Filed pursuant to Rule 424(b)(5)

Registration Statement Nos. 333-165052 and

333-165052-01 through 333-165052-88

 

SUBJECT TO COMPLETION, DATED APRIL 26, 2010

PRELIMINARY PROSPECTUS SUPPLEMENT

(To Prospectus Dated April 26, 2010)

 

$250,000,000

Patriot Coal Corporation

     % Senior Notes due 2018

 

 

 

 

The notes will bear interest at the rate of     % per year. Interest on the notes will accrue from and be payable semi-annually in arrears on           and           of each year, beginning on          , 2010. The notes will mature on          , 2018. We may redeem some or all of the notes at any time prior to          , 2014 at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest and a “make-whole” premium, as described under the caption “Description of Notes — Optional Redemption.” We may redeem some or all of the notes at any time on or after          , 2014 at the prices and as described under the caption “Description of Notes — Optional Redemption.” If a change of control (as defined herein) occurs, each holder of notes may require us to repurchase some or all of its notes at a purchase price equal to 101% of the principal amount of the notes repurchased, plus accrued and unpaid interest. In addition, prior to          , 2013, we may redeem up to 35% of the notes from the proceeds of certain equity offerings.

 

The notes will be fully and unconditionally guaranteed by each of our current and future domestic subsidiaries that is a guarantor under our revolving credit facility. See “Description of Notes — Note Guarantees.” The notes and guarantees will be our and the guarantors’ unsecured senior obligations and will rank equally with our and the guarantors’ other unsecured senior indebtedness from time to time outstanding. We do not intend to apply for listing of the notes on any national securities exchange. Currently, there is no public market for the notes.

 

The closing of this offering is conditioned upon an amendment and restatement to our revolving credit facility. See “Description of Material Indebtedness — Revolving Credit Facility.”

 

 

 

 

Investing in the notes involves risks.  See “Risk Factors” beginning on page S-12.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

 

 

Interest on the notes will accrue from          , 2010 to the date of delivery.

 

The underwriters expect to deliver the notes through the book-entry delivery system of The Depository Trust Company and its participants, to the purchasers on or about          , 2010.

 

 

 

 

Joint Book-Running Managers

 

Co-Managers

 

          , 2010

 

TABLE OF CONTENTS

 

Prospectus Supplement

 

 

 

 

 

We are responsible for the information contained in or incorporated by reference into this prospectus supplement, the accompanying prospectus and any free writing prospectus filed by us with the Securities and Exchange Commission, or SEC. We have not, and the underwriters have not, authorized anyone to provide you with any other information and we take no responsibility for other information others may give you. We are not making an offer of these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in or incorporated by reference into this prospectus supplement, the accompanying prospectus or any free writing prospectus is accurate as of any date other than their respective dates.

 

This document is in two parts. The first part is this prospectus supplement, which describes the specific terms of this offering and also adds to and updates information contained in the accompanying prospectus and the documents incorporated by reference into the prospectus. The second part, the accompanying prospectus, gives more general information, some of which does not apply to this offering.

 

If the information varies between this prospectus supplement and the accompanying prospectus, you should rely on the information contained in this prospectus supplement. However, if any statement in either of these documents is inconsistent with a statement in another document having a later date — for example, a document incorporated by reference — the statement in the document having the later date modifies or supersedes the earlier statement.

 

You should read both this prospectus supplement and the accompanying prospectus together with the additional information described in this prospectus supplement under “Incorporation By Reference; Where You Can Find More Information.”

 

As used in this prospectus supplement, the terms “we,” “us,” “our,” “Patriot,” and the “Company” refer to Patriot Coal Corporation and its subsidiaries on a consolidated basis, unless the context indicates another meaning.

 

This prospectus supplement and the accompanying prospectus include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties, and assumptions about our business, including, among other things:

 

 

 

These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in the documents incorporated by reference. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Consequently, actual events and results may vary significantly from those included in, contemplated or implied by our forward-looking statements. We do not undertake any obligation (and expressly disclaim any such obligation) to update or revise the forward-looking statements, except as required by federal securities laws.

 

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any document that we file at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at http://www.sec.gov, from which interested persons can electronically access our SEC filings, including the registration statement and the exhibits and schedules thereto.

 

The SEC allows us to “incorporate by reference” the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this prospectus supplement and the accompanying prospectus, and information that we file later with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below and all documents subsequently filed with the SEC pursuant to Section 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934, as amended, prior to the termination of the offering under this prospectus supplement and the accompanying prospectus:

 

(a) Current Reports on Form 8-K filed on January 5, 2010, January 6, 2010, January 7, 2010, February 23, 2010 (two 8-Ks), March 3, 2010, March 4, 2010 (with respect to Item 1.01 only), March 8, 2010 (two 8-Ks), March 9, 2010, March 16, 2010 and April 26, 2010 (two 8-Ks);

 

(b) Annual Report on Form 10-K for the year ended December 31, 2009;

 

(c) Definitive Proxy Statement on Schedule 14A filed on April 1, 2010; and

 

(d) Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.

 

You may also request copies of our filings and the proposed form of the indenture as described above in “Description of Notes,” free of charge, by telephone at (314) 275-3680 or by mail at: Patriot Coal Corporation, 12312 Olive Boulevard, St. Louis, Missouri 63141, attention: Investor Relations.

