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 endedJune 30, 2009





OR





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





For the transition period
from                    
to





Commission File
No. 001-32679







International Coal Group,
Inc.


(Exact Name of Registrant as Specified
in Its Charter)





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





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





(304) 760-2400


(Registrant’s Telephone Number,
Including Area Code)





N/A


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





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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, everyInteractive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during thepreceding 12 months (or
for such shorter period that the registrant was required to submit and post such
files).   Yes ̈No ̈





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





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) ofthe Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a
court.       Yes ̈No ̈





APPLICABLE ONLY TO CORPORATE
ISSUERS:





Number of shares of the Registrant’s
Common Stock, $0.01 par value, outstanding as of August 1, 2009—154,152,600.










TABLE OF CONTENTS




PagePART I—FINANCIAL INFORMATIONItem 1.
            
            Condensed Consolidated Financial
    Statements
            
            3Item 2.
            
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            
            22Item 3.
            
            Quantitative and Qualitative Disclosures About Market
      Risk
            
            41Item 4.
            
            Controls and Procedures
            
            42PART II—OTHER INFORMATIONItem 1.
            
            Legal Proceedings
            
            42Item 1A.
            
            Risk Factors
            
            44Item2.
            
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            
            47Item 4.
            
            Submission of Matters to a Vote of Security
      Holders
            
            48Item 6.
            
            Exhibits
            
            49




2











PART
I





Item 1.
            Condensed ConsolidatedFinancial
      Statements





INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


Condensed Consolidated Balance Sheets
(Unaudited)


(Dollars in thousands, except per share
amounts)





June 30,
              2009
            
            
            December 31,
              2008ASSETSCURRENT
    ASSETS:Cash and cash
      equivalents
            
            $
            66,315
            
            
            $
            63,930Accounts receivable, net of
      allowances of $1,406and $1,516
            
            
            84,739
            
            
            
            75,321Inventories,
      net
            
            
            81,600
            
            
            
            58,788Deferred income
      taxes
            
            
            17,666
            
            
            
            17,649Prepaid
      insurance
            
            
            6,027
            
            
            
            13,380Income taxes
      receivable
            
            
            11
            
            
            
            8,030Prepaid expenses and
      other
            
            
            9,602
            
            
            
            10,893Total current
      assets
            
            
            265,960
            
            
            
            247,991PROPERTY, PLANT, EQUIPMENT AND
      MINE DEVELOPMENT, net
            
            
            1,044,939
            
            
            
            1,069,297DEBT ISSUANCE COSTS,
      net
            
            
            9,714
            
            
            
            10,462ADVANCE ROYALTIES,
      net
            
            
            18,037
            
            
            
            17,462OTHER NON-CURRENT
      ASSETS
            
            
            5,613
            
            
            
            5,435Total
assets
            
            $
            1,344,263
            
            
            $
            1,350,647LIABILITIES AND STOCKHOLDERS’
      EQUITYCURRENT
      LIABILITIES:Accounts
      payable
            
            $
            55,878
            
            
            $
            75,810Short-term
    debt
            
            
            1,163
            
            
            
            4,741Current portion of long-term debt
      and capital lease
            
            
            17,769
            
            
            
            15,319Current portion of reclamation and
      mine closure costs
            
            
            10,976
            
            
            
            11,139Current portion of employee
      benefits
            
            
            3,359
            
            
            
            3,359Accrued expenses and
      other
            
            
            82,646
            
            
            
            87,704Total current
      liabilities
            
            
            171,791
            
            
            
            198,072LONG-TERM DEBT AND CAPITAL
      LEASE
            
            
            424,353
            
            
            
            417,551RECLAMATION AND MINE CLOSURE
      COSTS
            
            
            67,899
            
            
            
            68,107EMPLOYEE
      BENEFITS
            
            
            66,781
            
            
            
            61,194DEFERRED INCOME
      TAXES
            
            
            53,110
            
            
            
            49,403BELOW-MARKET COAL SUPPLY
      AGREEMENTS
            
            
            31,032
            
            
            
            43,888OTHER NON-CURRENT
      LIABILITIES
            
            
            6,695
            
            
            
            6,195Total
      liabilities
            
            
            821,661
            
            
            
            844,410COMMITMENTS AND
      CONTINGENCIES
            
            
            —
            
            
            
            —STOCKHOLDERS’
      EQUITY:Preferred stock – par value $0.01,
      200,000,000 shares authorized, none issued
            
            
            —
            
            
            
            —Common stock – par value $0.01,
      2,000,000,000 shares authorized,154,155,550and154,148,229shares issued and outstanding,
      respectively, as of June 30, 2009 and 153,322,245 shares issued and
      outstanding, as of December 31, 2008
            
            
            1,541
            
            
            
            1,533Treasury
    stock
            
            
            (14
            )
            
            
            —Additional paid-in
      capital
            
            
            659,222
            
            
            
            656,997Accumulated other comprehensive
      loss
            
            
            (5,071
            )
            
            
            (5,157
            )Retained
      deficit
            
            
            (133,096
            )
            
            
            (147,171
            )Total International Coal Group,
      Inc. stockholders’ equity
            
            
            522,582
            
            
            
            506,202Noncontrolling
      interest
            
            
            20
            
            
            
            35Total stockholders’
      equity
            
            
            522,602
            
            
            
            506,237Total liabilities and
      stockholders’ equity
            
            $
            1,344,263
            
            
            $
            1,350,647


See notes to condensed consolidated
financial statements.


3








INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


Condensed Consolidated Statements of
Operations (Unaudited)


(Dollars in thousands, except per share
amounts)




Three months
      ended
              June 30,
            
            
            Six months
      ended
              June 30,2009
            
            
            2008
            
            
            2009
            
            
            2008REVENUES:Coal sales
      revenues
            
            $
            254,677
            
            
            $
            253,109
            
            
            $
            528,493
            
            
            $
            479,713Freight and handling
      revenues
            
            
            6,041
            
            
            
            11,870
            
            
            
            14,675
            
            
            
            23,153Other
    revenues
            
            
            17,079
            
            
            
            12,906
            
            
            
            39,595
            
            
            
            26,944Total
    revenues
            
            
            277,797
            
            
            
            277,885
            
            
            
            582,763
            
            
            
            529,810COSTS AND
      EXPENSES:Cost of coal
      sales
            
            
            207,324
            
            
            
            217,590
            
            
            
            439,289
            
            
            
            426,394Freight and handling
      costs
            
            
            6,041
            
            
            
            11,870
            
            
            
            14,675
            
            
            
            23,153Cost of other
      revenues
            
            
            6,630
            
            
            
            9,222
            
            
            
            15,966
            
            
            
            18,157Depreciation, depletion and
      amortization
            
            
            26,035
            
            
            
            24,694
            
            
            
            52,298
            
            
            
            46,651Selling, general and
      administrative
            
            
            8,670
            
            
            
            10,129
            
            
            
            19,281
            
            
            
            18,655Gain on sale of assets,
      net
            
            
            (3,108
            )
            
            
            (26,081
            )
            
            
            (3,186
            )
            
            
            (26,292
            )Total costs and
      expenses
            
            
            251,592
            
            
            
            247,424
            
            
            
            538,323
            
            
            
            506,718Incomefrom
      operations
            
            
            26,205
            
            
            
            30,461
            
            
            
            44,440
            
            
            
            23,092INTEREST EXPENSE,
      net
            
            
            (13,214
            )
            
            
            (8,793
            )
            
            
            (26,232
            )
            
            
            (21,364
            )Incomebefore income
      taxes
            
            
            12,991
            
            
            
            21,668
            
            
            
            18,208
            
            
            
            1,728INCOME TAX (EXPENSE)
      BENEFIT
            
            
            (2,613
            )
            
            
            (7,900
            )
            
            
            (4,108
            )
            
            
            134Net income
            
            
            10,378
            
            
            
            13,768
            
            
            
            14,100
            
            
            
            1,862Net(income) lossattributable to noncontrolling
      interest
            
            
            4
            
            
            
            2
            
            
            
            (25
            )
            
            
            (5
            )Net incomeattributable to International
      Coal Group, Inc.
            
            $
            10,382
            
            
            $
            13,770
            
            
            $
            14,075
            
            
            $
            1,857Earnings per
      share:Basic
            
            $
            0.07
            
            
            $
            0.09
            
            
            $
            0.09
            
            
            $
            0.01Diluted
            
            $
            0.07
            
            
            $
            0.08
            
            
            $
            0.09
            
            
            $
            0.01Weighted-average common shares
      outstanding:Basic
            
            
            152,832,797
            
            
            
            152,550,960
            
            
            
            152,803,420
            
            
            
            152,499,812Diluted
            
            
            154,672,255
            
            
            
            167,912,909
            
            
            
            153,983,725
            
            
            
            167,551,824





See notes to condensed consolidated
financial statements.




4










INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


Condensed Consolidated Statements of
Cash Flows (Unaudited)


(Dollars in
thousands)




Six months
      ended
              June 30,2009
            
            
            2008CASH FLOWS FROM OPERATING
      ACTIVITIES:Net income
            
            $
            14,100
            
            
            $
            1,862Adjustments to reconcile net
      incometo net cash
      from operating activities:Depreciation, depletion and
      amortization
            
            
            52,298
            
            
            
            46,651Amortization of deferred finance
      costs and debt discount
            
            
            3,378
            
            
            
            3,001Provision for bad
      debt
            
            
            (110
            )
            
            
            (522
            )Compensation expense on equity
      instruments
            
            
            2,233
            
            
            
            2,377Gain on sale of assets,
      net
            
            
            (3,186
            )
            
            
            (26,292
            )Deferred income
      taxes
            
            
            3,632
            
            
            
            (285
            )Amortization of accumulated
      postretirement benefit obligation
            
            
            144
            
            
            
            215Changes in assets and
      liabilities:Accounts
      receivable
            
            
            (9,308
            )
            
            
            (29,664
            )Inventories
            
            
            (22,812
            )
            
            
            (3,277
            )Prepaid expenses and
      other
            
            
            16,663
            
            
            
            1,156Other non-current
      assets
            
            
            (630
            )
            
            
            823Accounts
      payable
            
            
            (10,784
            )
            
            
            298Accrued expenses and
      other
            
            
            (5,058
            )
            
            
            17,802Reclamation and mine closure
      costs
            
            
            176
            
            
            
            (1,125
            )Other
      liabilities
            
            
            (1,634
            )
            
            
            1,990Net cash from operating
      activities
            
            
            39,102
            
            
            
            15,010CASH FLOWS FROM INVESTING
      ACTIVITIES:Proceeds from the sale of
      assets
            
            
            3,066
            
            
            
            4,179Additions to property, plant,
      equipment and mine development
            
            
            (35,750
            )
            
            
            (55,379
            )Cash paid related to acquisitions
      and net assets acquired
            
            
            —
            
            
            
            (558
            )Withdrawals (deposits) of
      restricted cash
            
            
            (163
            )
            
            
            14Net cash from investing
      activities
            
            
            (32,847
            )
            
            
            (51,744
            )CASH FLOWS FROM FINANCING
      ACTIVITIES:Repayments on short-term
      debt
            
            
            (3,578
            )
            
            
            —Borrowings on long-term debt and
      capital lease
            
            
            9,086
            
            
            
            —Repayments on long-term debt and
      capital lease
            
            
            (8,755
            )
            
            
            (2,147
            )Purchases of treasury
      stock
            
            
            (14
            )
            
            
            —Debt issuance
      costs
            
            
            (609
            )
            
            
            (183
            )Net cash from financing
      activities
            
            
            (3,870
            )
            
            
            (2,330
            )NET CHANGE IN CASH AND CASH
      EQUIVALENTS
            
            
            2,385
            
            
            
            (39,064
            )CASH AND CASH EQUIVALENTS,
      BEGINNING OF PERIOD
            
            
            63,930
            
            
            
            107,150CASH AND CASH EQUIVALENTS, END OF
      PERIOD
            
            $
            66,315
            
            
            $
            68,086Supplemental
      information:Cash paid for interest (net of
      amount capitalized)
            
            $
            22,402
            
            
            $
            17,630Cash received for income taxes,
      net
            
            $
            7,588
            
            
            $
            —Supplemental disclosure of
      non-cash items:Purchases of property, plant,
      equipment and mine development through accounts
    payable
            
            $
            3,794
            
            
            $
            2,383Purchases of property, plant,
      equipment and mine development through financing
      arrangements
            
            $
            6,900
            
            
            $
            5,840Assets acquired through assumption
      of liabilities
            
            $
            —
            
            
            $
            17,464Assets acquired through the
      exchange of coal reserves
            
            $
            —
            
            
            $
            21,633





See notes to condensed consolidated
financial statements.




5










INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


June 30,2009


(Dollars in thousands, except per share
amounts)





(1) Basis of
Presentation





The accompanying interim condensed
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in 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 ofJune 30,2009 and for thethree and six months endedJune 30,2009 and 2008, and the notes thereto,
are unaudited. However, in the opinion of management, these financial statements
reflect all normal, recurring adjustments necessary for a fair presentation of
the results of the periods presented. The balance sheet information as of
December 31, 2008 has been derived from the Company’s audited consolidated
balance sheet. These statements should be read in conjunction with the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2008. The
results of operations for thethree and six months endedJune 30,2009 are not necessarily indicative of
the results to be expected for future quarters or for the year ending
December 31, 2009.





