| James River Coal CO Item 1A Risk Factors Risks Related to the Coal Industry Because the demand and pricing for coal is greatly influenced by consumption patterns of the domestic electricity generation industry, a reduction in the demand for coal by this industry would likely cause our revenues and profitability to decline significantly |
| We derived 85prca of our total revenues (contract and spot) in 2005 and 83prca of total revenue in 2004, from our electric utility customers |
| Fuel cost is a significant component of the cost associated with coal-fired power generation, with respect to not only the price of the coal, but also the costs associated with emissions control and credits (ie, sulfur dioxide, nitrogen oxides, etc), combustion by-product disposal (ie, ash) and equipment operations and maintenance (ie, materials handling facilities) |
| All of these costs must be considered when choosing between coal generation and alternative methods, including natural gas, nuclear, hydroelectric and others |
| 17 _________________________________________________________________ Weather patterns also can greatly affect electricity generation |
| Extreme temperatures, both hot and cold, cause increased power usage and, therefore, increased generating requirements from all sources |
| Mild temperatures, on the other hand, result in lower electrical demand, which allows generators to choose the lowest-cost sources of power generation when deciding which generation sources to dispatch |
| Accordingly, significant changes in weather patterns could reduce the demand for our coal |
| Overall economic activity and the associated demands for power by industrial users can have significant effects on overall electricity demand |
| Robust economic activity can cause much heavier demands for power, particularly if such activity results in increased utilization of industrial assets during evening and nighttime periods |
| Any downward pressure on coal prices, whether due to increased use of alternative energy sources, changes in weather patterns, decreases in overall demand or otherwise, would likely cause our profitability to decline |
| Deregulation of the electric utility industry may cause our customers to be more price-sensitive in purchasing coal, which could cause our profitability to decline |
| Electric utility deregulation is expected to provide incentives to generators of electricity to minimize their fuel costs and is believed to have caused electric generators to be more aggressive in negotiating prices with coal suppliers |
| To the extent utility deregulation causes our customers to be more cost-sensitive, deregulation may have a negative effect on our profitability |
| Changes in the export and import markets for coal products could affect the demand for our coal, our pricing and our profitability |
| We compete in a worldwide market |
| The pricing and demand for our products is affected by a number of factors beyond our control |
| These factors include: • currency exchange rates; • growth of economic development; and • ocean freight rates |
| Any decrease in the amount of coal exported from the United States, or any increase in the amount of coal imported into the United States, could have a material adverse impact on the demand for our coal, our pricing and our profitability |
| Increased consolidation and competition in the US coal industry may adversely affect our revenues and profitability |
| During the last several years, the US coal industry has experienced increased consolidation, which has contributed to the industry becoming more competitive |
| Consequently, many of our competitors in the domestic coal industry are major coal producers who have significantly greater financial resources than us |
| The intense competition among coal producers may impact our ability to retain or attract customers and may therefore adversely affect our future revenues and profitability |
| Fluctuations in transportation costs and the availability and dependability of transportation could affect the demand for our coal and our ability to deliver coal to our customers |
| Increases in transportation costs could have an adverse effect on demand for our coal |
| Customers choose coal supplies based, primarily, on the total delivered cost of coal |
| Any increase in transportation costs would cause an increase in the total delivered cost of coal |
| That could cause some of our customers to seek less expensive sources of coal or alternative fuels to satisfy their energy needs |
| In addition, significant decreases in transportation costs from other coal-producing regions, both domestic and international, could result in increased competition from coal producers in those regions |
| For instance, coal mines in the western US could become more attractive as a source of coal to consumers in the eastern US if the costs of transporting coal from the West were significantly reduced |
| 18 _________________________________________________________________ Our Central Appalachia mines generally ship coal via rail systems |
| During 2005, we shipped in excess of 95prca of our coal from our Central Appalachia mines via CSX In the Midwest, we shipped approximately 62prca of our produced coal by truck and the remainder via rail systems |
| Our dependence upon railroads and third party trucking companies impacts our ability to deliver coal to our customers |
| Disruption of service due to weather-related problems, strikes, lockouts, bottlenecks and other events could temporarily impair our ability to supply coal to our customers, resulting in decreased shipments |
| Decreased performance levels over longer periods of time could cause our customers to look elsewhere for their fuel needs, negatively affecting our revenues and profitability |
| In past years, the major eastern railroads (CSX and Norfolk Southern) have experienced an increase in overall rail traffic from the expanding economy and shortages of both equipment and personnel |
| This increase in traffic could impact our ability to obtain the necessary rail cars to deliver coal to our customers and have an adverse impact on our financial results |
| Shortages or increased costs of skilled labor in the Central Appalachian coal region may hamper our ability to achieve high labor productivity and competitive costs |
| Coal mining continues to be a labor-intensive industry |
| As the demand for coal has increased, many producers have attempted to increase coal production, which has resulted in a competitive market for the limited supply of trained coal miners in the Central Appalachian region |
| In some cases, this market situation has caused compensation levels to increase, particularly for “skilled” positions such as electricians and mine foremen |
| To maintain current production levels, we may be forced to respond to these increases in wages and other forms of compensation, and related recruiting efforts by our competitors |
| Any future shortage of skilled miners, or increases in our labor costs, could have an adverse impact on our labor productivity and costs and on our ability to expand production |
| Government laws, regulations and other requirements relating to the protection of the environment, health and safety and other matters impose significant costs on us, and future requirements could limit our ability to produce coal |