 

We are responsible for the information provided in this prospectus supplement and the accompanying prospectus, as well as the information incorporated by reference herein and therein. We have not, and the underwriters have not, authorized anyone to provide you with any other information and we take no responsibility for other information others may give you. You should not assume that the information in this prospectus supplement, the accompanying prospectus or any documents incorporated by reference herein and therein is accurate as of any date other than the date on the front of the applicable document.

 

SUMMARY

	•	We have a large and attractively located base of proven and probable coal reserves.  We control approximately 1.8 billion tons of proven and probable coal reserves, making us one of the largest reserve holders in Appalachia and a major reserve holder in the Illinois Basin, based on publicly available information. Our proven and probable coal reserves are located within a 500 mile radius to the majority of U.S. electricity generating plants and steel producers. We believe our location and scale position us as an attractive supplier to existing and new coal-fueled power plants.

	•	We are a leading United States producer of metallurgical coal.  For the year ended December 31, 2009 and for the three months ended March 31, 2010, we sold 5.4 million tons and 1.6 million tons of metallurgical coal, or 17% and 22% of our total coal sales volume, respectively, to steel mills and independent coke producers. We are pursuing opportunities to further increase our sales of metallurgical coal, including the development of new metallurgical mines and additional sales of metallurgical coal from our Panther complex. In recent years, metallurgical coal has commanded a premium price to thermal coal. This premium is principally due to (i) metallurgical coal’s value as a raw material in the steelmaking process and (ii) the limited availability of coal reserves and production with the specifications needed to produce steelmaking coke.
	•	We are a leading eastern United States coal producer, benefitting from our diverse mining operations.  We are a leading producer in the eastern United States, based on publicly available information, and produce coal from mining operations in each of the major eastern United States coal basins: Central Appalachia, Northern Appalachia and the Illinois Basin, which accounted for 65%, 12% and 23% of our production in 2009, respectively, and 66%, 9% and 25% of our production in the three months ended March 31, 2010, respectively. We operate 30 mines, including contractor operations, within our 14 active mining complexes, of which no single mine accounted for more than 12% of our production in 2009. In addition, our mining methods are diverse with surface production, underground continuous miner production and underground longwall production methods accounting for 30%, 54% and 16% of our coal production in 2009, respectively, and 28%, 57% and 15% of our production in the three months ended March 31, 2010, respectively.
	•	We believe our diversified product line and sourcing capabilities make us an attractive supplier to our customers.  We produce medium and high-Btu coal, with low, medium and high sulfur content, from our operations in Appalachia and the Illinois Basin. We believe this product diversification positions us as an attractive supplier to utility customers with installed sulfur dioxide emissions control devices (scrubbers), as well as utilities that will continue to use lower sulfur coal as part of their means to meet emission standards. We utilize our large scale preparation plants to blend coal produced at our mines, as well as coal produced at contractor-operated mines and coal purchased from third parties. We also produce several different qualities of metallurgical coal, including high volatile A and high volatile B coals. We have the ability to ship coal to our customers by rail, barge or truck as they require and have the ability to ship our coal to international customers, who accounted for 65% of our metallurgical coal volume in 2009. Through our diverse sourcing alternatives, blending capabilities and transportation options, we are able to offer multiple delivered cost alternatives to our customers.
	•	We have a well-trained, experienced and dedicated work force.  We employ well-trained, experienced miners whose tenure averages 14 years with our company. Approximately 52% of our employees as of March 31, 2010 at company operations were members of the United Mine Workers of America (UMWA), most of whom are employed under a five-year labor contract that became effective January 1, 2007. As a critical component to recruit and retain a talented workforce, we operate a dedicated training center to educate new employees and our existing workforce in safety, current mining techniques, equipment operation and maintenance. We operate both union and non-union mines and we have a track record of good cooperation with our employees.
	•	Our management team has a proven track record of success.  Our management team has a proven track record of increasing productivity, developing and maintaining strong customer relationships, operating safe and profitable mining operations, making strategic acquisitions and effectively positioning us for future growth and cash flow generation. The six members of our executive management team have a combined 140 years of experience in the mining industry.

	•	Safety.  Safety is our highest operational priority and the cornerstone of our relationship with all of our employees. Our average incidence rate has improved more than 40% in the last five years, and we intend to continue employing best practices in emergency preparedness, communications, training, and behavior to drive world-class safety performance. We have received over 30 awards for safety since 2000, six of them related to 2009. Our focus on safety has resulted in 2009 being the safest year on record for our operations.
	•	Productivity and cost management.  We intend to build on our strong and focused underground and surface engineering capabilities to optimize planning and capital deployment, proactively driving sustainable cost control and continuous improvements in all aspects of the production process. We plan to meet production and cost targets by utilizing a combination of our experienced, productive workforce, process improvement initiatives and state-of-the-art equipment. We also will seek to enhance productivity and lower costs by working closely with suppliers and equipment manufacturers to develop new technologies to extract and process coal.
	•	Environmental stewardship.  We will continue to be good stewards of the land on which we operate. We believe our operations and their surrounding communities will benefit from our responsible, effective environmental practices. We intend to build on our track record of success that has resulted in over 15 awards for reclamation excellence and outstanding stewardship received since 2003.