(2) Summary of Significant Accounting
Policies and General





Fair Value
Measurements—In September
2006, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 157,Fair Value
Measurements(“SFAS
No. 157”). SFAS No. 157 clarifies the definition of fair value,
establishes a framework for measuring fair value and expands the disclosures on
fair value measurements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007. Adoption of SFAS No. 157 did not
have a material impact on the Company’s financial position, results of
operations or cash flows.





In February 2008, the FASB issued FASB
Staff Position (“FSP”)FAS
No.157-2,Effective Date of
FASB Statement No. 157(“FSPFAS No.157-2”). FSPFAS No.157-2 permits delayed adoption of SFASNo.157 for certain non-financial assets and
liabilities, which are not recognized at fair value on a recurring basis, until
fiscal years, and interim periods within those fiscal years, beginning after
November 15, 2008. Adoption of FSPFAS No.157-2 did not have a material impact on
the Company’s financial position, results of operations or cash
flows.





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





6










INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


June 30,2009


(Dollars in thousands, except per share
amounts)





In April 2009, the FASB issued FSP FAS
No. 157-4,Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly(“FSP FAS No.
157-4”). FSP FAS No. 157-4 provides additional guidance on estimating fair value
when the volume and level of activity for an asset or liability have
significantly decreased in relation to normal market activity for the asset or
liability. FSP FAS No. 157-4 also provides additional guidance on circumstances
that may indicate that a transaction is not orderly. FSP FAS No. 157-4 is
effective for interim and annual periods ending after June 15, 2009. Adoption of
FSP FAS No. 157-4 did not have a material impact on the Company’s financial
position, results of operations or cash flows.





Convertible
Debt—In May 2008, the FASB
issued FSP APB 14-1,Accounting for
Convertible Debt Instruments That May be Settled in Cash Upon Conversion
(Including Partial Cash Settlement)(“FSP APB 14-1”). FSP APB 14-1 requires
the liability and equity components of convertible debt instruments that may be
settled in cash upon conversion to be separately accounted for in a manner that
reflects the issuer’s nonconvertible debt borrowing rate. To allocate the
proceeds from a convertible debt offering in this manner, a company
determinesthe carrying amount of the liability
component, whichisbased on the fair value of a similar
liability, excluding any embedded conversion options. The resulting debt
discountisamortized over the period during which
the debt is expected to be outstanding as additional non-cash interest expense.
FSP APB 14-1waseffective for financial statements for
fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years, andhas
beenapplied
retrospectively for all periods presented. The Company has determined its
non-convertible borrowing rate would have been 11.7% at issuance. The effect of
adoption of FSP APB 14-1was as follows:





December 31,
      2008AsPreviously
              Reported
            
            
            Adjustment
            
            
            As
              AdjustedProperty, plant, equipment and
      mine development
            
            $
            1,068,146
            
            
            $
            1,151
            
            
            $
            1,069,297Debt issuance costs,
      net
            
            
            10,635
            
            
            
            (173
            )
            
            
            10,462Total
assets
            
            
            1,349,669
            
            
            
            978
            
            
            
            1,350,647Long-term debt and capital
      lease
            
            
            434,920
            
            
            
            (17,369
            )
            
            
            417,551Deferred tax
      liability
            
            
            42,468
            
            
            
            6,935
            
            
            
            49,403Total
      liabilities
            
            
            854,844
            
            
            
            (10,434
            )
            
            
            844,410Additional paid-incapital
            
            
            643,480
            
            
            
            13,517
            
            
            
            656,997Retained
      deficit
            
            
            (145,066
            )
            
            
            (2,105
            )
            
            
            (147,171
            )TotalInternational Coal Group, Inc.stockholders’
      equity
            
            
            494,790
            
            
            
            11,412
            
            
            
            506,202Total liabilities and
      stockholders’ equity
            
            
            1,349,669
            
            
            
            978
            
            
            
            1,350,647





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





7








INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


June 30,2009


(Dollars in thousands, except per share
amounts)




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





Noncontrolling
Interests—In December 2007,
the FASB issued SFAS No. 160,Noncontrolling
Interests in Consolidated Financial Statements(“SFAS No. 160”). SFAS
No. 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary
(minority interest) is an ownership interest in the consolidated entity that
should be reported as equity in the consolidated financial statements and
separate from the parent company’s equity. Among other requirements, this
statement requires consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the noncontrolling
interest. It also requires disclosure, on the face of the consolidated statement
of operations, of the amounts of consolidated net income attributable to the
parent and to the noncontrolling interest. SFAS No. 160 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15,2008. Adoption of SFAS No. 160impacted the presentation
of noncontrolling interest in the Company’s balance sheet and statements of
operations and cash flows. The impact of the changes in presentation was not
material.





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





Share-Based
Payments—In June 2008, the
FASB issuedFSPEITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities(“FSPEITF 03-6-1”).FSPEITF 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.FSPEITF 03-6-1 is effective for fiscal
years beginning after December 15, 2008. Adoption ofFSPEITF 03-6-1 did not have a material
impact on the Company’s financial position, results of operationsorcash flows.





8










INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


June 30,2009


(Dollars in thousands, except per share
amounts)





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





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





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





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





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





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


FASB Interpretation
No.
46(R)


9










INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


June 30,2009


(Dollars in thousands, except per share
amounts)





Corporate Vacation
Policy—In June 2009,
the Company changed its policy related to when employees are credited with
vacation time. Under the original policy, employees earned their vacation in the
year prior to vesting, and were vested with 100% of their annual vacation time
on January 1st of each
year. Under the revised policy, employees are vested in their vacation
time ratably throughout the year as it is earned. If the Company continued to
account for vacation under the old policy, it would have recognized
additionalcost of coal sales,
cost of other revenues and selling, general and administrative expenses of
$1,626, $100 and $140, respectively, for the three months ended June 30, 2009
and $3,548, $230 and $268, respectively, for the six months ended June 30,
2009.


Aments to


(3) Inventories





Inventories consisted of the
following:




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





(4) Property, Plant,
Equipment and Mine Development





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




June 30,
              2009
            
            
            December 31,
              2008Coal lands and mineral
      rights
            
            $
            588,098
            
            
            $
            586,512Plant and
      equipment
            
            
            587,416
            
            
            
            571,083Mine
      development
            
            
            188,103
            
            
            
            181,876Land and land
      improvements
            
            
            25,406
            
            
            
            24,119Coalbed methane well development
      costs
            
            
            14,888
            
            
            
            14,8891,403,911
            
            
            
            1,378,479Lessaccumulated depreciation,
      depletion and amortization
            
            
            (358,972
            )
            
            
            (309,182
            )Net property, plant, equipment and
      mine development
            
            $
            1,044,939
            
            
            $
            1,069,297





Depreciation, depletion and amortization
expense related to property, plant, equipment and mine development for thethree months
endedJune 30,2009 and 2008 was $28,422and $25,629, respectively. Depreciation, depletion
and amortization expense related to property, plant, equipment and mine
development for thesix
months endedJune 30,2009 and 2008 was $57,433and $52,107, respectively.





On
June 23, 2008, the Company exchanged coal reserves with a third-party. In
addition to reserves, the Company received $3,000 in cash. As a result, the
Company recognized a pre-tax gain of $24,633 based upon the fair value of the
underlying assets received in the exchange, which is included in gain on sale of
assets in its statement of operations for the three and six months ended June
30, 2008.





10










INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


June 30,2009


(Dollars in thousands, except per share
amounts)





(5) Debt





Long-Term Debt and Capital
Lease





Long-term debtand capital leaseconsisted of the
following:





June 30,
              2009
            
            
            December 31,
              20089.00% Convertible Senior Notes,
      due 2012, net of debt
      discount of $15,347 and $17,369, respectively
            
            $
            209,653
            
            
            $
            207,63110.25% Senior Notes, due
      2014
            
            
            175,000
            
            
            
            175,000Equipment
    notes
            
            
            52,473
            
            
            
            43,378Capital lease and
      other
            
            
            4,996
            
            
            
            6,861Total
            
            
            442,122
            
            
            
            432,870Less current
      portion
            
            
            (17,769
            )
            
            
            (15,319
            )Long-term debtand capital
      lease
            
            $
            424,353
            
            
            $
            417,551





Convertibleseniornotes—In 2007, the Company completed a
private offering of $225,000 aggregate principal amount of 9.00% Convertible
Senior Notes (the “Convertible Notes”) due 2012. The Convertible Notes are the
Company’s senior unsecured obligations and are guaranteed on a senior unsecured
basis by the Company’s materialcurrent andfuture domestic subsidiaries. The
Convertible Notes and the related guarantees rank equal in right of payment to
all of the Company’s and the guarantors’ respective existing and future
unsecured senior indebtedness. Interest is payable semi-annually in arrears on
February 1st
and August 1stof each year.The Company
assessesthe convertibilityof the Convertible Notesonan ongoingbasis.The Convertible Notes were not
convertible as of June 30, 2009.





The principal amount of the Convertible
Notes is payable in cash and amounts above the principal amount, if any, will be
convertible into shares of the Company’s common stock or, at the Company’s
option, cash. The Convertible Notes are convertible at an initial conversion
price, subject to adjustment, of $6.10 per share (approximating 163.8136 shares
per one thousand dollar principal amount of the Convertible Notes). The
Convertible Notes are convertible upon the occurrence of certain events,
including (i) prior to February 12, 2012 during any calendar quarter
after September 30, 2007, if the closing sale price per share of the
Company’s common stock for each of 20 or more trading days in a period of 30
consecutive trading days ending on the last trading day of the immediately
preceding calendar quarter exceeds 130% of the conversion price in effect on the
last trading day of the immediately preceding calendar quarter; (ii) prior
to February 12, 2012 during the five consecutive business days immediately
after any five consecutive trading day period in which the average trading price
for the notes on each day during such five trading-day period was equal to or
less than 97% of the closing sale price of the Company’s common stock on such
day multiplied by the then current conversion rate; (iii) upon the
occurrence of specified corporate transactions; and (iv) at any time from,
and including February 1, 2012 until the close of business on the second
business day immediately preceding August 1, 2012. In addition, upon events
defined as a “fundamental change” under the Convertible Notes indenture, the
Company may be required to repurchase the Convertible Notes at a repurchase
price in cash equal to 100% of the principal amount of the notes to be
repurchased, plus any accrued and unpaid interest to, but excluding, the
fundamental change repurchase date. As such, in the eventthe Convertible Notes become
convertible, the Company
would be required to classify the entire amount outstanding of





11








INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


June 30,2009


(Dollars in thousands, except per share
amounts)





the Convertible Notes as a current
liability in the following quarter. In the event that a significant number of theholders of the Convertible
Notes were to convert their notes prior to maturity, the Company may not have
enough available funds at any particular time to make the required repayments.
Under these circumstances, the Company would look toWL Ross & Co. LLC (“WLR”), its banking group and other potential
lenders to obtain short-term funding until such time that it could secure
necessary financing on a long-term basis. The availability of any such financing
would depend upon the circumstances at the time, including the terms of any such
financing, and other factors. In addition, if conversion occurs in connection
with certain changes in control, the Company may be required to deliver
additional shares of the Company’s common stock (a “make-whole” premium) by increasing the
conversion rate with respect to such notes. For a discussion of the effects
of the Convertible Notes on
earnings per share, see Note 8.





Effective January 1, 2009, the Company
adopted FSP APB 14-1 (see Note 2). FSP APB 14-1 requires disclosure of the
carrying amount of the equity component of the related convertible debt, as well
as the interest expense resulting from amortization of the debt discount and
interest expense recognized on the principal amount of the debt. As of June 30,
2009 and December 31, 2008, the equity component of the convertible debt was
$13,517 and is included in additional paid-in capital. Interest expense
resulting from amortization of the debt discount was $1,020 and $911for the three months ended June 30,
2009 and 2008, respectively, and $2,022 and $1,804for the six months ended June 30, 2009
and 2008, respectively. Interest expense on the principal amount of the
Convertible Notes was $5,063 for each of the three month periods ended June 30,
2009 and 2008 and $10,126 for each of the six month periods ended June 30, 2009
and 2008.





Creditfacility—The Companyhas a $100,000revolving credit facility(the “Credit Facility”)which matures on June 23,
2011. Amaximum of $80,000 may be used for
letters of credit. In February 2009, the Company executed anamendment to the Credit Facility that
affected certain 2009 debt covenants. The amendment modified the maximum
permitted leverage and minimum interest coverage ratios. The amendment also
decreased the maximum capital spending and added a minimum liquidity
requirement. Debt covenants for years subsequent to 2009 were not affected by
the amendment. As ofJune
30,2009, the Company had
no borrowings outstanding and letters of credit totaling $73,551outstanding, leaving $26,449available for future borrowing
capacity. Interest on the borrowings under the Credit Facility is payable, at
the Company’s option, at either the base rate plus an applicable
marginof2.25% to3.00% or LIBOR plus an applicable
marginof3.25% to4.00%,based on the Company’s leverage ratio
as ofJune 30,
2009. As ofJune 30,2009, the Company was in compliance
with its financial covenants under the Credit Facility.The Company believes, based
on currently available information, that it will be able to meet the financial
covenants in the Credit Facility through the end of 2009. Current market
volatility, surrounding coal prices in particular, has made it extraordinarily
difficult to forecast results for 2010 and beyond. Accordingly, the
potential exists that the Company may not remain in compliance with certain
covenants in 2010. The Company will seek a waiver or amendment from its lenders
or pursue other alternatives for any period it believes it will not be in
compliance.