| We are subject to extensive federal, state and local regulations with respect to matters such as: • employee health and safety; • permitting and licensing requirements; • air quality standards; • water quality standards; • plant, wildlife and wetland protection; • blasting operations; • the management and disposal of hazardous and non-hazardous materials generated by mining operations; • the storage of petroleum products and other hazardous substances; • reclamation and restoration of properties after mining operations are completed; • discharge of materials into the environment, including air emissions and wastewater discharge; • surface subsidence from underground mining; and • the effects of mining operations on groundwater quality and availability |
| Complying with these requirements, including the terms of our permits, has had, and will continue to have, a significant effect on our costs of operations |
| We could incur substantial costs, including clean up costs, fines, civil or criminal sanctions and third party claims for personal injury or property damage as a result of violations of or liabilities under these laws and regulations |
| The coal industry is also affected by significant legislation mandating specified benefits for retired miners |
| In addition, the utility industry, which is the most significant end user of coal, is subject to extensive regulation regarding the environmental impact of its power generating activities |
| Coal contains impurities, including sulfur, mercury, chlorine and other elements or compounds, many of which are released into the air when coal is burned |
| Stricter environmental regulations of emissions from coal-fired electric generating plants could increase the costs of using coal thereby reducing demand for coal as a fuel source or the volume and price of our coal sales, or making coal a less attractive fuel alternative in the planning and building of utility power plants in the future |
| 19 _________________________________________________________________ New legislation, regulations and orders adopted or implemented in the future (or changes in interpretations of existing laws and regulations) may materially adversely affect our mining operations, our cost structure and our customers’ operations or ability to use coal |
| The majority of our coal supply agreements contain provisions that allow the purchaser to terminate its contract if legislation is passed that either restricts the use or type of coal permissible at the purchaser’s plant or results in too great an increase in the cost of coal |
| These factors and legislation, if enacted, could have a material adverse effect on our financial condition and results of operations |
| The passage of legislation responsive to the Framework Convention on Global Climate Change or similar governmental initiatives could result in restrictions on coal use |
| The United States and more than 160 other nations are signatories to the 1992 Framework Convention on Global Climate Change, commonly known as the Kyoto Protocol, which is intended to limit or capture emissions of greenhouse gases, such as carbon dioxide |
| In December 1997, the signatories to the convention established a potentially binding set of emissions targets for developed nations |
| Although the specific emissions targets vary from country to country, the United States would be required to reduce emissions to 93prca of 1990 levels over a five-year budget period from 2008 through 2012 |
| The US Senate has not ratified the treaty commitments, and the Bush administration has officially opposed the Kyoto Protocol and has proposed an alternative to reduce the intensity of United States emissions of greenhouse gases |
| With Russia’s ratification of the Kyoto Protocol in 2004, it became binding on all ratifying countries |
| The implementation of the Kyoto Protocol in a number of countries, and other emissions limits, such as those adopted by the European Union, could affect demand for coal outside the United States |
| If the Kyoto Protocol or other comprehensive legislation focusing on greenhouse gas emissions is enacted by the United States, it could have the effect of restricting the use of coal |
| Other efforts to reduce emissions of greenhouse gases and federal initiatives to encourage the use of natural gas also may affect the use of coal as an energy source |
| We are subject to the federal Clean Water Act and similar state laws which impose treatment, monitoring and reporting obligations |
| The federal Clean Water Act and corresponding state laws affect coal mining operations by imposing restrictions on discharges into regulated waters |
| Permits requiring regular monitoring and compliance with effluent limitations and reporting requirements govern the discharge of pollutants into regulated waters |
| New requirements under the Clean Water Act and corresponding state laws could cause us to incur significant additional costs that adversely affect our operating results |
| New regulations have expanded the definition of black lung disease and generally made it easier for claimants to assert and prosecute claims, which could increase our exposure to black lung benefit liabilities |
| In January 2001, the United States Department of Labor amended the regulations implementing the federal black lung laws to give greater weight to the opinion of a claimant’s treating physician, expand the definition of black lung disease and limit the amount of medical evidence that can be submitted by claimants and respondents |
| The amendments also alter administrative procedures for the adjudication of claims, which, according to the Department of Labor, results in streamlined procedures that are less formal, less adversarial and easier for participants to understand |
| These and other changes to the federal black lung regulations could significantly increase our exposure to black lung benefits liabilities |
| In recent years, legislation on black lung reform has been introduced but not enacted in Congress |
| It is possible that this legislation will be reintroduced for consideration by Congress |
| If any of the proposals included in this or similar legislation is passed, the number of claimants who are awarded benefits could significantly increase |
| Any such changes in black lung legislation, if approved, may adversely affect our business, financial condition and results of operations |
| 20 _________________________________________________________________ Extensive environmental laws and regulations affect the end-users of coal and could reduce the demand for coal as a fuel source and cause the volume of our sales to decline |
| The Clean Air Act and similar state and local laws extensively regulate the amount of sulfur dioxide, particulate matter, nitrogen oxides, mercury and other compounds emitted into the air from electric power plants, which are the largest end-users of our coal |
| Compliance with such laws and regulations, which can take a variety of forms, may reduce demand for coal as a fuel source because they require significant emissions control expenditures for coal-fired power plants to attain applicable ambient air quality standards, which may lead these generators to switch to other fuels that generate less of these emissions and may also reduce future demand for the construction of coal-fired power plants |
| The US Department of Justice, on behalf of the EPA, has filed lawsuits against several investor-owned electric utilities and brought an administrative action against one government-owned utility for alleged violations of the Clean Air Act |