	•	Profitability.  We intend to grow our production and sales of metallurgical coal, which in recent years has commanded a premium price to thermal coal. In addition, we plan to continue to balance production with market demand, and maintain flexibility to idle operations or restart operations depending on market conditions to ensure profitability of those mines.
	•	Stable and growing cash flow.  We intend to layer in sales contracts for our coal to improve the stability and predictability of our cash flow. We currently have 32 million tons, 17 million tons and 7 million tons of our 2010, 2011 and 2012 coal sales, respectively, committed and sold at fixed or escalating prices. We intend to leverage our uncommitted coal sales, particularly for metallurgical coal, to take advantage of increasing prices for our products and to enter into higher priced thermal contracts to replace certain legacy lower priced thermal contracts as those contracts roll off by the end of 2012.
	•	Liquidity and credit profile.  We intend to maintain and improve our liquidity position to ensure adequate availability of funds to operate our business and protect against unforeseen operational or regulatory impacts on our business. We intend to improve our credit ratios through continued growth in profitability and in cash flow of our operations.

	•	Sourcing flexibility.  We intend to utilize our production capabilities and efficient preparation facilities to process a diverse range of thermal and metallurgical coal products to satisfy our customers’ needs. Our multiple coal qualities, blending capabilities and transportation alternatives enhance our ability to reliably deliver product on time, within specifications and at competitive delivered costs.
	•	Coal brokerage.  As another means to meet certain customer requirements, we intend to use our sales contract portfolio, market presence, coal handling facilities and transportation flexibility to continue to expand purchase and resale of third-party coal.

	•	Organic growth.  We will evaluate opportunities to exploit previously untapped reserves through increased production from our large and diverse base of proven and probable coal reserves in Appalachia and the Illinois Basin. We will target metallurgical coal opportunities in close proximity to our existing preparation facilities where we believe we can generate appropriate profitability and return on capital investment.
	•	Acquisitions, reserve transactions and joint ventures.  We intend to pursue value-enhancing acquisition, reserve transaction and joint venture opportunities. Coal production in the United States is highly fragmented. Our proven and probable coal reserves and operations are contiguous or in close proximity to numerous small- and medium-sized operators, potentially creating acquisition and joint venture opportunities for us.

Issuer		Patriot Coal Corporation.
Securities Offered		$250,000,000 aggregate principal amount of     % Senior Notes due 2018.
Maturity Date		, 2018.
Interest		The notes will bear interest at a rate of     % per annum, payable semi-annually in arrears on           and          , beginning          , 2010.
Guarantees		The notes will be jointly and severally guaranteed, on a senior unsecured basis, by all of our existing and future subsidiaries that are guarantors under our revolving credit facility. See “Description of Notes — Note Guarantees.”
Optional Redemption		At any time prior to          , 2014, we may redeem some or all of the notes at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest and a “make-whole” premium.
		At any time on or after          , 2014, we may redeem some or all of the notes at the redemption prices set forth under “Description of Notes — Optional Redemption.”
		In addition, we may on one or more occasions redeem up to 35% of the aggregate principal amount of the notes prior to          , 2013 at a redemption price equal to          % of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, with the net cash proceeds of certain equity offerings.
Change of Control Offer		Upon the occurrence of certain change of control events, we may be required to offer to purchase each holder’s notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest. For more details, see “Description of Notes — Repurchase of Notes upon a Change of Control.”
Certain Covenants		The indenture governing the notes will, among other things, limit our ability and the ability of our restricted subsidiaries to:
		• incur additional indebtedness and issue preferred equity;
		• pay dividends or distributions;
		• repurchase equity or repay subordinated indebtedness;
		• make investments or certain other restricted payments;
		• create liens;
		• sell assets;
		• enter into agreements that restrict dividends, distributions or other payments from restricted subsidiaries;

		• enter into transactions with affiliates; and
		• consolidate, merge or transfer all or substantially all of our assets and the assets of our restricted subsidiaries on a combined basis.
		These covenants are subject to a number of important qualifications and exceptions and certain of these covenants will be inapplicable at any time that the notes have an investment grade rating. See “Description of Notes — Certain Covenants” and “Description of Notes— Suspension of Covenants.”
Ranking		The notes and the guarantees will be our and the guarantors’ senior unsecured obligations and will:
		• rank equally in right of payment to our and the guarantors’ respective existing and future senior debt;
		• rank senior in right of payment to all of our and the guarantors’ respective existing and future subordinated debt;
		• be effectively subordinated to our and the guarantors’ existing and future secured debt to the extent of the value of the assets securing such debt; and
		• be structurally subordinated to all of the existing and future debt or other liabilities of any of our subsidiaries that do not guarantee the notes.
		After giving effect to the offering of the notes, at March 31, 2010 we and the guarantors would have had approximately $455.6 million of indebtedness outstanding on a pro forma basis.
Use of Proceeds		We estimate that the net proceeds of this offering will be approximately $233.1 million, after deducting the underwriting discounts, estimated offering expenses payable by us and expenses related to the revolving credit facility amendment and restatement. We intend to use the net proceeds from this offering for general corporate purposes, which could include capital expenditures for development of additional metallurgical coal production capacity, working capital, acquisitions, refinancing of other debt or other capital transactions.
Risk Factors		You should carefully consider all information in this prospectus supplement, the accompanying prospectus and the documents incorporated by reference. In particular, you should evaluate the specific risks described in the section entitled “Risk Factors” in this prospectus supplement and the accompanying prospectus, for a discussion of risks relating to an investment in the notes. Please read these sections carefully before you decide whether to invest in the notes.