Equipmentnotes—The equipment notes, having various
maturity dates extending toFebruary2014, are collateralized by mining
equipment. As ofJune
30,2009, the Company had
amounts outstandingwith
terms ranging from36to60months anda weighted-average interest rate of7.30%. AtJune 30,2009, additional funds are available
under the Company’s revolving equipment credit facility for termsupto 60 months with a current interest
rate of6.90%.





Capital lease and
other—The Company leases certain mining
equipment underacapital lease.The Company imputed interest on its capital lease using
arate of10.44%.Additionally, the Companyhas an insurance policy with a coverage
period of 17 months that it financed over 15 monthsat aninterest rate of5.42%.





12










INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


June 30,2009


(Dollars in thousands, except per share
amounts)




Short-Term Debt





The Company finances the majority of its
insurance premiums, a portion of which is included in short-term debt.As of June 30, 2009,
the weighted-average
interest rate applicable to the notes was5.04%. As ofJune 30,2009 andDecember 31,2008, the Company had $1,163and $4,741, respectively, outstanding related tothe financing ofinsurancepremiums.





(6) Income Taxes





The effective income tax
ratesfor thethree and six months endedJune 30,2009and 2008werecalculated using estimated annual
effective ratesbased on projected earnings for therespectiveyears, exclusive of discrete
items.The effective income
tax rate for thethree
months endedJune 30, 2009 decreasedto18%from36%for thethree months endedJune 30,2008. The decrease wasprimarily a result of the effect of
income tax deductions for depletion of mineral rights on reduced quarterly earnings.The effective income tax
rate for thesix months
endedJune 30,2009increased to20%froman 8%tax benefitfor thesix months endedJune 30,2008. Theincrease wasprimarily a result of the effect of
income tax deductions for depletion of mineral rights on increased projected earnings,
combined with an increasein other non-deductible expensesand miscellaneous
items.





(7) Employee Benefits





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





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





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





(8) Earnings Per Share





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





13










INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


June 30,2009


(Dollars in thousands, except per share
amounts)





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





Three months ended
              June 30,
            
            
            Sixmonths ended
              June 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Net incomeattributable to International Coal
      Group, Inc.
            
            $
            10,382
            
            
            $
            13,770
            
            
            $
            14,075
            
            
            $
            1,857Weighted-average common shares
      outstanding—basic
            
            
            152,832,797
            
            
            
            152,550,960
            
            
            
            152,803,420
            
            
            
            152,499,812Incremental shares arising
      from:Stock
    options
            
            
            253,801
            
            
            
            154,763
            
            
            
            268
            
            
            
            —Restricted
      shares
            
            
            1,392,231
            
            
            
            203,967
            
            
            
            1,122,381
            
            
            
            48,793Restricted stock
      units
            
            
            193,496
            
            
            
            —
            
            
            
            57,656
            
            
            
            —Convertible
      notes
            
            
            —
            
            
            
            15,003,219
            
            
            
            —
            
            
            
            15,003,219Weighted-average common shares
      outstanding—diluted
            
            
            154,672,255
            
            
            
            167,912,909
            
            
            
            153,983,725
            
            
            
            167,551,824Earnings Per
      Share:Basic
            
            $
            0.07
            
            
            $
            0.09
            
            
            $
            0.09
            
            
            $
            0.01Diluted
            
            $
            0.07
            
            
            $
            0.08
            
            
            $
            0.09
            
            
            $
            0.01





Options to purchase2,777,822and2,797,022shares of common stock outstanding atJune30, 2009have been excluded from the computation
of diluted net income per share for the three andsixmonths endedJune 30, 2009because their effect would have been
anti-dilutive. Options to purchase1,069,292and1,096,292shares of common stock outstanding atJune 30, 2008have been excluded from the computation
of diluted netincomeper share for the three andsixmonths endedJune 30, 2008because their effect would have been
anti-dilutive.





The principal amount of the Convertible
Notes is payable in cash and amounts above the principal amount, if any, will be
convertible into shares of the Company’s common stock or, at the Company’s
option, cash. The volume weighted-average price of the Company’scommonstockfor the applicable cash settlement
averaging periodwas below
$6.10 per share. Accordingly, there were no potentially dilutive shares atJune 30,2009.





(9)
Fair Value of Financial Instruments





The estimated fair values of the
Company’s financial instruments are determined based on relevant market
information. These estimates involve uncertainty and cannot be determined with
precision. The following methods and assumptions were used to estimate the fair
value of each class of financial instrument.





Cash
and Cash Equivalents, Accounts Receivable, Accounts Payable, Short-Term Debt and
Other Current Liabilities—The carrying amounts approximate the
fair value due to the short maturity of these instruments.





14








INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


June 30,2009


(Dollars in thousands, except per share
amounts)





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





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





(10) Commitments and
Contingencies





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





Coal
Supply Agreements—Purchase
price allocated to the Company’s below-market coal supply agreements (sales
contracts) acquired in acquisitions accounted for as business combinations were
capitalized and are being amortized on the basis of coal to be shipped over the
term of the contracts. Purchase price allocated to the Company’s above-market
coal supply agreement was capitalized and is being reduced as related cash
payments are received. Value was allocated to coal supply agreements based on
discounted cash flows attributable to the difference between the above- or
below-market contract price and the prevailing market price at the date of
acquisition. The net book value of the Company’s above-market coal supply
agreement was $3,322and $3,447atJune 30, 2009andDecember 31,2008, respectively. This amount is recorded
in other assets in the Company’s consolidated balance sheets. The net book value
of the below-market coal supply agreements was $31,032and $43,888atJune 30, 2009andDecember 31,2008, respectively. Amortization income on
the below-market coal supply agreements was $2,386 and$934for the three months ended June 30, 2009
and 2008, respectively,and
$5,135 and$5,455for the six months ended June 30, 2009
and 2008,respectively.
Amortization income is included in depreciation, depletion and amortization
expense.During the three months ended June 30, 2009, the Company
terminated a below-market coal supply agreement and realized a $7,721 pre-tax
non-cash gain. The gain is included in other revenues in the Company’s statement
of operations for the three and six months ended June 30, 2009. Based on expected shipments related tothe remaining
below-marketcontracts, the
Company expects to record annual amortization income on the below-market coal
supply agreements in each of the next five years as reflected in the table
below.





Below-market
              contracts2009(remainder of
      year)
            
            $
            1,5652010
            
            
            3,2322011
            
            
            3,2322012
            
            
            3,2322013
            
            
            3,232





15








INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


June 30,2009


(Dollars in thousands, except per share
amounts)





Legal
Matters—On August 23, 2006, a survivor of
the Sago mine accident, Randal McCloy, filed a complaint in the Kanawha Circuit
Court inKanawha
County,West Virginia. The claims brought by Randal McCloy
and his family againstthe
Companyand certain ofitssubsidiaries, 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 againstthe Companyanditssubsidiary, Wolf Run Mining Company,
one ofitsshareholders, 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 ofthe
Company’ssubsidiaries to
the cases, including ICG, Inc., ICG, LLC and Hunter Ridge Coal Company, unnamed
parent, subsidiary and affiliate companies ofthe 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 Companybelievesthatit isappropriately insured for these and
other potential claims, andhasfully paiditsdeductible applicable toitsinsurance policies. In addition to the
dismissal of the McCloy claim,the Company hassettled and dismissed five other
actions. These settlements required the release ofthe Company,itssubsidiaries, 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 deferred its decision as to whether it will hear the appeal,
pending its ruling on an unrelated case that shares similar issues.That case was decided on June 23, 2009,
but the court has taken no further action on the plaintiffs' appeal in this
case. The Companywill
vigorously defenditselfagainst the remaining complaints and
any appeal of any prior settlements.





Allegheny Energy Supply (“Allegheny”),
the sole customer of coal produced atthe Company’ssubsidiary Wolf Run Mining Company’s
(“Wolf Run”) Sycamore No. 2 mine, filed a lawsuit against Wolf Run, Hunter
Ridge Holdings, Inc. (“HunterRidge”), andthe Companyin state court inAllegheny County,Pennsylvaniaon December 28, 2006, and amended
its complaint on April 23, 2007. Allegheny claims thatthe Companybreached a coal supply contract whenitdeclared force majeure under the
contract upon idling the Sycamore No. 2minein 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 $100,000to purchase replacement coal over the
life of the contract.The
Company, Wolf Run andHunterRidgeanswered the amended complaint on
August 13, 2007, disputing all of the remaining claims. On November 3, 2008,the Company, Wolf Run andHunterRidgefiled 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
withHunterRidge, which prohibited the solicitation of
its employees. After the coal supply agreement was executed, Allegheny hired the
then-president of Anker Coal Group, Inc. (nowHunterRidge) who engaged in negotiations on behalf
of Wolf Run andHunterRidge. 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.





16










INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


June 30,2009


(Dollars in thousands, except per share
amounts)





On December 6, 2007, the Kentucky
Waterways Alliance, Inc., and The Sierra Club sued the U.S. Army Corps of
Engineers (the “ACOE”) in the United States District Court for the Western
District of Kentucky, Louisville Division, asserting that a permit to construct
five valley fills was issued unlawfully tothe Company’sHazard subsidiary for its Thunder Ridge
Surface mine. The suit alleges that the ACOE failed to comply with the
requirements of both Section 404 of the Clean Water Act and the National
Environmental Policy Act. Hazard intervened in the suit to protectthe Company’sinterests. The ACOE suspended the
Section 404 permit on December 26, 2007 in order to evaluate the
issues raised by the plaintiffs.TheACOE completed its evaluation on March
25, 2009, and on March 27, 2009, reinstated Hazard’s
permit. Pursuant to earlier agreements with the plaintiffs in the litigation,the Companyprovided thirty (30) days notice to
plaintiffs’ counsel of Hazard’s intent to proceed with activities authorized
under the permit.After
such notice, the plaintiffs agreed to amend the earlier agreement to
allow Hazard partial use of the reinstated permit, including construction of an
additional valley fill. Subsequently, the parties agreed to pursue resolution of
the case in accordance with a scheduling order entered by the court. Pursuant to
that order, the plaintiffs filed an amended complaint on July 10, 2009. The
amended complaint modifies the plaintiffs’ allegations to apply to the reissued
permit, rather than the original permit. The action will proceed in accordance
with the scheduling order through November 2009, after which the court is
expected to render a decision. If
thecourtultimatelyfinds that the permit is unlawful,
production could be materially affected at the Thunder Ridge Surface mine.TheEPA’s heightened scrutiny will likely
render the process of obtaining ACOE permits for coal mining activities inAppalachiamore difficult.





On January 7, 2008, Saratoga
Advantage Trust(“Saratoga”)filed a class action lawsuit in the
U.S. District Court for the Southern District of West Virginia against the
Companyand certain ofitsofficers 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 withthe Company’sNovember 2005 reorganization and
December 2005 public offering of common stock. In addition, the complaint
challenges other ofthe
Company’spublic statements
regardingitsoperating condition and safety record.On July 6, 2009,Saratogafiled an amended complaint asserting
essentially the same claims but seeking to add an individual co-plaintiff. The
Companyintendsto vigorously defend the
action.





On July 3, 2007, Taylor Environmental
Advocacy Membership, Inc. (“T.E.A.M.”) filed a petition to appeal the issuance
ofICGTygartValley, LLC’s (“TygartValley”) 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 requiringTygartValleyto address a technical issue related to
projected post-mining water quality.TygartValleyprepared and submitted a permit
modification to alleviate theBoard’s concerns.The revision was approved by the WVDEP
on May 27, 2009, reinstating theTygartpermit. As expected, T.E.A.M. appealed
the reinstatement. No hearing date has been set.





In addition, from time to time,the Company isinvolved in legal proceedings arising
in the ordinary course of business. These proceedings include assessments of
penalties for citations and orders asserted by MSHA and other regulatory
agencies, none of which are expected by management to, individually or in the
aggregate, have a material adverse effect onthe Company. In the opinion of management,the Company hasrecorded 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 onthe Company’sfinancial condition, results of
operations or cash flows.





17








INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


June 30,2009


(Dollars in thousands, except per share
amounts)





(11) Related Party Transactions and
Balances





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





(12) Segment
Information





The Company extracts, processes and
markets steam and metallurgical coal from deep and surface mines for sale to
electric utilities and industrial customers, primarily in the 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.





Reportable segment resultsfromcontinuing operations for thethree and six months
endedJune 30,2009 and 2008 and segment assets as ofJune 30,2009 and 2008 were as
follows:





Three months endedJune 30,2009:




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





Three months endedJune 30,2008:




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





18










INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


June 30,2009


(Dollars in thousands, except per share
amounts)





Revenue in the Ancillary category
consists primarily of $12,720and $10,393relating to the Company’s brokered coal
sales and $4,018and $5,717relating to contract highwall mining
activities for thethree
months endedJune 30,2009 and 2008, respectively. Capital
expenditures include non-cash amounts of $10,693and $12,964for thethree months endedJune 30,2009and 2008, respectively. Capital expendituresdo notinclude $11,744 paid duringthethree months endedJune 30,2009related to capital expenditures accrued
in prior periods.