| These lawsuits could require the utilities to pay penalties, install pollution control equipment or undertake other emission reduction measures, any of which could adversely impact their demand for our coal |
| A regional haze program initiated by the EPA to protect and to improve visibility at and around national parks, national wilderness areas and international parks restricts the construction of new coal-fired power plants whose operation may impair visibility at and around federally protected areas and may require some existing coal-fired power plants to install additional control measures designed to limit haze-causing emissions |
| The Clean Air Act also imposes standards on sources of hazardous air pollutants |
| For example, the EPA has announced that it would regulate hazardous air pollutants from coal-fired power plants |
| Under the Clean Air Act, coal-fired power plants will be required to control hazardous air pollution emissions by no later than 2009, which likely will require significant new investment in controls by power plant operators |
| These standards and future standards could have the effect of decreasing demand for coal |
| Other so-called multi-pollutant bills, which could regulate additional air pollutants, have been proposed by various members of Congress |
| If such initiatives are enacted into law, power plant operators could choose other fuel sources to meet their requirements, reducing the demand for coal |
| The characteristics of coal may make it difficult for coal users to comply with various environmental standards related to coal combustion |
| As a result, they may switch to other fuels, which would affect the volume of our sales |
| Coal contains impurities, including sulfur, nitrogen oxide, mercury, chlorine and other elements or compounds, many of which are released into the air when coal is burned |
| Stricter environmental regulations of emissions from coal-fired electric generating plants could increase the costs of using coal thereby reducing demand for coal as a fuel source, and the volume and price of our coal sales |
| Stricter regulations could make coal a less attractive fuel alternative in the planning and building of utility power plants in the future |
| For example, in order to meet the federal Clean Air Act limits for sulfur dioxide emissions from electric power plants, coal users may need to install scrubbers, use sulfur dioxide emission allowances (some of which they may purchase), blend high sulfur coal with low sulfur coal or switch to other fuels |
| Each option has limitations |
| Lower sulfur coal may be more costly to purchase on an energy basis than higher sulfur coal depending on mining and transportation costs |
| The cost of installing scrubbers is significant and emission allowances may become more expensive as their availability declines |
| Switching to other fuels may require expensive modification of existing plants |
| On March 15, 2005, the US Environmental Protection Agency adopted a new federal rule to cap and reduce mercury emissions from both new and existing coal-fired power plants |
| The reductions will be implemented in stages, primarily through a market-based cap-and-trade program |
| Nevertheless, the new regulations will likely require some power plants to install new equipment, at substantial cost, or discourage the use of certain coals containing higher levels of mercury |
| 21 _________________________________________________________________ Other new and proposed reductions in emissions of sulfur dioxides, nitrogen oxides, particulate matter or greenhouse gases may require the installation of additional costly control technology or the implementation of other measures, including trading of emission allowances and switching to other fuels |
| For example, the Environmental Protection Agency recently proposed separate regulations to reduce the interstate transport of fine particulate matter and ozone through reductions in sulfur dioxides and nitrogen oxides through the eastern United States |
| The Environmental Protection Agency continues to require reduction of nitrogen oxide emissions in 22 eastern states and the District of Columbia and will require reduction of particulate matter emissions over the next several years for areas that do not meet air quality standards for fine particulates |
| In addition, Congress and several states are now considering legislation to further control air emissions of multiple pollutants from electric generating facilities and other large emitters |
| These new and proposed reductions will make it more costly to operate coal-fired plants and could make coal a less attractive fuel alternative to the planning and building of utility power plants in the future |
| To the extent that any new or proposed requirements affect our customers, this could adversely affect our operations and results |
| We must obtain governmental permits and approvals for mining operations, which can be a costly and time consuming process and result in restrictions on our operations |
| Numerous governmental permits and approvals are required for mining operations |
| Our operations are principally regulated under permits issued by state regulatory and enforcement agencies pursuant to the Surface Mining Control and Reclamation Act (SMCRA) |
| Regulatory authorities exercise considerable discretion in the timing and scope of permit issuance |
| Requirements imposed by these authorities may be costly and time consuming and may result in delays in the commencement or continuation of exploration or production operations |
| In addition, we often are required to prepare and present to federal, state and local authorities data pertaining to the effect or impact that proposed exploration for or production of coal might have on the environment |
| Further, the public may comment on and otherwise engage in the permitting process, including through intervention in the courts |
| Accordingly, the permits we need may not be issued, or, if issued, may not be issued in a timely fashion, or may involve requirements that restrict our ability to conduct our mining operations or to do so profitably |
| Prior to placing excess fill material in valleys, coal mining companies are required to obtain a permit from the US Army Corps of Engineers under Section 404 of the Clean Water Act |
| The permit can be either a simplified Nation Wide Permit #21 (“NWP 21”) or a more complicated individual permit |
| On July 8, 2004, US District Judge Joseph R Goodwin of the Southern District of West Virginia, Huntington Division found that NWP 21 is in violation of the Clean Water Act |
| This ruling applied only to certain counties in southern West Virginia (where we do not now operate) and did allow permits to continue to be issued under the more costly and time consuming individual permit process |
| On November 23, 2005, the 4^th Circuit US Court of Appeals completely reversed Judge Goodwin and held that NWP 21 are valid permits |
| In January 2005, a virtually identical claim to that filed in West Virginia was filed in Kentucky |
| Colonel Robert A Rowlette, Jr, et al, Civil Action No 05-CV-36-JBC, seek the same relief as that sought in West Virginia |
| Oral arguments in this case were heard on November 7, 2005 |
| A ruling for the plaintiffs in this matter could have an adverse impact on our planned surface mining operations |
| Recent litigation could impact our ability to conduct underground mining operations |