		Year Ended												Three Months								Twelve Months Ended
		December 31,												Ended March 31,								March 31,
		2007				2008				2009				2009				2010				2010
														(unaudited)				(unaudited)				(unaudited)
						(In thousands)
Results of Operations Data:
Revenues:
Sales		$	1,069,316			$	1,630,873			$	1,995,667			$	522,838			$	464,208			$	1,937,037
Other revenues			4,046				23,749				49,616				6,098				3,049				46,567
Total revenues			1,073,362				1,654,622				2,045,283				528,936				467,257				1,983,604
Costs and expenses:
Operating costs and expenses			1,109,315				1,607,746				1,893,419				494,977				433,491				1,831,933
Depreciation, depletion and amortization			85,640				125,356				205,339				54,979				49,612				199,972
Reclamation and remediation obligation expense			20,144				19,260				35,116				6,451				10,846				39,511
Sales contract accretion			—				(279,402	)			(298,572	)			(77,807	)			(25,308	)			(246,073	)
Restructuring and impairment charge			—				—				20,157				—				—				20,157
Selling and administrative expenses			45,137				38,607				48,732				12,886				12,774				48,620
Other operating (income) expense:
Net gain on disposal or exchange of assets(1)			(81,458	)			(7,004	)			(7,215	)			(30	)			(23,796	)			(30,981	)
Loss (income) from equity affiliates			(63	)			915				(398	)			231				(448	)			(1,077	)
Operating profit (loss)			(105,353	)			149,144				148,705				37,249				10,086				121,542
Interest expense			8,337				23,648				38,108				8,593				9,032				38,547
Interest income			(11,543	)			(17,232	)			(16,646	)			(3,487	)			(3,442	)			(16,601	)
Income (loss) before income taxes			(102,147	)			142,728				127,243				32,143				4,496				99,596
Income tax provision			—				—				—				—				235				235
Net income (loss)			(102,147	)			142,728				127,243				32,143				4,261				99,361
Net income attributable to noncontrolling interest			4,721				—				—				—				—				—
Net income (loss) attributable to Patriot			(106,868	)			142,728				127,243				32,143				4,261				99,361
Effect of noncontrolling interest purchase arrangement			(15,667	)			—				—				—				—				—
Net income (loss) attributable to common stockholders		$	(122,535	)		$	142,728			$	127,243			$	32,143			$	4,261			$	99,361
Balance Sheet Data (at period end):
Total assets		$	1,199,837			$	3,622,320			$	3,618,163			$	3,643,965			$	3,615,223			$	3,615,223
Total liabilities			1,117,521				2,782,139				2,682,669				2,764,284				2,671,459				2,671,459
Total long-term debt, less current maturities			11,438				176,123				197,951				175,901				198,415				198,415
Total stockholders’ equity			82,316				840,181				935,494				879,681				943,764				943,764

		Year Ended												Three Months								Twelve Months Ended
		December 31,												Ended March 31,								March 31,
		2007				2008				2009				2009				2010				2010
														(unaudited)				(unaudited)				(unaudited)
						(In thousands)
Statement of Cash Flow Data:
Net cash provided by (used in):
Operating activities		$	(79,699	)		$	63,426			$	39,611			$	(19,196	)		$	32,110			$	90,917
Investing activities			54,721				(138,665	)			(77,593	)			(18,119	)			(30,407	)			(89,881	)
Financing activities			30,563				72,128				62,208				40,643				(2,312	)			19,253
Additions to property, plant, equipment and mine development			55,594				121,388				78,263				19,042				35,130				94,351
Acquisitions, net			47,733				9,566				—				—				—				—
Other Financial Data:
Adjusted EBITDA(2) (unaudited)			431				44,238				110,745				21,872				45,236				134,109
Past mining obligation payments(3) (unaudited)			144,811				101,746				129,060				30,810				33,724				131,974
Operating Data:
Tons sold:
Appalachia			14,432				20,654				25,850				6,639				5,849				25,060
Illinois Basin			7,711				7,866				6,986				1,819				1,746				6,913
Total Tons Sold			22,143				28,520				32,836				8,458				7,595				31,973
Average sales price per ton sold:
Appalachia		$	56.62			$	65.23			$	66.79			$	68.30			$	66.74			$	66.38
Illinois Basin			32.71				36.06				38.52				38.14				42.28				39.57
As Adjusted Financial Data:(4)
Total debt (at period end)										$	455,993											$	455,571
Net debt (at period end)(5)											195,795												195,982
Pro forma interest expense											62,876												63,315
Ratio of Total debt to Adjusted EBITDA											4.1x												3.4x
Ratio of Net debt to Adjusted EBITDA											1.8x												1.5x
Ratio of Adjusted EBITDA to Pro forma interest expense											1.8x												2.1x