Six months endedJune 30,2009:




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





Six months endedJune 30,2008:




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





Revenue in the Ancillary category
consists primarily of $23,440and $27,090relating to the Company’s brokered coal
sales and $10,858and $9,778relating to contract highwall mining
activities for thesix
months endedJune 30,2009 and 2008, respectively. Capital
expenditures include non-cash amounts of $10,693and $8,223for thesix months endedJune 30,2009and 2008, respectively. Capital expendituresdo notinclude $12,942 paid duringthesix months endedJune 30,2009related to capital expenditures accrued
in prior periods.





19











INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


June 30,2009


(Dollars in thousands, except per share
amounts)




Adjusted EBITDA represents
earnings before deducting
interest, income taxes,
depreciation, depletion, amortization andnoncontrollinginterest. 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 incomeattributable toInternational Coal Group, Inc.to Adjusted EBITDA for thethree and six months endedJune 30,2009 and 2008 is
as follows:





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





(13) Supplementary Guarantor
Information





International Coal Group, Inc. (the
“Parent Company”) issued $175,000 of Senior Notes (the “Notes”) due 2014 in June
2006 and $225,000 of Convertible Senior Notes (the “Convertible Notes”) due 2012
in July 2007. The Parent Company has no independent assets or operations other
than those related to the issuance, administration and repayment of the Notes
and the Convertible Notes. All subsidiaries of the Parent Company (the
“Guarantors”), except for a minor non-guarantor joint venture, have fully and
unconditionally guaranteed the Notes and the Convertible Notes on a joint and
several basis. The Guarantors are 100% owned, directly or indirectly, by the
Parent Company. Accordingly, condensed consolidating financial information for
the Parent Company and the Guarantorsisnot presented.





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




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





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





20









INTERNATIONAL COAL GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


June 30,2009


(Dollars in thousands, except per share
amounts)





(14) Subsequent Event





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





The
Company has evaluated events and transactions occurring subsequent to the
balance sheet date for items that should potentially be recognized or disclosed
in its financial statements. The evaluation was conducted through August 6,
2009, the date of the filing of this Quarterly Report on Form 10-Q.





21










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





Cautionary Note Regarding
Forward-Looking Statements





Statements in this Quarterly Report on Form 10-Q that
are not historical facts
are forward-looking statements within the “safe harbor” provision of the Private
Securities Litigation Reform Act of 1995and 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 tovarious
risks,uncertainties and
factors relating to our operations and business environment, all of which are
difficult to predict and many of which are beyond our control, that could cause
our actual results to differ materially from those matters expressed in or
implied by these forward-looking statements. The following factors are among
those that may cause actual results to differ materially from our
forward-looking statements:





•
            market demand for coal,
      electricity and steel;•
            availability of qualified
      workers;•
            future economic or capital market
      conditions;•
            weather conditions or catastrophic
      weather-related damage;•
            our production
      capabilities;•
            consummation of financing,
      acquisition or disposition transactions and the effect thereof on our
      business;•
            a significant number of
      conversions of our Convertible Senior Notes prior to
      maturity;•
            our plans and objectives for
      future operations and expansion or
consolidation;•
            our relationships with, and other
      conditions affecting, our customers;•
            availability and costs of key
      supplies or commodities such as diesel fuel, steel, explosives and
      tires;•
            availability and costs of capital
      equipment;•
            prices of fuels which compete with
      or impact coal usage, such as oil and natural
  gas;•
            timing of reductions or increases
      in customer coal inventories;•
            long-term coal supply
      arrangements;•
            reductions and/or deferrals of
      purchases by major customers;•
            risks in or related to coal mining
      operations, including risks relatedto 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;





22










•
            availability and costs of credit,
      surety bonds and letters of credit;•
            title defects or loss of leasehold
      interests in our properties which could result in unanticipated costs or
      inability to mine these properties;•
            future legislation and changes in
      regulations or governmental policies or changes in interpretations or
      enforcement thereof, including with respect to safety enhancements and
      environmental initiatives relating to global
    warming;•
            impairment of the value of our
      long-lived and deferred tax assets;•
            our liquidity, including the
      ability to adhere to financial covenants related to our borrowing
      arrangements, results of operations and financial
      condition;•
            adequacy and sufficiency of our
      internal controls; and•
            legal and administrative
      proceedings, settlements, investigations and claims and the availability
      of related insurance
coverage.





You should keep in mind that any
forward-looking statementsmade by us in this Quarterly Report on
Form 10-Qor
elsewherespeaks only as of
the date on whichthe
statements were made. New
risks and uncertainties arise from timetotime, and it is impossible for us to
predict these events or how they may affect usor anticipated results. We have no duty to, and do not intend
to, update or revise the forward-looking statements in this report after the
date of this report, except as may be required by law. In light of these risks
and uncertainties, you should keep in mind that any forward-looking statement
made in this report might not occur. When considering these forward-looking
statements, you should keep in mind the cautionary statements in this document
and in our other SEC filings, including the more detailed discussion of these
factors, as well as other factors that could affect our results, contained in
Item 3, “Quantitative and Qualitative Disclosures About Market Risk,” as
well as in the “Risks Relating to Our Business” section of Item 1A of our
2008 Annual Report on Form 10-K.




23










RESULTS OF CONTINUING
OPERATIONS





Three months endedJune 30,2009 compared to thethree months endedJune 30,2008





Revenues, coal sales revenues byreportablesegment and tons sold byreportablesegment





The following table depicts revenues for
thethree months
endedJune 30,2009 and 2008 for the indicated
categories:





Three months
      ended
              June 30,
            
            Increase
              (Decrease)2009
            
            
            2008
            
            $ or Tons
            
            %(in thousands, except percentages
      and per ton data)Coal sales
      revenues
            
            $
            254,677
            
            
            $
            253,109
            
            $
            1,568
            
            1
            %Freight and handling
      revenues
            
            
            6,041
            
            
            
            11,870
            
            
            (5,829
            )
            (49
            )%Other
    revenues
            
            
            17,079
            
            
            
            12,906
            
            
            4,173
            
            32
            %Total
    revenues
            
            $
            277,797
            
            
            $
            277,885
            
            $
            (88
            )
            *
            %Tons sold
            
            
            4,180
            
            
            
            4,858
            
            
            (678
            )
            (14
            )%Coal sales revenue per
      ton
            
            $
            60.92
            
            
            $
            52.10
            
            $
            8.82
            
            17
            %




The following table depicts coal sales
revenues byreportablesegment for thethree months endedJune 30,2009 and 2008:





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





The following table depicts tons sold byreportablesegment for thethree months endedJune 30,2009 and 2008:





Three months
      ended
              June 30,
            
            Increase
              (Decrease)2009
            
            
            2008
            
            Tons
            
            %(in thousands, except percentages)Central
      Appalachian
            
            
            2,480
            
            
            
            3,004
            
            (524
            )
            (17
            )%Northern
      Appalachian
            
            
            947
            
            
            
            1,075
            
            (128
            )
            (12
            )%IllinoisBasin
            
            
            546
            
            
            
            543
            
            3
            
            1
            %Ancillary
            
            
            207
            
            
            
            236
            
            (29
            )
            (12
            )%Total tons
    sold
            
            
            4,180
            
            
            
            4,858
            
            (678
            )
            (14
            )%




* not meaningful





Coal
sales revenues—Coal sales
revenues are derived from sales of produced coal and brokered coal contracts.
Coal sales revenues increased for thethree months endedJune 30,2009compared to thethree months ended June 30,
2008due to a17% increase in sales realization per ton
resultingfrom favorable
pricing on contracts entered into throughout 2008.Offsetting the impact of improved
realization per tonwas a
14% decrease in tons sold, primarily as a result of decreased participation in
the spot market.




24










Central
Appalachian.Coal sales revenues from our Central
Appalachian segment for thethree months endedJune 30,2009 increasedover the same period in 2008primarily due to an
increasein sales
realizationof
$15.24per ton, which was driven by higher
averagecontractprices of our
coal. Partially offsetting
the increase in realization was a 17% decrease in tons sold, largely driven by
decreased spot market sales.





Northern
Appalachian. For thethree months
endedJune 30, 2009, our Northern Appalachian coal sales
revenuesdecreased due toa 12% decreasein tons sold,primarily related to reduced spot market
sales. Coal sales revenue also decreased due to a decrease in sales realization
of $4.24 per ton, principally resulting from a decrease in sales of high-priced
metallurgical-quality coal.





IllinoisBasin. The increase in coal sales revenues
from ourIllinoisBasinsegmentfor the three months ended June 30, 2009was due to an increase in sales realization of $2.58
per ton and a 1% increase in tons sold.





Ancillary. Our Ancillary segment’s coal sales
revenues are comprised of coal sold under brokered coal contracts.For the three months ended June 30,
2009, our Ancillary coal sales revenues increased 25% primarily due to an
increase in sales realization of $18.31 per ton. The increase in average prices
was partially offset by a 12% decrease in tons sold related to the expiration of
certain coal supply agreements, as well as to decreased shipments on various
remaining 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 costsdecreasedfor thethree months endedJune 30,2009 compared to thecomparableperiodof2008 primarily due todecreased sales volumes. Additionally,
transportation rates and fuel surcharges have decreased as a result of decreased
fuel prices subsequent to the second quarter of 2008.





Other
revenues—The increase in other revenues for thethree months
endedJune 30, 2009compared to thethree months ended June 30,
2008wasdueto a $7.7 million gain on the
termination of a below-market contract and incentive payments received related
to rail transportation. Partially offsetting these increases were decreased
revenues from coalbed methane wells and decreased contract mining revenues from
our ADDCAR subsidiary.





Costs and expenses





The following table depicts cost of
operations for thethree
months endedJune 30,2009 and 2008 for the indicated
categories:




Three months
      ended
              June 30,
            
            Increase
              (Decrease)2009
            
            
            2008
            
            $
            
            %(in thousands, except percentages
      and per ton data)Cost of coal
      sales
            
            $
            207,324
            
            
            $
            217,590
            
            $
            (10,266
            )
            (5
            )%Freight and handling
      costs
            
            
            6,041
            
            
            
            11,870
            
            
            (5,829
            )
            (49
            )%Cost of other
      revenues
            
            
            6,630
            
            
            
            9,222
            
            
            (2,592
            )
            (28
            )%Depreciation, depletion and
      amortization
            
            
            26,035
            
            
            
            24,694
            
            
            1,341
            
            5
            %Selling, general and
      administrative expenses
            
            
            8,670
            
            
            
            10,129
            
            
            (1,459
            )
            (14
            )%Gain on sale of
      assets
            
            
            (3,108
            )
            
            
            (26,081
            )
            
            22,973
            
            (88
            )%Total costs and
      expenses
            
            $
            251,592
            
            
            $
            247,424
            
            $
            4,168
            
            2
            %Cost of coal sales per
      ton
            
            $
            49.60
            
            
            $
            44.79
            
            $
            4.81
            
            11
            %





25










The following table depicts cost of coal
sales byreportablesegment for thethree months endedJune 30,2009 and 2008:





Three months
      ended
              June 30,
            
            Increase
              (Decrease)2009
            
            
            2008
            
            $
            
            %(in thousands, except percentages)Central
      Appalachian
            
            $
            140,142
            
            
            $
            146,079
            
            $
            (5,937
            )
            (4
            )%Northern
      Appalachian
            
            
            44,745
            
            
            
            51,834
            
            
            (7,089
            )
            (14
            )%IllinoisBasin
            
            
            14,274
            
            
            
            12,675
            
            
            1,599
            
            13
            %Ancillary
            
            
            8,163
            
            
            
            7,002
            
            
            1,161
            
            17
            %Cost of coal
      sales
            
            $
            207,324
            
            
            $
            217,590
            
            $
            (10,266
            )
            (5
            )%




Cost
of coal sales—For thethree months ended June 30,
2009, our cost of coal
salesdecreased compared to thethree months ended June 30,
2008primarily as a result
of a14%decrease in tons sold. Partially
offsetting the decrease in tons sold was an 11% increase in cost per
ton.




Central
Appalachian. Cost of coal
sales from our Central Appalachian segment decreased due to a 17% decrease in
tons sold. Offsetting the decrease in tons sold was an increase in cost of coal
sales from $48.63 per ton for the three months ended June 30, 2008 to $56.52 per
ton for the three months ended June 30, 2009.Thisincrease in cost per ton was primarily
a result of increased labor and benefits, royalty expense and repairs and
maintenance. Labor and benefit costs increased on a per ton basis as a
result of lower production volumes associated with idled and start-up operations
over the three months ended June 30, 2008. Royalties increased for the three
months ended June 30, 2009 due to an increase in sales realization on tons
sold, as well asincreased mining of leased
reserves. Repairs and maintenance costs increased as a result of several major
repairs. Further impacting the increase in cost of coal sales per ton were
increases in diesel fuel, tire expense, severance taxes and miscellaneous
operating supplies.




Northern
Appalachian. Our Northern
Appalachian segment cost of coal sales decreased due to a 12% decrease in tons
soldcoupled
witha decrease in cost of
coal sales per tonfrom
$48.22 per ton for the three months ended June 30, 2008to $47.21per tonfor the three months ended June 30,
2009. The decrease in cost per ton was primarily due to decreased transportation
costs, offset
byincreasesin labor and benefits and contract
labor costs.