| On March 29, 2002, the United States District Court for the District of Columbia issued a ruling that could restrict underground mining activities conducted in the vicinity of public roads, within a variety of federally protected lands, within national forests and within a certain proximity of occupied dwellings |
| The lawsuit, Citizens Coal Council v |
| Norton, was filed in February 2000 to challenge regulations issued by the Department of Interior providing, among other things, that subsidence and underground activities that may lead to subsidence are not surface mining activities within the meaning of SMCRA SMCRA generally contains restrictions and certain prohibitions on the locations where surface mining activities can be conducted |
| The District Court entered summary judgment on the plaintiffs’ claims that the Secretary of the Interior’s determination violated SMCRA This decision was recently reversed by the United States Court of Appeals for the Fourth Circuit, which upheld the regulation |
| In December 2003, a petition for a writ of certiorari was filed by the Citizens Coal Council and others requesting US Supreme Court review |
| 22 _________________________________________________________________ In the future, we intend to conduct underground mining activities on properties that are within federally protected lands or national forests where the above-mentioned restrictions within the meaning of SMCRA could apply |
| Any reinstatement of the District Court decision by the Supreme Court would pose a potential restriction on underground mining within 100 feet of a public road as well as other restrictions |
| If these SMCRA restrictions ultimately apply to underground mining, considerable uncertainty would exist about the nature and extent of this restriction |
| While, even if that occurs, it could remain possible to obtain permits for underground mining operations in these areas, the time and expense of that permitting process would be likely to increase significantly and the restrictions placed on the mining of those properties could adversely affect our costs |
| We have significant reclamation and mine closure obligations |
| If the assumptions underlying our accruals are materially inaccurate, we could be required to expend greater amounts than anticipated |
| The SMCRA establishes operational, reclamation and closure standards for all aspects of surface mining as well as many aspects of underground mining |
| We accrue for the costs of current mine disturbance and of final mine closure, including the cost of treating mine water discharge where necessary |
| Effective January 1, 2003, we adopted Statement of Financial Accounting Standards Nodtta 143 (SFAS 143) to account for the costs related to the closure of mines and the reclamation of the land upon exhaustion of coal reserves |
| This statement requires the fair value of an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made |
| The present value of the estimated asset retirement costs is capitalized as part of the carrying amount of the long-lived asset |
| At December 31, 2005, we had accrued dlra26dtta8 million related to estimated mine reclamation costs |
| These amounts recorded are dependent upon a number of variables, including the estimated future retirement costs, estimated proven reserves, assumptions involving profit margins, inflation rates, and the assumed credit-adjusted risk-free interest rates |
| Furthermore, these obligations are unfunded |
| If these accruals are insufficient or our liability in a particular year is greater than currently anticipated, our future operating results could be adversely affected |
| Terrorist attacks and threats, escalation of military activity in response to such attacks or acts of war may negatively affect our business, financial condition and results of operations |
| Our business is affected by general economic conditions, fluctuations in consumer confidence and spending, and market liquidity, which can decline as a result of numerous factors outside of our control, such as terrorist attacks and acts of war |
| Future terrorist attacks against US targets, rumors or threats of war, actual conflicts involving the United States or its allies, or military or trade disruptions affecting our customers could cause delays or losses in transportation and deliveries of coal to our customers, decreased sales of our coal and extension of time for payment of accounts receivable from our customers |
| Strategic targets such as energy-related assets may be at greater risk of future terrorist attacks than other targets in the United States |
| In addition, disruption or significant increases in energy prices could result in government-imposed price controls |
| It is possible that any, or a combination, of these occurrences could have a material adverse effect on our business, financial condition and results of operations |
| Risks Related to Our Operations The loss of, or significant reduction in, purchases by our largest customers could adversely affect our revenues |
| For 2005, we generated approximately 80prca of our total revenues from several long-term contracts with electrical utilities, including 27prca from our largest customer, Georgia Power Company, and 17prca from South Carolina Public Service Authority |
| At December 31, 2005, we had coal supply agreements with these customers that expire in 2006 to 2007 |
| The execution of a substantial coal supply agreement is frequently the basis on which we undertake the development of coal reserves required to be supplied under the contract |
| Many of our coal supply agreements contain provisions that permit adjustment of the contract price upward or downward at specified times |
| Failure of the parties to agree on a price under those provisions may allow either party to either terminate the contract or reduce the coal to be delivered under the contract |
| Coal supply agreements also typically contain force majeure provisions allowing temporary suspension of performance by the customer or us for the duration of specified events beyond the control of the affected party |
| Most coal supply agreements contain provisions requiring us to deliver coal meeting quality thresholds for certain characteristics such as: 23 _________________________________________________________________ • British thermal units (Btu’s); • sulfur content; • ash content; • grindability; and • ash fusion temperature |
| In some cases, failure to meet these specifications could result in economic penalties, including price adjustments, the rejection of deliveries or termination of the contracts |
| In addition, all of our contracts allow our customers to renegotiate or terminate their contracts in the event of changes in regulations or other governmental impositions affecting our industry that increase the cost of coal beyond specified limits |
| Further, we have been required in the past to purchase sulfur credits or make other pricing adjustments to comply with contractual requirements relating to the sulfur content of coal sold to our customers, and may be required to do so in the future |
| The operating profits we realize from coal sold under supply agreements depend on a variety of factors |
| In addition, price adjustment and other provisions may increase our exposure to short-term coal price volatility provided by those contracts |
| If a substantial portion of our coal supply agreements are modified or terminated, we could be materially adversely affected to the extent that we are unable to find alternate buyers for our coal at the same level of profitability |