(1)		Net gain on disposal or exchange of assets included gains of $78.5 million from the sales of coal reserves and surface land in 2007.
(2)		Adjusted EBITDA is defined as net income (loss) before deducting net interest income and expense; income taxes; reclamation and remediation obligation expense; depreciation, depletion and amortization; restructuring and impairment charge; and net sales contract accretion. Net sales contract accretion represents contract accretion excluding back-to-back coal purchase and sales contracts. The contract accretion on the back-to-back coal purchase and sales contracts reflects the accretion related to certain coal purchase and sales contracts existing prior to July 23, 2008, whereby Magnum purchased coal from third parties to fulfill tonnage commitments on sales contracts. Adjusted EBITDA is used by management to measure operating performance, and management also believes it is a useful indicator of our ability to meet debt service and capital expenditure requirements. We believe that in our industry such information is a relevant measurement of a company’s operating financial performance. The term Adjusted EBITDA does not purport to be an alternative to operating income, net income or cash flows from operating activities as determined in accordance with generally accepted accounting principles as a measure of profitability or liquidity. Because Adjusted EBITDA is not calculated identically by all companies, our calculation may not be comparable to similarly titled measures of other companies.

(3)		Past mining obligation payments represents cash payments relating to our postretirement benefit plans, work-related injuries and illnesses obligations and multi-employer retiree healthcare and pension plans.
(4)		As Adjusted financial data includes pro forma adjustments to reflect the 2018 Senior Notes offered hereby and the amendment and restatement to our revolving credit facility. Our revolving credit facility will be amended and restated concurrently with the closing of this offering to, among other things, extend the maturity date and adjust borrowing capacity under the facility. See “Description of Material Indebtedness — Revolving Credit Facility.” Pro forma interest expense includes assumed interest on the 2018 Senior Notes and amortization of deferred financing costs related to the 2018 Senior Notes and the revolving credit facility amendment and restatement.
(5)		Net debt is defined as total short and long-term debt less cash and cash equivalents and is regarded as a useful measure of our outstanding debt obligations. Our use of the term “net debt” shall not be understood to mean that we will use any cash on hand to repay debt. Net debt is not a recognized term under U.S. generally accepted accounting principles.

																						Twelve Months Ended
		Year Ended December 31,												Three Months Ended March 31,								March 31,
		2007				2008				2009				2009				2010				2010
										(In thousands)
Net income (loss)		$	(102,147	)		$	142,728			$	127,243			$	32,143			$	4,261			$	99,361
Depreciation, depletion and amortization			85,640				125,356				205,339				54,979				49,612				199,972
Sales contract accretion, net(a)			—				(249,522	)			(298,572	)			(76,807	)			(25,308	)			(247,073	)
Reclamation and remediation obligation expense			20,144				19,260				35,116				6,451				10,846				39,511
Restructuring and impairment			—				—				20,157				—				—				20,157
Interest expense			8,337				23,648				38,108				8,593				9,032				38,547
Interest income			(11,543	)			(17,232	)			(16,646	)			(3,487	)			(3,442	)			(16,601	)
Income tax provision			—				—				—				—				235				235
Adjusted EBITDA		$	431			$	44,238			$	110,745			$	21,872			$	45,236			$	134,109

	(a)	Net sales contract accretion resulted from the below market coal sales and purchase contracts acquired in the Magnum acquisition that were recorded at fair value in purchase accounting. The net liability generated from applying fair value to these contracts is being accreted over the life of the contracts as the coal is shipped.

 

An investment in the notes involves risks. We urge you to consider carefully the risks described below and in “Risk Factors” on page 6 of the accompanying prospectus. These risks could materially affect our business, results of operation or financial condition and affect the value of the notes. In such case, you may lose all or part of your original investment. The risks described below, in the “Risk Factors” section of the accompanying prospectus or elsewhere in this document or the documents incorporated by reference herein are not the only risks facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business, results of operation or financial condition.

 

Risks Related to the Notes and This Offering

 

Our existing indebtedness could restrict our business activities and could have an adverse effect on our business, financial condition and results of operations.

 

After giving effect to this offering and the application of the proceeds therefrom, we will have approximately $455.6 million of total long-term debt (which does not include approximately $248.7 million of asset retirement obligations, $207.1 million of workers’ compensation obligations, $1.2 billion of accrued postretirement benefit costs and $292.6 million of other noncurrent liabilities). Our inability to generate sufficient cash flow to satisfy our existing debt obligations, to refinance our existing debt obligations or to access capital and financial markets on commercially reasonable terms could have an adverse effect on our business, financial condition and results of operations and could:

 

 

We are also subject to financial maintenance covenants in our revolving credit facility, including maximum leverage and minimum interest coverage covenants, and agreements governing future indebtedness may contain additional, more onerous covenants. As a cyclical business, it may be difficult for us to comply with these covenants. These restrictions could limit our ability to plan for or react to market conditions or meet extraordinary capital needs or otherwise restrict corporate activities.

 

We may be able to incur substantially more debt. This could exacerbate the risks described above.

 

We and our subsidiaries may be able to incur substantially more debt in the future. Although the indenture governing the notes and our revolving credit facility contain restrictions on our incurrence of additional indebtedness, these restrictions are subject to a number of important qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. Also, these restrictions do not prevent us from incurring obligations that do not constitute indebtedness. The more

leveraged we become, the more we and our subsidiaries, and in turn our noteholders, become exposed to the risks described above under “— Our existing indebtedness could restrict our business activities and could have an adverse effect on our business, financial condition and results of operations.”