IllinoisBasin. For the three months ended June 30,
2009 cost of coal sales increased by $2.79 per ton, while tons sold remained
relatively consistent with the three months ended June 30, 2008. The increase in
cost per ton was primarily due to increased labor and benefits and repairs and
maintenance costs. Labor and benefits increased in the secondquarterof 2009as a result of an increase inaverage employee headcount
over the three months ended June 30, 2008. Additionally, repairs and maintenance
costswere
higherdue to
increasedutilization of
undergroundmining
equipment. Partially offsetting the increases was a decrease inthe cost ofroof control supplies as a result of
reductions insteelprices.




Ancillary. Cost of coal sales from our Ancillary
segment increased for the three months ended June 30, 2009 primarily due to a
$9.83 increase in cost per ton, partially offset by a 12% decrease in tons
sold.





Cost
of other revenues—For thethree months ended June 30,
2009, cost of other
revenuesdecreased primarily due todecreases ingathering fees related to coalbed
methane wells,trucking costs and repairs and
maintenance. Partially offsetting the decrease was an increase in labor and
benefit costs at our ADDCAR subsidiary.




26










Depreciation,
depletion and amortization—Depreciation, depletion and amortization
expenseincreased for the
three months ended June 30, 2009 primarily as a result of capital spending
throughout 2008 and in the first quarter 2009, as well as a decrease in
amortization income related to the completion of shipments on a below-market
contract subsequent to the second quarter of 2008.These increases were partially offset by
a decrease in amortization of coalbed methane well development
costs.





Selling,
general and administrative expenses—Selling, general and administrative
expenses for thethree
months ended June 30, 2009decreased primarily due todecreases inlabor and benefits and bad debt
expense.




Gain
on sale of assets—Gain on sale of assets decreased $23.0
million for the three months ended June 30, 2009 due to a $24.6 million pre-tax
gain on exchange of coal reserves with a third-party in the comparable period in
2008.




Adjusted EBITDAbyreportablesegment





Adjusted EBITDA representsearningsbefore deducting interest, income
taxes, depreciation,
depletion, amortizationandnoncontrollinginterest. 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 fornoncontrollinginterest. 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 page29of this Quarterly Report on Form 10-Q
and in Note12to ourcondensedconsolidated financial statements for
thethree months
endedJune 30,2009.





The following table depicts Adjusted
EBITDAby reportable
segmentfor thethree months
endedJune 30,2009 and 2008:





Three months
      ended
              June 30,
            
            Increase
              (Decrease)2009
            
            
            2008
            
            $
            
            %(in thousands, except percentages)Central
      Appalachian
            
            $
            47,166
            
            
            $
            46,567
            
            $
            599
            
            1
            %Northern
      Appalachian
            
            
            5,301
            
            
            
            9,730
            
            
            (4,429
            )
            (46
            )%IllinoisBasin
            
            
            3,762
            
            
            
            3,895
            
            
            (133
            )
            (3
            )%Ancillary
            
            
            (3,989
            )
            
            
            (5,037
            )
            
            1,048
            
            21
            %Total Adjusted
      EBITDA
            
            $
            52,240
            
            
            $
            55,155
            
            $
            (2,915
            )
            (5
            )%





Central
Appalachian.Adjusted EBITDA for thethree months ended June 30, 2009
increased compared to the three months ended June 30, 2008primarily due to a$15.24 per ton increase in sales
realization coupled with a $7.89 increase in cost per ton, resulting in$7.35 per ton increase in profit margins.
Partially offsetting the increase in profit margins was a decrease of
approximately 524,000 tons sold.




NorthernAppalachian.Thedecrease in Adjusted EBITDA was due to a
combination ofa
decrease in sales
realization of $4.24per ton, and a decrease of $1.01 in cost per
ton, resulting in decreasedprofit margins of $3.23per ton, as well as adecrease of approximately128,000 tons sold.




IllinoisBasin.Adjusted EBITDAdecreased during thethree months ended June 30, 2009related toa decreaseinprofit margins of $0.21 per ton as a
result of increased sales realization and increased cost per ton of $2.58 and
$2.79, respectively.




27







Ancillary.Theincrease in Adjusted EBITDA was primarily
due toan increase in sales
realization of $18.31 per ton offset by a $9.83 increase in cost per ton,
resulting in an increase in profit margins of $8.48 per ton. Partially
offsetting this increase were decreased revenue from coalbed methane wells anda decrease of approximately29,000 tons sold related to the expiration
of brokered coal contractsthroughout 2008, as well as to decreased shipments on various remaining
contracts.





Reconciliation ofadjusted EBITDA tonet income (loss)byreportablesegment





The following tables reconcile Adjusted
EBITDA to net income (loss) byreportablesegment for thethree months endedJune 30,2009 and 2008:





Three months
      ended
              June 30,
            
            Increase
              (Decrease)2009
            
            2008
            
            $
            
            %(in thousands, except percentages)Central
      AppalachianNet incomeattributable to International Coal
      Group, Inc.
            
            $
            23,257
            
            $
            30,400
            
            $
            (7,143
            )
            (23
            )%Depreciation, depletion and
      amortization
            
            
            17,250
            
            
            15,719
            
            
            1,531
            
            10
            %Interest expense,
      net
            
            
            1,189
            
            
            448
            
            
            741
            
            165
            %Income tax
      expense
            
            
            5,470
            
            
            —
            
            
            5,470
            
            100
            %Adjusted
    EBITDA
            
            $
            47,166
            
            $
            46,567
            
            $
            599
            
            1
            %





Three months
      ended
              June 30,
            
            Increase
              (Decrease)2009
            
            
            2008
            
            $
            
            %(in thousands, except percentages)Northern
      AppalachianNet incomeattributable to International
      Coal Group, Inc.
            
            $
            106
            
            
            $
            4,152
            
            $
            (4,046
            )
            (97
            )%Depreciation, depletion and
      amortization
            
            
            5,246
            
            
            
            5,434
            
            
            (188
            )
            (3
            )%Interest expense,
      net
            
            
            9
            
            
            
            146
            
            
            (137
            )
            (94
            )%Income tax
      benefit
            
            
            (56
            )
            
            
            —
            
            
            (56
            )
            100
            %Noncontrollinginterest
            
            
            (4
            )
            
            
            (2
            )
            
            (2
            )
            (100
            )%Adjusted
    EBITDA
            
            $
            5,301
            
            
            $
            9,730
            
            $
            (4,429
            )
            (46
            )%





Three months
      ended
              June 30,
            
            Increase
              (Decrease)2009
            
            
            2008
            
            $
            
            %(in thousands, except percentages)IllinoisBasinNet incomeattributable to International
      Coal Group, Inc.
            
            $
            1,422
            
            
            $
            1,887
            
            $
            (465
            )
            (25
            )%Depreciation, depletion and
      amortization
            
            
            1,953
            
            
            
            1,949
            
            
            4
            
            *
            %Interest expense,
      net
            
            
            75
            
            
            
            59
            
            
            16
            
            27
            %Income tax
      expense
            
            
            312
            
            
            
            —
            
            
            312
            
            100
            %Adjusted
    EBITDA
            
            $
            3,762
            
            
            $
            3,895
            
            $
            (133
            )
            (3
            )%





28










Three months
      ended
              June 30,
            
            Increase
              (Decrease)2009
            
            
            2008
            
            $
            
            %(in thousands, except percentages)AncillaryNet lossattributable to International
      Coal Group, Inc.
            
            $
            (14,403
            )
            
            $
            (22,669
            )
            $
            8,266
            
            36
            %Depreciation, depletion and
      amortization
            
            
            1,586
            
            
            
            1,592
            
            
            (6
            )
            *
            %Interest expense,
      net
            
            
            11,941
            
            
            
            8,140
            
            
            3,801
            
            47
            %Income taxexpense
      (benefit)
            
            
            (3,113
            )
            
            
            7,900
            
            
            (11,013
            )
            *
            %Adjusted
    EBITDA
            
            $
            (3,989
            )
            
            $
            (5,037
            )
            $
            1,048
            
            (21
            )%








Three months
      ended
              June 30,
            
            Increase
              (Decrease)2009
            
            
            2008
            
            $
            
            %(in thousands, except percentages)ConsolidatedNetincome attributable to
      International Coal Group, Inc.
            
            $
            10,382
            
            
            $
            13,770
            
            $
            (3,388
            )
            (25
            )%Depreciation, depletion and
      amortization
            
            
            26,035
            
            
            
            24,694
            
            
            1,341
            
            5
            %Interest expense,
      net
            
            
            13,214
            
            
            
            8,793
            
            
            4,421
            
            50
            %Income taxexpense
            
            
            2,613
            
            
            
            7,900
            
            
            (5,287
            )
            (67
            )%Noncontrollinginterest
            
            
            (4
            )
            
            
            (2
            )
            
            (2
            )
            100
            %Adjusted
    EBITDA
            
            $
            52,240
            
            
            $
            55,155
            
            $
            (2,915
            )
            (5
            )%




* not meaningful





RESULTS OF CONTINUING
OPERATIONS





Six months endedJune 30,2009 compared to thesix months endedJune 30,2008





Revenues, coal sales revenues byreportablesegment and tons sold byreportablesegment





The following table depicts revenues for
thesix months
endedJune 30,2009 and 2008 for the indicated
categories:





Six months
      ended
              June 30,
            
            Increase
              (Decrease)2009
            
            
            2008
            
            $ or Tons
            
            %(in thousands, except percentages
      and per ton data)Coal sales
      revenues
            
            $
            528,493
            
            
            $
            479,713
            
            $
            48,780
            
            10
            %Freight and handling
      revenues
            
            
            14,675
            
            
            
            23,153
            
            
            (8,478
            )
            (37
            )%Other
    revenues
            
            
            39,595
            
            
            
            26,944
            
            
            12,651
            
            47
            %Total
    revenues
            
            $
            582,763
            
            
            $
            529,810
            
            $
            52,953
            
            10
            %Tons sold
            
            
            8,860
            
            
            
            9,708
            
            
            (848
            )
            (9
            )%Coal sales revenue per
      ton
            
            $
            59.65
            
            
            $
            49.41
            
            $
            10.24
            
            21
            %




29








The following table depicts coal sales
revenues byreportablesegment for thesix months endedJune 30,2009 and 2008:





Six months
      ended
              June 30,
            
            Increase
              (Decrease)2009
            
            
            2008
            
            $
            
            %(in thousands, except percentages)Central
      Appalachian
            
            $
            359,693
            
            
            $
            313,725
            
            $
            45,968
            
            15
            %Northern
      Appalachian
            
            
            108,936
            
            
            
            104,997
            
            
            3,939
            
            4
            %IllinoisBasin
            
            
            36,424
            
            
            
            34,089
            
            
            2,335
            
            7
            %Ancillary
            
            
            23,440
            
            
            
            26,902
            
            
            (3,462
            )
            (13
            )%Total coal sales
      revenues
            
            $
            528,493
            
            
            $
            479,713
            
            $
            48,780
            
            10
            %





The following table depicts tons sold byreportablesegment for thesix months endedJune 30,2009 and 2008:





Six months
      ended
              June 30,
            
            Increase
              (Decrease)2009
            
            
            2008
            
            Tons
            
            %(in thousands, except percentages)Central
      Appalachian
            
            
            5,249
            
            
            
            5,886
            
            (637
            )
            (11
            )%Northern
      Appalachian
            
            
            2,055
            
            
            
            2,051
            
            4
            
            *
            %IllinoisBasin
            
            
            1,136
            
            
            
            1,143
            
            (7
            )
            (1
            )%Ancillary
            
            
            420
            
            
            
            628
            
            (208
            )
            (33
            )%Total tons
    sold
            
            
            8,860
            
            
            
            9,708
            
            (848
            )
            (9
            )%




* not meaningful





Coal
sales revenues—Coal sales
revenues are derived from sales of produced coal and brokered coal contracts.
Coal sales revenues increased for thesix months endedJune 30,2009compared to thesix months ended June 30,
2008primarilydue to a 21% increase in sales realization per ton
resultingfrom favorable
pricing on contracts entered into throughout 2008.Partially offsetting the impact of
improved realization per tonwas a 9% decrease in tons sold,
primarily as a result of decreased participation in the spot
market.





Central
Appalachian.Coal sales revenues from our Central
Appalachian segment for thesix months endedJune 30,2009 increasedover the same period in 2008primarily due to an
increasein sales
realizationof
$15.23per ton, which was driven by higher
averagecontractprices of our
coal. Partially offsetting
the increase in realization was an 11% decrease in tons sold, largely driven by
decreased spot market sales.





Northern
Appalachian. For thesix months
endedJune 30, 2009, our Northern Appalachian coal sales
revenues increased due to an increasein sales realizationof $1.82per ton resulting from higher average
prices of coal soldunder
ourcoal supplycontracts.





IllinoisBasin. The increase in coal sales revenues
from ourIllinoisBasinsegmentfor the six months ended June 30, 2009was due to an increase in sales realization of $2.24
per ton, partially offset by a 1% decrease in tons sold.





Ancillary. Our Ancillary segment’s coal sales
revenues are comprised of coal sold under brokered coal contracts.For the six months ended June 30, 2009,
our Ancillary coal sales revenues decreased due to a 33% decrease in tons sold
related to the expiration of certain coal supply agreements, as well as to
decreased shipments on various remaining contracts. This decrease in tons sold
was partially offset by an increase in sales realization of $12.97 per ton
sold.