| The current strength in the coal market may not continue |
| As a result, we might not be able to replace existing long-term coal supply agreements at the same prices or with similar profit margins when they expire |
| Our profitability will be negatively impacted if we are unable to balance our mix of contract and spot sales |
| We have implemented a sales plan that includes long-term contracts (greater than one year) and spot sales/short-term contracts (less than one year) |
| We have structured our sales plan based on the assumptions that demand will remain adequate to maintain current shipping levels and that any disruptions in the market will be relatively short-lived |
| If we are unable to maintain a balance of contract sales with spot sales, or our markets become depressed for an extended period of time, our volumes and margins could decrease, negatively affecting our profitability |
| Our ability to operate our company effectively could be impaired if we lose senior executives or fail to employ needed additional personnel |
| The loss of senior executives could have a material adverse effect on our business |
| There may be a limited number of persons with the requisite experience and skills to serve in our senior management positions |
| We may not be able to locate or employ qualified executives on acceptable terms |
| In addition, as our business develops and expands, we believe that our future success will depend greatly on our continued ability to attract and retain highly skilled and qualified personnel |
| We might not continue to be able to employ key personnel, or to attract and retain qualified personnel in the future |
| Failure to retain senior executives or attract key personnel could have a material adverse effect on our operations and financial results |
| Unexpected increases in raw material costs could significantly impair our operating results |
| Our coal mining operations use significant amounts of steel, petroleum products and other raw materials in various pieces of mining equipment, supplies and materials, including the roof bolts required by the room and pillar method of mining |
| Petroleum prices have risen significantly in the past twelve months, and, historically, the prices of scrap steel and petroleum have fluctuated |
| If the price of steel or other of these materials increase, our operational expenses will increase, which could have a significant negative impact on our operating results |
| Coal mining is subject to conditions or events beyond our control, which could cause our quarterly or annual results to deteriorate |
| Our coal mining operations are conducted, in large part, in underground mines and, to a lesser extent, at surface mines |
| These mines are subject to conditions or events beyond our control that could disrupt operations, affect production and the cost of mining at particular mines for varying lengths of time and have a significant impact on our operating results |
| These conditions or events have included: 24 _________________________________________________________________ • variations in thickness of the layer, or seam, of coal; • variations in geological conditions; • amounts of rock and other natural materials intruding into the coal seam; • equipment failures and unexpected major repairs; • unexpected maintenance problems; • unexpected departures of one or more of our contract miners; • fires and explosions from methane and other sources; • accidental minewater discharges or other environmental accidents; • other accidents or natural disasters; and • weather conditions |
| Mining in Central Appalachia is complex due to geological characteristics of the region |
| The geological characteristics of coal reserves in Central Appalachia, such as depth of overburden and coal seam thickness, make them complex and costly to mine |
| As mines become depleted, replacement reserves may not be available when required or, if available, may not be capable of being mined at costs comparable to those characteristic of the depleting mines |
| These factors could materially adversely affect the mining operations and cost structures of, and customers’ ability to use coal produced by, operators in Central Appalachia, including us |
| Our future success depends upon our ability to acquire or develop additional coal reserves that are economically recoverable |
| Our recoverable reserves decline as we produce coal |
| Since we attempt, where practical, to mine our lowest-cost reserves first, we may not be able to mine all of our reserves as profitably as we do at our current operations |
| Our planned development and exploration projects might not result in significant additional reserves, and we might not have continuing success developing additional mines |
| For example, our construction of additional mining facilities necessary to exploit our reserves could be delayed or terminated due to various factors, including unforeseen geological conditions, weather delays or unanticipated development costs |
| Our ability to acquire additional coal reserves in the future also could be limited by restrictions under our existing or future debt facilities, competition from other coal companies for attractive properties, or the lack of suitable acquisition candidates |
| In order to develop our reserves, we must receive various governmental permits |
| In addition, we might not continue to receive the permits necessary for us to operate profitably in the future |
| We may not be able to negotiate new leases from the government or from private parties or obtain mining contracts for properties containing additional reserves or maintain our leasehold interests in properties on which mining operations are not commenced during the term of the lease |
| Our financial performance may suffer if we do not successfully execute our development plans |
| We are currently undertaking numerous project developments |
| If we are unable to successfully implement these planned development projects, our financial performance could be negatively affected |
| Factors beyond our control could impact the amount and pricing of coal supplied by our independent contractors and other third parties |
| In addition to coal we produce from our Company-operated mines, we have mines that typically are operated by independent contract mine operators, and we purchase coal from third parties for resale |
| For 2006, we anticipate approximately 6prca of our total production will come from mines operated by independent contract mine operators and that almost 4prca of our total coal sold will come from third party purchased coal sources |
| Operational difficulties, changes in demand for contract mine operators from our competitors and other factors beyond our control could affect the availability, pricing and quality of coal produced for us by independent contract mine operators |
| The demand for contract mining companies has increased significantly due to the current strong market prices for coal from Central Appalachia |
| Disruptions in supply, increases in prices paid for coal produced by independent contract mine operators or purchased from third parties, or the availability of more lucrative direct sales opportunities for our purchased coal sources could increase our costs or lower our volumes, either of which could negatively affect our profitability |
| 25 _________________________________________________________________ We face significant uncertainty in estimating our recoverable coal reserves, and variations from those estimates could lead to decreased revenues and profitability |