 

We may not be able to generate sufficient cash to service all of our indebtedness, including the notes, and may be forced to take other actions to satisfy our obligations under our indebtedness that may not be successful.

 

Our ability to pay principal and interest on the notes and to satisfy our other debt obligations will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, competitive, legislative, regulatory and other factors, many of which are beyond our control, and our ability to access the capital and financial markets on commercially reasonable terms. In addition to payments on outstanding debt, we have other demands on our cash resources, including our cash costs of coal production, capital expenditures, interests costs and costs related to past mining obligations as well as acquisitions. We cannot assure you that our business will generate sufficient cash flow from operations, or that we will be able to access the capital and financial markets, in an amount sufficient to fund our liquidity needs, including the payment of principal and interest on the notes. See “Cautionary Note Regarding Forward-Looking Statements.”

 

If our cash flows and capital resources are insufficient to service our indebtedness, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness, including the notes. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Our ability to restructure or refinance our debt will depend upon the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, the terms of existing or future debt agreements, including the revolving credit facility and the indenture governing the notes, may restrict us from adopting some of these alternatives. Without such resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions for fair market value or at all. Furthermore, any proceeds that we could realize from any such dispositions may not be adequate to meet our debt service obligations then due.

 

If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the notes.

 

If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to make required payments of principal, premium, if any, or interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all of the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under our revolving credit facility could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets. In addition, a default under the agreements governing our indebtedness, including the indenture governing the notes, the indenture governing our outstanding convertible notes or our revolving credit facility, could result in a default and potential acceleration of our repayment obligations under the cross default provisions in those agreements. If an acceleration or cross default were to occur, we would be significantly less likely to be able to pay our debts or borrow sufficient funds to refinance them and the limitations imposed by these and any other future financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain such other financing. Even if new financing were available, it may not be on terms acceptable to us. As a result, we could be forced to take actions that we otherwise would not take, or not take actions that we otherwise might take, in order to comply with the covenants in the applicable agreements.

 

If our operating performance declines, we may in the future need to seek to obtain waivers from the required lenders under our revolving credit facility or other financing agreements to avoid being in default. We

cannot assure you that we will be granted waivers or amendments to these agreements if for any reason we are unable to comply with these agreements, or that we will be able to refinance our debt on terms acceptable to us, or at all. If this occurs, we would be in default under our revolving credit facility or other financing agreements and the lenders could exercise their rights as described above. See “Description of Material Indebtedness — Revolving Credit Facility.”

 

The notes and the guarantees will not be secured by any of our assets and therefore will be effectively subordinated to our existing and future secured indebtedness.

 

The notes and guarantees thereof will be senior unsecured obligations ranking effectively junior in right of payment to existing and future secured debt of us and our subsidiary guarantors to the extent of the collateral securing such debt. We are able to incur $522.5 million of indebtedness under our revolving credit facility. As of March 31, 2010, the balance of the outstanding letters of credit issued against the revolving credit facility totaled $359.5 million, leaving availability under the revolving credit facility of $163.0 million. The revolving credit facility will be effectively senior to the notes and the guarantees to the extent of the value of the assets securing our obligations under the revolving credit facility. Additionally, as of December 31, 2009, Arch Coal, Inc. (Arch) held surety bonds of $93.3 million related to properties acquired by Patriot in the Magnum acquisition, of which $91.7 million related to reclamation. As a result of the acquisition, we are required to post letters of credit in Arch’s favor in phases, measured on six-month intervals, ending February 2011 for the amount of our accrued reclamation liabilities related to those certain properties. As of December 31, 2009, our accrued reclamation liabilities related to those certain properties were approximately $33.1 million, for which we currently have approximately $16.5 million of letters of credit posted in Arch’s favor.

 

The indenture governing the notes will permit the incurrence of additional debt, some of which may be secured debt. See “Description of Notes.” In the event that we or a guarantor are declared bankrupt, become insolvent or are liquidated or reorganized, creditors whose debt is secured by assets of us or the applicable guarantor will be entitled to the remedies available to secured holders under applicable laws, including the foreclosure of the collateral securing such debt before any payment may be made with respect to the notes or the affected guarantees. As a result, there may be insufficient assets to pay amounts due on the notes and holders of the notes may receive less, ratably, than holders of secured indebtedness.

 

Federal and state fraudulent transfer laws permit a court, under certain circumstances, to void the guarantees, and, if that occurs, you may not receive any payments on the guarantees.

 

The issuance of the guarantees may be subject to review under federal and state fraudulent transfer and conveyance statutes if a bankruptcy, liquidation or reorganization case or a lawsuit, including under circumstances in which bankruptcy is not involved, were commenced at some future date by the guarantors or on behalf of the unpaid creditors of a guarantor. While the relevant laws may vary from state to state, under such laws a guarantee will generally be a fraudulent conveyance if (i) consideration was paid with the intent of hindering, delaying or defrauding creditors or (ii) any of our subsidiary guarantors received less than reasonably equivalent value or fair consideration in return for issuing such guarantee, and, in the case of (ii) only, one of the following is also true:

 

 

If a court were to find that the issuance of a guarantee was a fraudulent conveyance, the court could void the payment obligations under such guarantee or further subordinate such guarantee to presently existing and future indebtedness of such subsidiary guarantor, or require the holders of the notes to repay any amounts received with respect to such guarantee. In the event of a finding that a fraudulent conveyance occurred, you

may not receive any repayment on the notes with respect to such guarantee. Further, the voidance of a guarantee could result in an event of default with respect to our other debt and that of our subsidiary guarantors that could result in acceleration of such debt.