30











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 costsdecreasedfor thesix months endedJune 30,2009 compared to thecomparableperiodof2008 primarily due todecreased sales volumes. Additionally,
transportation rates and fuel surcharges have decreased as a result of decreased
fuel prices subsequent to the second quarter of 2008.





Other
revenues—The increase in other revenues for thesix months
endedJune 30, 2009compared to thesix months ended June 30,
2008wasdue to$7.9 million received in settlement of
contract terminations, a $7.7 million gain on the termination of a below-market
contract, increased contract mining revenue and incentive payments received
related to rail transportation. Partially offsetting these increases were
decreases in revenue from coalbed methane wells and sales of scrap
materials.





Costs and expenses





The following table depicts cost of
operations for thesix
months endedJune 30,2009 and 2008 for the indicated
categories:




Six months
      ended
              June 30,
            
            Increase
              (Decrease)2009
            
            
            2008
            
            $
            
            %(in thousands, except percentages
      and per ton data)Cost of coal
      sales
            
            $
            439,289
            
            
            $
            426,394
            
            $
            12,895
            
            3
            %Freight and handling
      costs
            
            
            14,675
            
            
            
            23,153
            
            
            (8,478
            )
            (37
            )%Cost of other
      revenues
            
            
            15,966
            
            
            
            18,157
            
            
            (2,191
            )
            (12
            )%Depreciation, depletion and
      amortization
            
            
            52,298
            
            
            
            46,651
            
            
            5,647
            
            12
            %Selling, general and
      administrative expenses
            
            
            19,281
            
            
            
            18,655
            
            
            626
            
            3
            %Gain on sale of
      assets
            
            
            (3,186
            )
            
            
            (26,292
            )
            
            23,106
            
            88
            %Total costs and
      expenses
            
            $
            538,323
            
            
            $
            506,718
            
            $
            31,605
            
            6
            %Cost of coal sales per
      ton
            
            $
            49.58
            
            
            $
            43.92
            
            $
            5.66
            
            13
            %





The following table depicts cost of coal
sales byreportablesegment for thesix months endedJune 30,2009 and 2008:





Six months
      ended
              June 30,
            
            Increase
              (Decrease)2009
            
            
            2008
            
            $
            
            %(in thousands, except percentages)Central
      Appalachian
            
            $
            295,973
            
            
            $
            279,259
            
            $
            16,714
            
            6
            %Northern
      Appalachian
            
            
            97,123
            
            
            
            96,994
            
            
            129
            
            *
            %IllinoisBasin
            
            
            30,487
            
            
            
            28,626
            
            
            1,861
            
            7
            %Ancillary
            
            
            15,706
            
            
            
            21,515
            
            
            (5,809
            )
            (27
            )%Cost of coal
      sales
            
            $
            439,289
            
            
            $
            426,394
            
            $
            12,895
            
            3
            %




* not meaningful





Cost
of coal sales—For thesix months ended June 30,
2009, our cost of coal
sales increased compared to thesix months ended June 30,
2008primarily as a result
of a 13% increase in cost per ton.Partially offsetting the increase in
cost per ton was a 9% decrease in tons sold.




31











Central
Appalachian.OurCentral Appalachian segmentcost of coal salesincreased to $56.39 per ton
for the six months ended June 30, 2009 from $47.44 per ton for the six months
ended June 30, 2008 primarily a result of increased labor and benefits, repairs
and maintenance and royalty expenses. Labor and benefit costs increased due to
wage increases in the second half of 2008 in an effort to remain competitive in
a tight labor market and as a result of an increase in high dollar medical
claims incurred in the six months ended June 30, 2009. Repairs and maintenance
costs increased as a result of several major repairs performed at certain
complexes. Royalties increased for the six months ended June 30, 2009 due to an
increase in sales realization on tons sold, as well asincreased mining of leased reserves.
Further impacting the increase in cost ofcoal sales were increases indiesel fuel costs
andseverancetaxes.





Northern
Appalachian. Cost of coal
sales and tons sold from our Northern Appalachian segment for thesix months ended June 30,
2009remainedconsistentas compared tothe six months ended June 30,
2008.




IllinoisBasin. For the six months ended June 30,
2009, ourIllinoisBasincost of coal sales increased by $1.79
per ton primarily due to increased labor and benefits and repairs and
maintenance costs. Labor and benefits increasedsubsequent tothe secondquarterof 2008 as a result of increased wages
in an effort to retain skilled miners. Additionally, repairs and maintenance
costswere
higherdue to major repairs
on, and increased
utilization of,underground
mining equipment during the six months ended June 30, 2009.




Ancillary. Cost of coal
sales from our Ancillary segment decreased for the six months ended June 30,
2009 primarily due to decreasedpurchased coal costs related to the
expiration of certain brokered coal contracts, as well as to decreased shipments on
various remaining contracts,throughout 2008 and into
2009.





Cost
of other revenues—For thesix months ended June 30,
2009, cost of other
revenuesdecreased primarily due toa decrease ingathering fees related to coalbed
methane wells, offset by an
increase in labor and benefit costs at our ADDCAR subsidiary.




Depreciation, depletion and amortization—Depreciation, depletion and amortization
expenseincreased for the
six months ended June 30, 2009 primarily as a result of capital spending
throughout 2008 and during the first half of 2009, as well as a decrease in
amortization income related to the completion of shipments on a below-market
contract subsequent to the second quarter of 2008.These increases were partially offset by
a decrease in amortization of coalbed methane well development
costs.





Selling,
general and administrative expenses—Selling, general and administrative
expenses for thesix months
ended June 30, 2009increased primarily due toanincrease inlegal and professional fees. Partially
offsetting the increase were decreases in bad debt expense and sales and use
taxes.





Gain
on sale of assets—Gain on sale of assets decreased $23.1
million for the six months ended June 30, 2009 due to a $24.6 million pre-tax
gain on exchange of coal reserves with a third-party in the comparable period in
2008.




32










Adjusted EBITDAbyreportablesegment





Adjusted EBITDA representsearningsbefore deducting interest, income taxes, depreciation, depletion,
amortizationandnoncontrollinginterest. 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 fornoncontrollinginterest. 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 page35of this Quarterly Report on Form 10-Q
and in Note12to ourcondensedconsolidated financial statements for
thesix months
endedJune 30,2009.





The following table depicts Adjusted
EBITDAby reportable
segmentfor thesix months
endedJune 30,2009 and 2008:





Six months
      ended
              June 30,
            
            Increase
              (Decrease)2009
            
            
            2008
            
            $
            
            %(in thousands, except percentages)Central
      Appalachian
            
            $
            76,599
            
            
            $
            62,145
            
            $
            14,454
            
            23
            %Northern
      Appalachian
            
            
            15,453
            
            
            
            11,525
            
            
            3,928
            
            34
            %IllinoisBasin
            
            
            6,633
            
            
            
            6,243
            
            
            390
            
            6
            %Ancillary
            
            
            (1,947
            )
            
            
            (10,170
            )
            
            8,223
            
            81
            %Total Adjusted
      EBITDA
            
            $
            96,738
            
            
            $
            69,743
            
            $
            26,995
            
            39
            %





Central
Appalachian.Adjusted EBITDA for thesix months ended June 30, 2009 increased
compared to the six months ended June 30, 2008primarily due to a$15.23 per ton increase in sales
realization coupled with an $8.95 increase in cost per ton, resulting in$6.28 per ton increase in profit margins.
Partially offsetting this increase from improved profit margins was a decrease
of approximately 637,000 tons sold.




NorthernAppalachian.The increase in Adjusted EBITDA was due
to a combination of an increase in sales realization of $1.82per ton, and a decrease of $0.03 in cost per
ton, resulting in increased
profit margins of $1.85per ton, as well as an increase of
approximately4,000 tons sold.




IllinoisBasin.Adjusted EBITDAincreased during thesix months ended June 30, 2009related toanincreaseinprofit margins of $0.45 per ton as a
result of increased sales realization and increased cost per ton of $2.24 and
$1.79, respectively, per ton compared to the six months ended June 30,
2008.




Ancillary.Theincrease in Adjusted EBITDA was primarily
due toan increase in sales
realization of $12.97 per ton, offset by a $3.14 increase in cost per ton,
resulting in an increase in profit margins of $9.83 per ton. Further impacting
the increase in Adjusted EBITDA from our Ancillary segment were $7.9 million
received in settlement of contract terminations and increased contract mining
revenue, offset by decreased revenue from coalbed methane wells anda decrease of approximately208,000 tons sold related to the expiration
of brokered coal contractsthroughout 2008, as well as to decreased shipments of various remaining
contracts.





33








Reconciliation ofadjusted EBITDA tonet income (loss)byreportablesegment





The following tables reconcile Adjusted
EBITDA to net income (loss) byreportablesegment for thesix months endedJune 30,2009 and 2008:





Six months
      ended
              June 30,
            
            Increase
              (Decrease)2009
            
            
            2008
            
            $
            
            %(in thousands, except percentages)Central
      AppalachianNet income attributable to International
      Coal Group, Inc.
            
            $
            31,336
            
            
            $
            29,681
            
            $
            1,655
            
            6
            %Depreciation, depletion and
      amortization
            
            
            34,840
            
            
            
            31,565
            
            
            3,275
            
            10
            %Interest expense,
      net
            
            
            2,097
            
            
            
            899
            
            
            1,198
            
            133
            %Income tax
      expense
            
            
            8,326
            
            
            
            —
            
            
            8,326
            
            100
            %Adjusted
    EBITDA
            
            $
            76,599
            
            
            $
            62,145
            
            $
            14,454
            
            23
            %





Six months
      ended
              June 30,
            
            Increase
              (Decrease)2009
            
            
            2008
            
            $
            
            %(in thousands, except percentages)Northern
      AppalachianNet income attributable to
      International Coal Group, Inc.
            
            $
            3,323
            
            
            $
            3,661
            
            $
            (338
            )
            (9
            )%Depreciation, depletion and
      amortization
            
            
            10,821
            
            
            
            7,561
            
            
            3,260
            
            43
            %Interest expense,
      net
            
            
            140
            
            
            
            298
            
            
            (158
            )
            (53
            )%Income tax
      expense
            
            
            1,144
            
            
            
            —
            
            
            1,144
            
            100
            %Noncontrollinginterest
            
            
            25
            
            
            
            5
            
            
            20
            
            400
            %Adjusted
    EBITDA
            
            $
            15,453
            
            
            $
            11,525
            
            $
            3,928
            
            34
            %








Six months
      ended
              June 30,
            
            Increase
              (Decrease)2009
            
            
            2008
            
            $
            
            %(in thousands, except percentages)IllinoisBasinNet incomeattributable to International
      Coal Group, Inc.
            
            $
            2,264
            
            
            $
            2,365
            
            $
            (101
            )
            (4
            )%Depreciation, depletion and
      amortization
            
            
            3,663
            
            
            
            3,762
            
            
            (99
            )
            (3
            )%Interest expense,
      net
            
            
            144
            
            
            
            116
            
            
            28
            
            24
            %Income tax
      expense
            
            
            562
            
            
            
            —
            
            
            562
            
            100
            %Adjusted
    EBITDA
            
            $
            6,633
            
            
            $
            6,243
            
            $
            390
            
            6
            %





Six months
      ended
              June 30,
            
            Increase
              (Decrease)2009
            
            
            2008
            
            $
            
            %(in thousands, except percentages)AncillaryNet lossattributable to International
      Coal Group, Inc.
            
            $
            (22,848
            )
            
            $
            (33,850
            )
            $
            11,002
            
            33
            %Depreciation, depletion and
      amortization
            
            
            2,974
            
            
            
            3,763
            
            
            (789
            )
            (21
            )%Interest expense,
      net
            
            
            23,851
            
            
            
            20,051
            
            
            3,800
            
            19
            %Income tax
      benefit
            
            
            (5,924
            )
            
            
            (134
            )
            
            (5,790
            )
            *
            %Adjusted
    EBITDA
            
            $
            (1,947
            )
            
            $
            (10,170
            )
            $
            8,223
            
            (81
            )%





34







Six months
      ended
              June 30,
            
            Increase
              (Decrease)2009
            
            
            2008
            
            $
            
            %(in thousands, except percentages)ConsolidatedNetincome attributable to
      International Coal Group, Inc.
            
            $
            14,075
            
            
            $
            1,857
            
            $
            12,218
            
            658
            %Depreciation, depletion and
      amortization
            
            
            52,298
            
            
            
            46,651
            
            
            5,647
            
            12
            %Interest expense,
      net
            
            
            26,232
            
            
            
            21,364
            
            
            4,868
            
            23
            %Income taxexpense (benefit)
            
            
            4,108
            
            
            
            (134
            )
            
            4,242
            
            *
            %Noncontrollinginterest
            
            
            25
            
            
            
            5
            
            
            20
            
            400
            %Adjusted
    EBITDA
            
            $
            96,738
            
            
            $
            69,743
            
            $
            26,995
            
            39
            %




*not meaningful





Liquidity and Capital
Resources





Our business is capital intensive and
requires substantial capital expenditures for, among other things, purchasing
and upgrading 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 arecash
on hand,cash flows fromoperations, borrowings under our senior credit
facilityand equipment financing
arrangements.