| Forecasts of our future performance are based on estimates of our recoverable coal reserves |
| Estimates of those reserves are based on studies conducted by Marshall Miller & Associates, Inc |
| in accordance with industry-accepted standards which we have updated for current activity using similar methodologies |
| A number of sources of information were used to determine recoverable reserves estimates, including: • currently available geological, mining and property control data and maps; • our own operational experience and that of our consultants; • historical production from similar areas with similar conditions; • previously completed geological and reserve studies; • the assumed effects of regulations and taxes by governmental agencies; and • assumptions governing future prices and future operating costs |
| Reserve estimates will change from time to time to reflect, among other factors: • mining activities; • new engineering and geological data; • acquisition or divestiture of reserve holdings; and • modification of mining plans or mining methods |
| Therefore, actual coal tonnage recovered from identified reserve areas or properties, and costs associated with our mining operations, may vary from estimates |
| These variations could be material, and therefore could result in decreased profitability |
| Our operations could be adversely affected if we are unable to obtain required surety bonds |
| Federal and state laws require bonds to secure our obligations to reclaim lands used for mining, to pay federal and state workers’ compensation and to satisfy other miscellaneous obligations |
| As of December 31, 2005, we had outstanding surety bonds with third parties for post-mining reclamation totaling dlra48dtta0 million |
| Furthermore, we have surety bonds for an additional dlra44dtta2 million in place for our federal and state workers’ compensation obligations and other miscellaneous obligations |
| Insurance companies have informed us, along with other participants in the coal industry, that they no longer will provide surety bonds for workers’ compensation and other post-employment benefits without collateral |
| We have satisfied our obligations under these statutes and regulations by providing letters of credit or other assurances of payment |
| However, letters of credit can be significantly more costly to us than surety bonds |
| The issuance of letters of credit under our senior secured credit facility also reduces amounts that we can borrow under our senior secured credit facility for other purposes |
| If we are unable to secure surety bonds for these obligations in the future, and are forced to secure letters of credit indefinitely, our profitability may be negatively affected |
| We have significant unfunded obligations for long-term employee benefits for which we accrue based upon assumptions, which, if incorrect, could result in us being required to expend greater amounts than anticipated |
| We are required by law to provide various long-term employee benefits |
| We accrue amounts for these obligations based on the present value of expected future costs |
| We employed an independent actuary to complete estimates for our workers’ compensation and black lung (both state and federal) obligations |
| At December 31, 2005, the current and non-current portions of these obligations included dlra27dtta3 million for coal workers’ black lung benefits and dlra52dtta3 million for workers’ compensation benefits |
| 26 _________________________________________________________________ We use a valuation method under which the total present and future liabilities are booked based on actuarial studies |
| Our independent actuary updates these liability estimates annually |
| However, if our assumptions are incorrect, we could be required to expend greater amounts than anticipated |
| All of these obligations are unfunded |
| In addition, the federal government and the governments of the states in which we operate consider changes in workers’ compensation laws from time to time |
| Such changes, if enacted, could increase our benefit expenses and payments |
| We may be unable to adequately provide funding for our pension plan obligations based on our current estimates of those obligations |
| We provide pension benefits to eligible employees |
| As of December 31, 2005, we estimated that our pension plan was underfunded by approximately dlra18dtta8 million |
| As of the same date, we had long-term pension obligations of dlra13dtta6 million, with the difference between that amount and the underfunded amount due to unamortized actuarial losses |
| If future payments are insufficient to fund the pension plan adequately to cover our future pension obligations, we could incur cash expenditures and costs materially higher than anticipated |
| The pension obligation is calculated annually and is based on several assumptions, including then prevailing conditions, which may change from year to year |
| In any year, if our assumptions are inaccurate, we could be required to expend greater amounts than anticipated |
| As a result of our adoption of “fresh start” accounting in connection with our emergence from bankruptcy, you will not be able to compare our financial results for periods before our emergence from bankruptcy with our financial results for periods after our emergence from bankruptcy |
| As a result of the consummation of our Plan of Reorganization and the transactions contemplated thereby, we are operating our business under a new capital structure |
| In addition, we became subject to the fresh start accounting rules upon emerging from bankruptcy |
| Accordingly, our financial condition and results of operations disclosed for periods after our emergence from bankruptcy differ significantly from the financial condition or results of operations reflected in our financial statements for periods before our emergence from bankruptcy |
| Substantially all of our assets are subject to security interests |
| Substantially all of our cash, receivables, inventory and other assets are subject to various liens and security interests under our debt instruments |
| If one of these security interest holders becomes entitled to exercise its rights as a secured party, it would have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to its security interest, and the collateral accordingly would be unavailable to us and our other creditors, except to the extent, if any, that other creditors have a superior or equal security interest in the affected collateral or the value of the affected collateral exceeds the amount of indebtedness in respect of which these foreclosure rights are exercised |
| We may be unable to comply with restrictions imposed by the terms of our indebtedness, which could result in a default under these instruments |
| Our debt instruments impose a number of restrictions on us |
| A failure to comply with these restrictions could adversely affect our ability to borrow under our revolving credit facility or result in an event of default under our debt instruments |
| Our debt instruments contain financial and other covenants that create limitations on our ability to, among other things, borrow the full amount on our revolver, issue letters of credit under our letter of credit facility or incur additional debt, and require us to maintain various financial ratios and comply with various other financial covenants |