 

The measures of insolvency for purposes of fraudulent conveyance laws vary depending upon the law of the jurisdiction that is being applied. Generally, an entity would be considered insolvent if, at the time it incurred indebtedness:

 

 

We cannot be certain as to the standards a court would use to determine whether or not the subsidiary guarantors were solvent at the relevant time, or regardless of the standard used, that the issuance of the guarantees would not be subordinated to any subsidiary guarantor’s other debt.

 

If the guarantees were legally challenged, any guarantee could also be subject to the claim that, since the guarantee was incurred for our benefit, and only indirectly for the benefit of the subsidiary guarantor, the obligations of the applicable subsidiary guarantor were incurred for less than fair consideration. A court could thus void the obligations under the guarantees, subordinate them to the applicable subsidiary guarantor’s other debt or take other action detrimental to the holders of the notes. In addition, the liability of each guarantor under each indenture will be limited to the amount that will result in its guarantee not constituting a fraudulent conveyance or improper corporate distribution, and there can be no assurance as to what standard a court would apply in making a determination as to what would be the maximum liability of each guarantor.

 

The guarantors could be released from their guarantees of the notes.

 

Pursuant to the terms of the indenture governing the notes, each of our current and future subsidiaries that is a guarantor under our revolving credit facility will guarantee the notes. The guarantee of a guarantor will terminate upon (a) a sale or other disposition of capital stock (including by way of consolidation or merger) of such guarantor following which it is no longer a direct or indirect subsidiary of us or the sale or disposition of all or substantially all the assets of the guarantor (other than to us or a restricted subsidiary), (b) the designation by us of such guarantor as an unrestricted subsidiary, (c) if the guarantee was required pursuant to the terms of the indenture, the cessation of the circumstances requiring the guarantee, (d) defeasance or discharge of the notes, or (e) the release, other than discharge through payment by the guarantor, of all other guarantees by such guarantor of debt of the company or any other restricted subsidiary. See “Description of Notes — Note Guarantees.”

 

In these circumstances, including if a guarantor is no longer a guarantor of obligations under the revolving credit facility or any other successor credit facilities that may be then outstanding, the guarantee of the notes by such guarantor will be released automatically without action by, or consent of, any holder of the notes or the trustee under the indenture governing the notes. You will not have a claim as a creditor against any subsidiary that is no longer a guarantor of the notes, and the indebtedness and other liabilities, including trade payables, whether secured or unsecured, of those subsidiaries will effectively be senior to claims of noteholders.

The terms of the revolving credit facility, the indenture governing the notes and the agreements governing our other indebtedness may restrict our current and future operations, particularly our ability to respond to changes in our business or to take certain actions.

 

The revolving credit facility, the indenture governing the notes and the agreements governing our other indebtedness contain, and any future indebtedness of ours may contain, a number of restrictive covenants that will impose significant operating and financial restrictions on us, which restrict our ability to, among other things:

 

 

In addition, the revolving credit facility requires us to comply with certain affirmative financial covenants. As a result of these covenants, we will be limited in the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs. A failure to comply with these covenants could result in an event of default under our existing credit agreement or the agreements governing our other indebtedness, which, if not cured or waived, could have a material adverse affect on our business, financial condition and results of operations. In the event of any default under the revolving credit facility or the agreements governing our other indebtedness, including our outstanding convertible notes, the lenders thereunder:

 

 

If the indebtedness under the revolving credit facility or our other indebtedness, including the notes offered hereby or our outstanding convertible notes, were to be accelerated, there can be no assurance that our assets would be sufficient to repay in full.

 

We may not be able to repurchase the notes upon a change of control.

 

Upon a change of control as defined in the indenture governing the notes, we will be required to make an offer to repurchase all outstanding notes at 101% of their principal amount, plus accrued and unpaid interest, unless we have previously given notice of our intention to exercise our right to redeem the notes. We may not have sufficient financial resources to purchase all of the notes that are tendered upon a change of control offer or, if then permitted under the indenture governing the notes, to redeem the notes. We also may be contractually restricted pursuant to the terms governing our existing indebtedness from purchasing all or some of the notes tendered upon a change of control. A failure to make the applicable change of control offer or to pay the applicable change of control purchase price when due would result in a default under the indenture.

The occurrence of a change of control would also constitute an event of default under the revolving credit facility and may constitute an event of default under the terms of the agreements governing our other indebtedness. See “Description of Notes — Repurchase of Notes upon a Change of Control.” In the event of such default, the holders of such indebtedness could elect to declare all of the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, or the lenders under our revolving credit facility could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets.

 

If the notes are rated investment grade by both Moody’s and S&P in the future, certain covenants contained in the indenture will no longer be applicable to the notes, and the holders of the notes will lose the protection of these covenants.