We believe the principal indicators of
our liquidity are our cash position and remaining availability under our credit
facility. As ofJune
30,2009, our available
liquidity was $92.7million, including cash of
$66.3million and $26.4million available for borrowing under
our $100.0 million senior credit facility. Total debt represented
46% of our total
capitalization atJune
30,2009. Our total
capitalization represents our current and long-term debt combined with our total
stockholders’ equity.





In February 2009, we executed an
amendment to our $100.0 million credit facility that affected certain 2009 debt
covenants. The amendment modified the maximum permitted leverage and minimum
interest coverage ratios. The amendment also decreased the maximum capital
spending and added a minimum liquidity requirement. Debt covenantsfor years subsequent to 2009 were not
affected by the amendment.Management believes, based on currently
available information, that we will be able to meet the financial covenants in
our credit facility through the end of 2009. Current market volatility,
surrounding coal prices in particular, has made it extraordinarily difficult to
forecast results for 2010 and beyond. Accordingly, the potential exists that we
may not remain in compliance with certain covenants in 2010. We will seek a
waiver or amendment from our lenders or pursue other alternatives for any period
we believe we will not be in compliance.





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. It
is possible that, due to the financial position of one or more of our lenders in
the credit facility, they will be unable to fund future borrowings. 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.





35










We currently expect our total capital
expenditures will be approximately $90.0millionto $95.0 millionin 2009, substantially all of which will
be for equipment and infrastructure at our existing operations. Cash paid for
capital expenditures was approximately $35.7million for thesix months endedJune 30,2009. We have funded andexpect tocontinue to fund these capital
expenditures from our internal operationsand equipment financing arrangements,
such asour $50.0 million
equipment revolving credit facility with Caterpillar Financial Services
Corporation. We believe that these sources of capital will be sufficient to fund
our anticipated capital expenditures through thesecondquarter of 2010. Although we expect to
experience some periods of tight liquidity, we expect to be able to manage
through such periods. To the extent necessary, management believes it has
flexibility in the timing of the cash requirements by managing the pace of
capital spending. In addition, management may from time to time raise additional
capital through the disposition of non-core assets or engaging in sale-leaseback
transactions. The need and timing of seeking additional capital in the future
will be subject to market conditions.





Approximately
$14.9 million of cash paid for capital expenditures in the six months ended June
30, 2009 was attributable to our Central Appalachian operations. This amount
represents investments of approximately $3.6 million in our Beckley mining
complex and $2.7 million at Hazard, as well as additional investments of $8.6
million for upgrades at the remaining Central Appalachian operations. We paid
approximately $12.6 million at our Northern Appalachian operations in the six
months ended June 30, 2009, approximately $5.1 million of which was for
investments at our Sentinel complex. Expenditures of approximately $5.8 million
for our Illinois Basin operations were for development of a new mine portal
and ongoing operations improvements. Approximately $2.4 million of cash paid for
capital expenditures for the six months ended June 30, 2009 was within our
Ancillary segment for safety equipment, as well as for various other
upgrades.





On
July 14, 2009, one of our customers elected to exercise contractual options that
provided for early termination of two coal supply agreements in exchange for a
payment of $18.0 million. Furthermore, we received an additional $9.0 million
that represents the lost margin on pre-termination shipments that the customer
was unable to accept. We received the $27.0 million payment on July 30,
2009.





More stringent regulatory requirementsimposed upon the mining
industrydemandsubstantialcapital expenditures to meet safety
standards. For thesix
months endedJune 30,2009, we spent $1.1million to meet these standards and
anticipate spending an additional $4.6million for the remainder of
2009.




Cash Flows





Net cash provided by operating
activities was $39.1million for thesix months
endedJune 30,2009, an increase of $24.1million from the same period in 2008.
This increase is attributable to an increase in net income of $45.5million,after adjustment for non-cash
charges, partially offset
by a $21.4 milliondecreasedue to the changein net operating assets and
liabilities.





For thesix months endedJune 30,2009, net cash used in investing
activities was $32.8million compared to
$51.7million for thesix months endedJune 30,2008. For thesix months endedJune 30,2009, $35.7million of cash was used toupgrade andsupport existing mining operations
compared to $55.4million in the same periodof2008.





Net cashused infinancing activities of $3.9million for thesix months endedJune 30,2009 was due toborrowings of $9.1 million used to
finance equipment. Offsetting these borrowings wererepayments on ourshort- andlong-term debt of $12.3millionanddeferred finance costs of $0.6millionpaid to amend our credit
facility.





36










Credit Facility and Long-term Debt
Obligations





As ofJune 30,2009 our total long-term indebtedness
consisted of the following (in thousands):




June 30,
              20099.00% Convertible Senior Notes,
      due 2012, net of debt
      discount of $15,347
            
            $
            209,65310.25% Senior Notes, due
      2014
            
            
            175,000Equipment
    notes
            
            
            52,473Capital lease and
      other
            
            
            4,996Total
            
            
            442,122Lesscurrent
    portion
            
            
            (17,769
            )Long-term
    debt
            
            $
            424,353




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
facilityand equipment
credit facility, will be
adequate at least through thesecondquarter of 2010 for making required
payments of principal and interest on our indebtedness and for funding
anticipated capital expenditures and working capital requirements. Although we
expect to experience some periods of tight liquidity, we expect to be able to
manage through such periods. To the extent necessary, management believes it hassomeflexibilityto manage itscash requirements bycontrolling the pace and
timingof capital
spending, utilizing
availability under its credit facilities, reducing certain costs and idling
high-cost operations. In
addition, management may from time to time raise additional capital through the
disposition of non-core assets or engaging in sale-leaseback transactions.
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.





Our Convertible Senior Notes (the
“Convertible Notes”) were not convertible as of June 30, 2009.In the event thatthe Convertible Notes were to become
convertible anda
significant number of the holders were to convert their notes prior to maturity,wemay not have enough available funds at
any particular time to make the required repayments. Under these circumstances,wewould look toWL Ross & Co. LLC,ourbanking group and other potential
lenders to obtain short-term funding until such time thatwecould secure necessary financing on a
long-term basis. The availability of any such financing would depend upon the
circumstances at the time, including the terms of any such financing, and other
factors.





37








Recent Accounting
Pronouncements





Fair Value
Measurements.In September
2006, the FASB issued 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.





In February 2008, the FASB issued
FASBStaffPosition (“FSP”)FAS No.157-2,Effective Date of
FASB Statement No. 157(“FSPFASNo.157-2”). FSPFAS No.157-2 permits delayed adoption of SFAS
No. 157 for certain non-financial assets and liabilities, which are not
recognized at fair value on a recurring basis, until fiscal years, and interim
periods within those fiscal years, beginning after November 15, 2008.
Adoption of FSPFASNo.157-2 did not have a material impact on
our financial position, results of operations or cash flows.





In October 2008, the FASB issued FSPFAS No.157-3,DeterminingtheFairValue of a
Financial Asset When theMarketforThatAssetIs Not
Active(“FSPFAS No.157-3”). FSPFASNo.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. FSPFAS No.157-3 was effective upon issuance,
including prior periods for which financial statements had not been issued.
Adoption of FSPFAS No.157-3 did not have a
material impact on our financial position, results of operations or cash
flows.





In April 2009, the FASB issued FSP FAS
No. 157-4,Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly(“FSP FAS No.
157-4”). FSP FAS No. 157-4 provides additional guidance on estimating fair value
when the volume and level of activity for an asset or liability have
significantly decreased in relation to normal market activity for the asset or
liability. FSP FAS No. 157-4 also provides additional guidance on circumstances
that may indicate that a transaction is not orderly. FSP FAS No. 157-4 is
effective for interim and annual periods ending after June 15, 2009. Adoption of
FSP FAS No. 157-4 did not have a material impact on our financial position,
results of operations or cash flows.





Convertible
Debt.In May 2008, the FASB
issued FSP APB 14-1,Accounting for
Convertible Debt Instruments That May be Settledin 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 determinesthe carrying amount of the liability
component, whichisbased on the fair value of a similar
liability (excluding any embedded conversion options). The resulting debt
discountisamortized over the period during which
the debt is expected to be outstanding as additional non-cash interest expense.
FSP APB 14-1waseffective for financial statements for
fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years, andhas
beenapplied
retrospectively for all periods presented. We have determined our
non-convertible borrowing rate would have been 11.7% at issuance. The effect of
adoption of FSP APB 14-1was as follows:





38










December 31,
      2008AsPreviously
              Reported
            
            
            Adjustment
            
            
            As
              AdjustedProperty, plant, equipment and
      mine development
            
            $
            1,068,146
            
            
            $
            1,151
            
            
            $
            1,069,297Debt issuance costs,
      net
            
            
            10,635
            
            
            
            (173
            )
            
            
            10,462Total
assets
            
            
            1,349,669
            
            
            
            978
            
            
            
            1,350,647Long-term debt and capital
      lease
            
            
            434,920
            
            
            
            (17,369
            )
            
            
            417,551Deferred tax
      liability
            
            
            42,468
            
            
            
            6,935
            
            
            
            49,403Total
      liabilities
            
            
            854,844
            
            
            
            (10,434
            )
            
            
            844,410Additional paid-incapital
            
            
            643,480
            
            
            
            13,517
            
            
            
            656,997Retained
      deficit
            
            
            (145,066
            )
            
            
            (2,105
            )
            
            
            (147,171
            )TotalInternational Coal Group, Inc.stockholders’
      equity
            
            
            494,790
            
            
            
            11,412
            
            
            
            506,202Total liabilities and
      stockholders’ equity
            
            
            1,349,669
            
            
            
            978
            
            
            
            1,350,647





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





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, as well as for tax uncertainties and
valuation allowances from prior acquisitions.





Noncontrolling
Interests.In December
2007, the FASB issued SFAS No. 160,Noncontrolling
Interests in Consolidated Financial Statements(“SFAS No. 160”). SFAS
No. 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary
(minority interest) is an ownership interest in the consolidated entity that
should be reported as equity in the consolidated financial statements and
separate from the parent company’s equity. Among other requirements, this
statement requires consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the noncontrolling
interest. It also requires disclosure, on the face of the consolidated statement
of operations, of the amounts of consolidated net income attributable to the
parent and to the noncontrolling interest. SFAS No. 160 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008.Adoption of SFAS No. 160impacted the presentation
of noncontrolling interest in ourbalance sheet and statements of
operations and cash flows.The impact of the changes in
presentation was not material.





39











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





Share-Based
Payments.In June 2008, the
FASB issuedFSPEITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities(“FSPEITF 03-6-1”).FSPEITF 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.FSPEITF 03-6-1 is effective for fiscal
years beginning after December 15, 2008. Adoption ofFSPEITF 03-6-1 did not 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. Adoption of EITF 07-5 did not have a material impact on
our financial position, results of operations or cash flows.





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





40










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





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





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





FASB Codification.In
June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles– a
replacement of FASB Statement No. 162 (“SFAS No. 168”). SFAS No. 168
makes the FASB Accounting Standards Codification the single source of
authoritative U.S. accounting and reporting standards, but it does not change
U.S.generally accepted accounting
principles. SFAS No. 168 is effective for interim and annual periods
ending after September 15, 2009. Adoption of SFAS No. 168 will not impact
our financial condition, 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 Statesof Americarequires 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 thesix months endedJune 30,2009arenot 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, 2008 for a
discussion of our critical accounting policies and
estimates.





Item 3.
            Quantitative and Qualitative
      Disclosures About Market
Risk





Market price
risk. We are exposed to
market price risk in the normal course of mining and sellingcoal.We manage this risk through
the use of long-term coal supply agreements, rather than through the use of
derivative instruments.As of June
30, 2009, substantially allofour2009projected sales arecommittedand priced.Any committed and
unpriced projected sales are subject to future market price volatility.





41










Item4.
            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 procedureshas
beencarried 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 ControlsOver Financial
Reporting





There have been no changes in our
internal controlsover financial reporting during thesecondquarter of fiscal 2009 that have
materially affected, or are reasonably likely to materially affect, oursystem ofinternal 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 our 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 we are appropriately
insured for these and other potential claims, and we have fully paid our
deductible applicable to our insurance policies. In addition to the dismissal of
the McCloy claim, we have settled and dismissed five other actions. These
settlements required the release of us, 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 deferred its decision as to whether it will hear the appeal,
pending its ruling on an unrelated case that shares similar issues.That case was decided on June 23, 2009,
but the court has taken no further action on the plaintiffs' appeal in this
case.We will vigorously
defend ourselves against the remaining complaints and any appeal of any prior
settlements.