| These covenants include the following: • minimum fixed charge coverage ratio; • maximum total leverage ratio and senior secured leverage ratio; and • maximum limits on capital expenditures |
| In the event of a default, our lenders could terminate their commitments to us and declare all amounts borrowed, together with accrued interest and fees, immediately due and payable |
| If this were to occur, we might not be able to pay these amounts or we might be forced to seek an amendment to our debt agreements which could make the terms of these agreements more onerous for us and require the payment of amendment or waiver fees |
| Failure to comply with these restrictions, even if waived by our lenders, also could adversely affect our credit ratings, which could increase our costs of debt financings and impair our ability to obtain additional debt financing |
| 27 _________________________________________________________________ As a result of our lower than expected operating results in the fourth quarter 2005, we were not in compliance with the fixed charge coverage ratio and the leverage ratio required by our debt facility as of December 31, 2005 |
| We entered into an amendment to the facility in February 2006 that brought us into compliance with all of these financial covenants as of December 31, 2005 and revised certain covenants during 2006 to levels that we project we will meet |
| Changes in our credit ratings could adversely affect our costs and expenses |
| Any downgrade in our credit ratings could adversely affect our ability to borrow and result in more restrictive borrowing terms, including increased borrowing costs, more restrictive covenants and the extension of less open credit |
| This, in turn, could affect our internal cost of capital estimates and therefore impact operational decisions |
| Defects in title or loss of any leasehold interests in our properties could limit our ability to mine these properties or result in significant unanticipated costs |
| We conduct substantially all of our mining operations on properties that we lease |
| The loss of any lease could adversely affect our ability to mine the associated reserves |
| Because we generally do not obtain title insurance or otherwise verify title to our leased properties, our right to mine some of our reserves has been in the past, and may again in the future be, adversely affected if defects in title or boundaries exist |
| In order to obtain leases or rights to conduct our mining operations on property where these defects exist, we have had to, and may in the future have to, incur unanticipated costs |
| In addition, we may not be able to successfully negotiate new leases for properties containing additional reserves |
| Some leases have minimum production requirements |
| Failure to meet those requirements could result in losses of prepaid royalties and, in some rare cases, could result in a loss of the lease itself |
| Inability to satisfy contractual obligations may adversely affect our profitability |
| From time to time, we have disputes with our customers over the provisions of long-term contracts relating to, among other things, coal quality, pricing, quantity and delays in delivery |
| In addition, we may not be able to produce sufficient amounts of coal to meet our commitments to our customers |
| Our inability to satisfy our contractual obligations could result in our need to purchase coal from third party sources to satisfy those obligations or may result in customers initiating claims against us |
| We may not be able to resolve all of these disputes in a satisfactory manner, which could result in substantial damages or otherwise harm our relationships with customers |
| The disallowance or early termination of Section 29 tax credits for synfuel plants by the Internal Revenue Service could decrease our revenues |
| We supply coal to a third party synfuel plant and receive fees for the handling, shipping and marketing of the synfuel product |
| Synfuel is a synthetic fuel product that is produced by chemically altering coal |
| In 2005, 2prca of our total revenues came from synfuel handling, shipping and marketing revenues |
| Sales of the fuel processed through these types of facilities are eligible for non-conventional fuels tax credits under Section 29 of the Internal Revenue Code |
| The owner of the facility that we supply with coal has obtained a Private Letter Ruling (“PLR”) from the Internal Revenue Service confirming that the facility produces a qualified fuel eligible for Section 29 tax credits |
| The Section 29 tax credit program is scheduled to expire on December 31, 2007 |
| There is a risk that the IRS could modify or disallow the Section 29 tax credit, or (in certain circumstances related to the market price of oil), terminate the credit earlier than expected, making operation of the synfuel plant unprofitable |
| If the synfuel plant ceases operations, we will no longer receive the handling, shipping and marketing fees for our services, which may negatively affect our profitability |
| We may be unable to exploit opportunities to diversify our operations |
| Our future business plan may consider opportunities other than underground and surface mining in eastern Kentucky and southern Indiana |
| We will consider opportunities to further increase the percentage of coal that comes from surface mines |
| We may also consider opportunities to expand both surface and underground mining activities in areas that are outside of eastern Kentucky and southern Indiana |
| We may also consider opportunities in other energy-related areas that are not prohibited by the Indenture governing our senior notes due 2012 |
| If we undertake these diversification strategies and fail to execute them successfully, our financial condition and results of operations may be adversely affected |
| 28 _________________________________________________________________ There are risks associated with our acquisition strategy, including our inability to successfully complete acquisitions, our assumption of liabilities, dilution of your investment, significant costs and additional financing required |
| We intend to expand our operations through strategic acquisitions of other coal mining companies |
| Other than the transaction disclosed in Item 7A “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Other Supplemental Information,” we currently have no agreement or understanding for any specific acquisition |
| Risks associated with our current and potential acquisitions include the disruption of our ongoing business, problems retaining the employees of the acquired business, assets acquired proving to be less valuable than expected, the potential assumption of unknown or unexpected liabilities, costs and problems, the inability of management to maintain uniform standards, controls, procedures and policies, the difficulty of managing a larger company, the risk of becoming involved in labor, commercial or regulatory disputes or litigation related to the new enterprises and the difficulty of integrating the acquired operations and personnel into our existing business |
| We may choose to use shares of our common stock or other securities to finance a portion of the consideration for future acquisitions, either by issuing them to pay a portion of the purchase price or selling additional shares to investors to raise cash to pay a portion of the purchase price |
