Indenture, dated July 31,
      2007, by and among ICG, the guarantors party thereto and The Bank of New
      York Trust Company, N.A., as trustee
            
            (J
            )4.7
            
            Form of Senior Convertible 9.00%
      Note
            
            (J
            )4.8
            
            Registration Rights Agreement,
      dated July 31, 2007, by and among ICG, the guarantors party thereto and
      UBS Securities LLC
            
            (J
            )4.9
            
            Registration Rights Agreement
      dated as of May 16, 2008 by and between ICG and Fairfax Financial Holdings
      Limited
            
            (K
            )10.1
            
            Amendment No. 1 to the Second
      Amended and Restated Credit Agreement, dated as of January 31, 2007, among
      ICG, LLC, as borrower, International Coal Group, Inc. and certain of its
      subsidiaries as guarantors, the lenders party thereto, J.P. Morgan Chase
      Securities Inc. and UBS Securities LLC, as joint lead arrangers and joint
      bookrunners, JPMorgan Chase Bank, N.A. and CIT Capital USA Inc., as
      co-syndication agents, Bank of America, N.A. and Wachovia Bank, N.A., as
      co-documentation agents, JPMorgan Chase Bank and Bank of America, N.A., as
      issuing banks, UBS Loan Finance LLC, as swingline lender, and UBS AG,
      Stamford Branch, as issuing bank, as administrative agent and as
      collateral agent for the lenders
            
            (H
            )10.2
            
            Second Amendment and Limited
      Waiver to Second Amended and Restated Credit Agreement, effective as of
      July 31, 2007, by and among ICG, LLC, as borrower, the guarantors
      party thereto, the lenders party thereto, J.P. Morgan Securities Inc. and
      UBS Securities LLC, as joint lead arrangers and joint bookrunners,
      JPMorgan Chase Bank, N.A. and CIT Capital Securities LLC, as
      co-syndication agents, Bank of America, N.A. and Wachovia Bank, N.A. as
      co-documentation agents, JPMorgan Chase Bank, N.A. as an issuing bank, UBS
      Loan Finance LLC, as swingline lender, and UBS AG, Stamford Branch, as an
      issuing bank, administrative agent and collateral
    agent
            
            (J
            )31.1
            
            Certification of the Principal
      Executive Officer
            
            (D
            )31.2
            
            Certification of the Principal
      Financial Officer
            
            (D
            )32.1
            
            Certification Pursuant to §906 of
      the Sarbanes Oxley Act of 2002
            
            (D
            )




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(A)
            
            Previously filed as an exhibit to
      Amendment No. 1 to International Coal Group, Inc.’s Registration
      Statement on Form S-1 (Reg. No. 333-124393), filed on June 15,
      2005 and incorporated herein by reference.(B)
            
            Previously filed as an exhibit to
      Amendment No. 2 to International Coal Group, Inc.’s Registration
      Statement on Form S-1 (Reg. No. 333-124393), filed on June 30,
      2005 and incorporated herein by reference.(C)
            
            Previously filed as an exhibit to
      Amendment No. 3 to International Coal Group, Inc.’s Registration
      Statement on Form S-1 (Reg. No. 333-124393), filed on
      September 28, 2005 and incorporated herein by
      reference.(D)
            
            Filed
    herewith.(E)
            
            Previously filed as an exhibit to
      Amendment No. 4 to International Coal Group, Inc.’s Registration
      Statement on Form S-1 (Reg. No. 333-124393), filed on
      October 24, 2005.(F)
            
            Previously filed as an exhibit to
      Amendment No. 5 to International Coal Group, Inc.’s Registration
      Statement on Form S-1 (Reg. No. 333-124393), filed on
      November 9, 2005.(G)
            
            Previously filed as an exhibit to
      International Coal Group, Inc.’s Current Report on Form 8-K filed on
      June 26, 2006.(H)
            
            Previously filed as an exhibit to
      International Coal Group, Inc.’s Annual Report on Form 10-K for the year
      ended December 31, 2006 filed on March 1,
      2007.(I)
            
            Previously filed as an exhibit to
      International Coal Group, Inc.’s Quarterly Report on Form 10-Q for the
      quarter ended March 31, 2007 filed on May 8,
      2007.(J)
            
            Previously filed as an exhibit to
      International Coal Group, Inc.’s Current Report on Form 8-K filed on
      July 31, 2007.(K)
            
            Previously filed as an exhibit to
      Fairfax Financial Holdings Limited’s Amendment No. 1 to Form Schedule 13D
      filed on May 29, 2008.(L)
            
            Previously filed as an exhibit to
      International Coal Group, Inc.’s Quarterly Report on Form 10-Q for the
      quarter ended June 30, 2008 filed on August 8,
  2008.




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SIGNATURES





Pursuant to the requirements 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.




INTERNATIONAL COAL GROUP,
      INC.By:
            
            /s/ Bennett K.
      HatfieldName:
            
            Bennett K.
      HatfieldTitle:
            
            President, Chief Executive Officer and Director(Principal Executive
      Officer)By:
            
            /s/ Bradley W.
      HarrisName:
            
            Bradley W.
      HarrisTitle:
            
            Senior Vice President, Chief
      Financial Officer and Treasurer(Principal
      Financial Officer)





Date: November 7,
2008




35