42










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. 2minein 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 andHunterRidgeanswered the amended complaint on
August 13, 2007, disputing all of the remaining claims. On November 3, 2008, we,
Wolf Run andHunterRidgefiled 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
withHunterRidge, which prohibited the solicitation of
its employees. After the coal supply agreement was executed, Allegheny hired the
then-president of Anker Coal Group, Inc. (nowHunterRidge) who engaged in negotiations on behalf
of Wolf Run andHunterRidge. 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 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 toourHazard subsidiary for its Thunder Ridge
Surface mine. The suit alleges that the ACOE failed to comply with the
requirements of both Section 404 of the Clean Water Act and the National
Environmental Policy Act. Hazard intervened in the suit to protectourinterests. The ACOE suspended the
Section 404 permit on December 26, 2007 in order to evaluate the
issues raised by the plaintiffs.TheACOE completed its evaluation on March
25, 2009, and on March 27, 2009, reinstated Hazard’s
permit. Pursuant to earlier agreements with the plaintiffs in the litigation,weprovided thirty (30) days notice to
plaintiffs’ counsel of Hazard’s intent to proceed with activities authorized
under the permit.After
such notice, the plaintiffs agreed to amend the earlier agreement to
allow Hazard partial use of the reinstated permit, including construction of an
additional valley fill. Subsequently, the parties agreed to pursue resolution of
the case in accordance with a scheduling order entered by the court. Pursuant to
that order, the plaintiffs filed an amended complaint on July 10, 2009. The
amended complaint modifies the plaintiffs’ allegations to apply to the reissued
permit, rather than the original permit. The action will proceed in accordance
with the scheduling order through November 2009, after which the court is
expected to render a decision. If
thecourtultimatelyfinds that the permit is unlawful,
production could be materially affected at the Thunder Ridge Surface mine.TheEPA’s heightened scrutiny will likely
render the process of obtaining ACOE permits for coal mining activities inAppalachiamore difficult.





On January 7, 2008, Saratoga
Advantage Trust(“Saratoga”)filed a class action lawsuit in the
U.S. District Court for the Southern District of West Virginia against 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.On July 6, 2009,Saratogafiled an amended complaint asserting
essentially the same claims but seeking to add an individual co-plaintiff.We intend to vigorously
defend the action.





43










On July 3, 2007, Taylor Environmental
Advocacy Membership, Inc. (“T.E.A.M.”) filed a petition to appeal the issuance
ofICGTygartValley, LLC’s (“TygartValley”) 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 requiringTygartValleyto address a technical issue related to
projected post-mining water quality.TygartValleyprepared and submitted a permit
modification to alleviate theBoard’s concerns.The revision was approved by the WVDEP
on May 27, 2009, reinstating theTygartpermit. As expected, T.E.A.M. appealed
the reinstatement. No hearing date has been set.





In addition, 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 MSHA 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 are risk factors that have
been revised or added to thosedisclosed in our Annual Report on Form
10-K for the fiscal year ended December 31, 2008.





Judicial rulings that restrict disposal
of mining spoil material could significantly increase our operating costs,
discourage customers from purchasing our coal and materially harm our financial
condition and operating results.





Mining in the mountainous terrain ofAppalachiatypically requires the use of valley
fills for the disposal of excess spoil (rock and soil material) generated by
construction and mining activities. In our surface mining operations, we use
mountaintop removal mining wherever feasible because it allows us to recover
more tons of coal per acre and facilitates the permitting of larger projects,
which allows mining to continue over a longer period of time than would be the
case using other mining methods. Mountaintop removal mining, along with other
methods of surface mining, depends on valley fills to dispose of mining spoil
material. Construction of roads, underground mine portal sites, coal processing
and handling facilities and coal refuse embankments or impoundments related to
both surface and underground mining also require the development of valley
fills. We obtain permits to construct and operate valley fills and surface
impoundments from the Army Corps of Engineers (the “ACOE”) under the auspices of
Section 404 of the federal Clean Water Act. Lawsuits challenging the ACOE’s
authority to authorize surface mining activities under Nationwide Permit 21
(“NWP21”) or under more comprehensive individual permits have been instituted by
environmental groups, which also advocate for changes in federal and state laws
that would prevent or further restrict the issuance of such permits. Under the
provisions of a Memorandum of Understanding executed on June 11, 2009 between
the Environmental Protection Agency, the ACOE and the Department of the
Interior, the ACOE intends to suspend the use of NWP21 for surface mining
activities in Appalachia while NWP21 is modified to prohibit its use to
authorize discharges of dredged or fill material into waters of the United
States for surface coal mining activities in the Appalachian region of the
following states: Kentucky, Ohio, Pennsylvania, Tennessee, Virginia and West
Virginia.





44








In a March 2007 decision pertaining
originally to certain Section 404 permits issued to Massey Energy Company, Judge
Robert C. Chambers of the U.S. District Court for the Southern District of West
Virginia ruled that the ACOE failed to adequately assess the impacts of surface
mining on headwaters and approved mitigation that did not appropriately
compensate for stream losses. Judge Chambers in June 2007 found that sediment
ponds situated within a stream channel violated the prohibition against using
the waters of theU.S.for waste treatment and further decided
that using the reach of stream between a valley fill and the sediment pond to
transport sediment-laden runoff is prohibited by the Clean Water Act. The ACOE
along with several intervenors appealed Judge Chambers’ decisions to the Fourth
Circuit Court of Appeals, which heard oral arguments in September 2008. A
three-judge panel of the Fourth Circuit on February 13, 2009 reversed, vacated
and remanded Judge Chambers’ March 2007 and June 2007 decisions in their
entirety, ruling that the ACOE properly exercised its discretion in the permit
review and approval process. On May 29, 2009 the Fourth Circuit Court of Appeals
declined to rehear the case or to conduct a hearing en banc. The appellees have
stated their intentions to appeal the February 13, 2009 decision to the
U.S. Supreme Court.





A similar challenge to the ACOE
Section 404 permit process was launched by environmental groups inKentuckyin December 2007 when a lawsuit was
filed in federal court against the ACOE alleging that it wrongfully issued a
Section 404 authorization for the expansion of ICG Hazard’s Thunder Ridge
surface mine.Hazard 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. The ACOE completed its evaluation
on March 25, 2009, and on March 27, 2009, reinstated Hazard’s permit. Pursuant
to earlier agreements with the plaintiffs in the litigation, the Company
provided thirty (30) days notice to plaintiffs’ counsel of Hazard’s intent to
proceed with activities authorized under the permit. After such notice, the
plaintiffs agreed to amend the earlier agreement to allow Hazard partial use of
the reinstated permit, including construction of an additional valley fill.
Subsequently, the parties agreed to pursue resolution of the case in accordance
with a scheduling order issued by the court on June 24, 2009. In accordance with
that order, the plaintiffs filed an amended complaint on July 10, 2009. The
amended complaint updates the plaintiffs’ allegation to challenge the reissued
permit, rather than the original permit. The sequence of filings outlined in the
scheduling order will continue through November 2009, after which the court is
expected to render a decision. The
Company currently has two subsidiaries in that jurisdiction ofKentuckythat will require Section 404
permits within the next two years. If permitting requirements are substantially
increased or if mining methods at issue are limited or prohibited, it could
greatly lengthen the time needed to permit new reserves, significantly increase
our operational costs, make it more difficult to economically recover a
significant portion of our reserves and lead to a material adverse effect on our
financial condition and results of operation. We may not be able to increase the
price we charge for coal to cover higher production costs without reducing
customer demand for our coal. See “Legal Proceedings” contained in Part II, Item
1 of this Quarterly Report on Form 10-Q.





Federal or state legislation that
restricts disposal of mining spoil material or coal refuse material could
eliminate certain mining methods, significantly increase our operating costs and
materially harm our financial condition and operating
results.





Congress and state legislatures from
time to time consider proposals that would effectively prohibit the placement of
materials generated by coal mining into waters of theUnited States, which practice is essential to surface
mining in centralAppalachia. A prohibition against excess spoil
placement in streams would essentially eliminate surface mining in steep
terrain, thus rendering much of our coal reserves unmineable. Restrictions on
the placement of coal refuse material in streams or in abandoned underground
coal mines could limit the life of existing coal processing operations,
potentially block new coal preparation plants and at minimum significantly
increase our operating costs.





45








Reduced
coal consumption by North American electric power generators could result in
lower prices for our coal, which could reduce our revenues and adversely impact
our earnings and the value of our coal reserves.





Restrictions
on the emission of greenhouse gases, including carbon dioxide, continue to be
proposed and adopted by various legislative and regulatory bodies at federal,
state and local levels of government. The intended effect of these restrictions
is to discourage the combustion of fossil fuels in general and the generation of
electricity by coal in particular in favor of "alternative sources" of
energy which do not involve the combustion of fossil fuels. Most notably, on
June 26, 2009 the U.S. House of Representatives passed The American Clean Energy
and Security Act of 2009 (House Bill 2454). If enacted, this Bill would create
or expand myriad federal programs designed to reduce energy produced by burning
fossil fuels and increase alternative energy sources. In particular, the Bill
would reduce greenhouse gas emissions via a cap and trade system for larger
emitters, including coal-fired power plants. A cap would be placed on overall
U.S. greenhouse gas emissions beginning in 2012 and, compared to 2005 levels,
would increasingly reduce emissions by 83 percent in 2050. The economic impact
of the cost of this cap on coal users would be mitigated by allocating to
electric utilities and certain other industries "free allowances" which would
progressively decrease over time. The imposition of such a program may result in
more electric power generators shifting from coal to natural gas-fired plants or
alternative energy sources. Any reduction in the amount of coal consumed by
North American electric power generators could reduce the price of steam coal
that we mine and sell, thereby reducing our revenues and adversely impacting our
earnings and the value of our coal reserves.





46










Item2.
            Unregistered Sales of Securities
      and Use of Proceeds





There
were no unregistered sales of equity securities during the three months ended
June 30, 2009.





ISSUER PURCHASES OF EQUITY
      SECURITIESPeriod
            
            Total Number of Shares Purchased(1)
            
            Average Price Paid per
      Share(1)
            
            Total Number of Shares Purchased
      as Part of Publicly Announced Plans or Programs
            
            Approximate Dollar Value of Shares
      that May Yet be Purchased Under the Plans or
    ProgramsApril 1, 2009 through April 30,
      2009
            
            2,165
            
            $
            1.99
            
            —
            
            —May 1, 2009 through May 31,
      2009
            
            —
            
            
            —
            
            —
            
            —June 1, 2009 through June 30,
      2009
            
            388
            
            
            2.86Total
            
            2,553
            
            $
            2.12
            
            —
            
            —




(1)
            During the three months ended June 30, 2009, we withheld
      2,553 shares of common stock from employees to satisfy estimated tax
      obligations upon the vesting of restricted stock under the terms of our
      2005 Equity and Performance Incentive Plan. The value of the common stock
      that was withheld was based upon the closing price of our common stock on
      the applicable vesting dates.





47








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





WeheldourAnnual Meeting of shareholders on
May 20, 2009. In connection with the meeting, proxies were solicited
pursuant to Section 14(a) of the Securities Exchange Act of 1934. Matters
voted upon were (1) the election of three Class I directors for a term
of three years expiring in 2012; (2) the approval of an amendment toour2005 Equity and Performance Incentive
Plan; (3) the ratification of the Board of Directors’ selection of
Deloitte & Touche LLP asourindependent registered public
accounting firm for 2009 and (4) to consider a stockholder proposal regarding
global warming. The number of votes cast for, against or withheld, as well as
abstentions and broker non-votes, if applicable, with respect to each matter are
set out below.





1.
            All of the nominees forDirector listed in the proxy
      statement were elected to hold office for a three-year term or until their
      successors are elected and qualified with the following
      vote:




DIRECTOR
      NOMINEE
            
            SHARES VOTED
      “FOR”
            
            SHARES
      “WITHHELD”Maurice E. Carino,
      Jr.
            
            133,209,444
            
            2,152,879StanleyN. Gaines
            
            133,145,022
            
            2,217,301Samuel A.
      Mitchell
            
            133,167,690
            
            2,194,633





The followingDirectors remained in office: Cynthia B.
Bezik, William J. Catacosinos, Bennett K. Hatfield, Wilbur L. Ross, Jr. and
Wendy L. Teramoto.




2.
            The amendment toour2005 Equity and Performance
      Incentive plan was approved with the following
  vote:




SHARES VOTED
      “FOR”
            
            SHARES VOTED
      “AGAINST”
            
            SHARES
      “ABSTAINING”
            
            BROKER NON
      VOTES85,878,205
            
            11,548,243
            
            115,440
            
            37,820,435




3.
            The ratification of the Board of
      Directors’ selection of Deloitte &
      Touche LLP asourindependent registered accounting
      firm for the fiscal year ending December 31, 2009 was approved with
      the following vote:




SHARES VOTED
      “FOR”
            
            SHARES VOTED
      “AGAINST”
            
            SHARES
      “ABSTAINING”134,223,749
            
            452,317
            
            686,257





4.
            The stockholder proposal regarding
      global warming was not approved with the following
      vote:





SHARES VOTED
      “FOR”
            
            SHARES VOTED
      “AGAINST”
            
            SHARES
      “ABSTAINING”
            
            BROKER NON
      VOTES6,979,224
            
            83,301,089
            
            7,261,575
            
            37,820,435





48










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 ofJune 30,2005
            
            (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 ofJune
      30,2005
            
            (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
            )





49







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
            )10.3
            
            Amendment No. 3 to the Second
      Amended and Restated Credit Agreement, dated as of February 20, 2009,
      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
            
            (M
            )10.4
            
            International Coal Group, Inc.
      Amended and Restated 2005 Equity and Performance Incentive
      Plan
            
            (N
            )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
            )







(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 endedJune
      30,2007 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.(M)
            
            Previously filed as an exhibit to
      International Coal Group, Inc.’s Annual Report on Form 10-K for the year
      ended December 31, 2008 filed on February 27,
  2009.(N)
            
            Previously filedas Annex A to International Coal
      Group, Inc.’s Definitive Proxy Statement on Schedule 14A (File No.
      1-32679) filed on April 15,
2009.




50









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:August 6, 2009




51