| If shares of our common stock do not maintain sufficient market value or potential acquisition candidates are unwilling to accept shares of our common stock as part of the consideration for the sale of their businesses, we will be required to raise capital through additional sales of debt or equity securities, which might not be possible, or forego the acquisition opportunity, and our growth could be limited |
| In addition, securities issued in such acquisitions may dilute the holdings of our current or future shareholders |
| Our currently available cash may not be sufficient to finance any additional acquisitions |
| We believe that our current cash on hand and our availability under our revolver will satisfy our operating and capital requirements for at least the next 12 months |
| However, such funds likely will not provide sufficient cash to fund any future acquisitions |
| Accordingly, we may need to conduct additional debt or equity financings in order to fund any such additional acquisitions, unless we issue shares of our common stock as consideration for those acquisitions |
| If we are unable to obtain any such financings, we may be required to forego future acquisition opportunities |
| Our current reserve base in southern Indiana is limited |
| Our southern Indiana mining complex currently has rights to proven and probable reserves that we believe will be exhausted in approximately 5dtta8 years at 2005 levels of production, compared to our current Central Appalachia mining complexes, which have reserves that we believe will last an average of approximately 28 years at 2005 levels of production |
| We intend to increase our reserves in southern Indiana by acquiring rights to additional exploitable reserves that are either adjacent to or nearby our current reserves |
| If we are unable to successfully acquire such rights on acceptable terms, or if our exploration or acquisition activities indicate that such coal reserves or rights do not exist or are not available on acceptable terms, our production and revenues will decline as our reserves in that region are depleted |
| Exhaustion of reserves at particular mines also may have an adverse effect on our operating results that is disproportionate to the percentage of overall production represented by such mines |
| Surface mining is subject to increased regulation, and may require us to incur additional costs |
| Our surface mining operations have increased regulatory significantly since our acquisition of Triad in May 2005 |
| Surface mining is subject to numerous regulations related to blasting activities that can result in additional costs |
| For example, when blasting in close proximity to structures, additional costs are incurred in designing and implementing more complex blast delay regimens, conducting pre-blast surveys and blast monitoring, and the risk of potential blast-related damages increases |
| Since the nature of surface mining requires ongoing disturbance to the surface, environmental compliance costs can be significantly greater than with underground operations |
| In addition, the US Army Corps of Engineers imposes stream mitigation requirements on surface mining operations |
| These regulations require that footage of stream loss be replaced through various mitigation processes, if any ephemeral, intermittent, or perennial streams are in-filled due to mining operations |
| These regulations may cause us to incur significant additional costs, which could adversely impact our operating performance |
| 29 _________________________________________________________________ Underground mining is subject to increased regulation, and may require us to incur additional cost |
| The recent mine disasters in West Virginia and other states have resulted in increased scrutiny of coal mining in general and underground coal mining in particular |
| New legislation has been introduced at the state and federal level that would create requirements for maintaining caches of self-contained self-rescuers throughout underground mines; equipping all underground miners with wireless communications devices and tracking devices; and in some cases, installing cable lifelines from the mine portal to all sections of the mine for assistance in emergency escape |
| Additionally, new requirements for prompt reporting of accidents and increased fines and penalties for violation of these and other regulations have been proposed and in some states already implemented |
| Risks Relating to our Common Stock The market price of our common stock has been volatile and difficult to predict, and may continue to be volatile and difficult to predict in the future, and the value of your investment may decline |
| The market price of our common stock has been volatile in the past and may continue to be volatile in the future |
| The market price of our common stock will be affected by, among other things: • variations in our quarterly operating results; • changes in financial estimates by securities analysts; • sales of shares of our common stock by our officers and directors or by our shareholders; • changes in general conditions in the economy or the financial markets; • changes in accounting standards, policies or interpretations; • other developments affecting us, our industry, clients or competitors; and • the operating and stock price performance of companies that investors deem comparable to us |
| Any of these factors could have a negative effect on the price of our common stock on the Nasdaq National Market, make it difficult to predict the market price for our common stock in the future and cause the value of your investment to decline |
| Dividends are limited by our senior secured credit facility |
| We do not anticipate paying any cash dividends on our common stock in the near future |
| In addition, covenants in our senior secured credit facility restrict our ability to pay cash dividends and may prohibit the payment of dividends and certain other payments |
| Provisions of our articles of incorporation, bylaws and shareholder rights agreement could discourage potential acquisition proposals and could deter or prevent a change in control |
| Some provisions of our articles of incorporation and bylaws, as well as Virginia statutes, may have the effect of delaying, deferring or preventing a change in control |
| These provisions may make it more difficult for other persons, without the approval of our Board of Directors, to make a tender offer or otherwise acquire substantial amounts of our common stock or to launch other takeover attempts that a shareholder might consider to be in such shareholderapstas best interest |
| These provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock |
| On May 25, 2004, our shareholders approved a rights agreement which, in certain circumstances, including a person or group acquiring, or the commencement of a tender or exchange offer that would result in a person or group acquiring, beneficial ownership of more than 15prca of the outstanding shares of our common stock, would entitle each right holder, other than the person or group triggering the plan, to receive, upon exercise of the right, shares of our common stock having a then-current fair value equal to twice the exercise price of a right |
| This shareholder rights agreement provides us with a defensive mechanism that decreases the risk that a hostile acquirer will attempt to take control of us without negotiating directly with our board of directors |
| The shareholder rights agreement may discourage acquirers from attempting to purchase us, which may adversely affect the price of our common stock |