 

The indenture contains certain covenants that will no longer be applicable to the notes during any future period in which the notes are rated investment grade by both Moody’s and S&P (or a nationally recognized statistical rating agency substituted for either Moody’s or S&P), provided that at such time no default has occurred and is continuing. See “Description of Notes — Suspension of Covenants.” These covenants restrict, among other things, our ability to pay dividends, incur additional debt and enter into certain types of transactions. Because we would not be subject to these restrictions during the time that the notes are rated investment grade by both Moody’s and S&P, we would be able to make dividends and distributions, incur substantial additional debt and enter into certain types of transactions during such period.

 

There can be no assurances that an active trading market will develop for the notes, which could make it more difficult for holders of the notes to sell their notes and/or result in a lower price at which holders would be able to sell their notes.

 

There is currently no established trading market for the notes, and there can be no assurance as to the liquidity of any markets that may develop for the notes, the ability of the holders of the notes to sell their notes or the price at which such holders would be able to sell their notes. If such a market were to exist, the notes could trade at prices that may be lower than the initial market values thereof depending on many factors, including prevailing interest rates and our business performance. We do not intend to apply for the listing of the notes on any securities exchange in the United States or elsewhere.

 

Even if a trading market for either series of notes does develop, you may not be able to sell your notes at a particular time, if at all, or you may not be able to obtain the price you desire for your notes. If the notes are traded after their initial issuance, they may trade at a discount from their initial offering price depending on many factors, including prevailing interest rates, the market for similar securities, our credit rating, the interest of securities dealers in making a market for the notes, the price of any other securities we issue, our performance, prospects, operating results and financial condition, as well as of other companies in our industry.

 

Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial fluctuations in the price of securities that are similar to the notes. Therefore, even if a trading market for the notes develops, it may be subject to disruptions and price volatility.

 

We estimate that the net proceeds of this offering will be approximately $233.1 million, after deducting the underwriting discounts, estimated offering expenses payable by us and expenses related to the revolving credit facility amendment and restatement. We intend to use the net proceeds from this offering for general corporate purposes, which could include capital expenditures for development of additional metallurgical coal production capacity, working capital, acquisitions, refinancing of other debt or other capital transactions.

 

The following table sets forth Patriot’s cash and cash equivalents and consolidated capitalization as of March 31, 2010 on (i) an actual basis and (ii) as adjusted to give effect to this offering and the amendment and restatement of our revolving credit facility.

 

You should read this table along with Patriot’s consolidated financial statements, the related notes and other financial information included elsewhere in this prospectus supplement.

 

 

 

 

Overview

 

We are a leading producer of thermal coal in the eastern United States (U.S.), with operations and coal reserves in Appalachia and the Illinois Basin, our operating segments. We are also a leading U.S. producer of metallurgical quality coal. Our principal business is the mining, preparation and sale of thermal coal, also known as steam coal, for sale primarily to electric utilities and metallurgical coal, for sale to steel mills and independent coke producers.

 

Our operations consist of fourteen mining complexes, which include company-operated mines, contractor-operated mines and coal preparation facilities. The Appalachia and Illinois Basin segments consist of our operations in West Virginia and Kentucky, respectively. We control approximately 1.8 billion tons of proven and probable coal reserves. Our proven and probable coal reserves include metallurgical coal and medium and high Btu thermal coal, with low, medium and high sulfur content.

 

We ship coal to electric utilities, industrial users, steel mills and independent coke producers. In the first three months of 2010, we sold 7.6 million tons of coal, of which 78% was sold to domestic electric utilities and industrial customers and 22% was sold to domestic and global steel and coke producers. In 2009, we sold 32.8 million tons of coal, of which 83% was sold to domestic electric utilities and industrial customers and 17% was sold to domestic and global steel and coke producers. Coal is shipped via various company-owned and third-party loading facilities, multiple rail and river transportation routes and ocean-going vessels.

 

Our mining operations and coal reserves are as follows:

 

 

Results of Operations

 

Adjusted EBITDA

 

The discussion of our results of operations below includes references to and analysis of our Appalachia and Illinois Basin Segments’ Adjusted EBITDA results. Adjusted EBITDA is defined as net income (loss) before deducting interest income and expense; income taxes; reclamation and remediation obligation expense; depreciation, depletion and amortization; and net sales contract accretion. Net sales contract accretion represents contract accretion excluding back-to-back coal purchase and sales contracts. The contract accretion on the back-to-back coal purchase and sales contracts reflects the accretion related to certain coal purchase and sales contracts existing on July 23, 2008, whereby Magnum purchased coal from third parties to fulfill tonnage commitments on sales contracts. Adjusted EBITDA is used by management primarily as a measure of our segments’ operating performance. We believe that in our industry such information is a relevant measurement of a company’s operating financial performance. Because Adjusted EBITDA and Segment Adjusted EBITDA are not calculated identically by all companies, our calculation may not be comparable to similarly titled measures of other companies. Segment Adjusted EBITDA is calculated the same as Adjusted EBITDA but also excludes selling, general and administrative expenses, past mining obligation expense and gain on disposal or exchange of assets and is reconciled to its most comparable measure below under Net

Income. Adjusted EBITDA is reconciled to its most comparable measure under generally accepted accounting principles in Note 12 to our unaudited condensed consolidated financial statements.

 

Three Months Ended March 31, 2010 Compared to March 31, 2009

 

Summary

 

Our Segment Adjusted EBITDA for the three months ended March 31, 2010 increased compared to the prior year primarily due to cost savings resulting from the suspension of certain higher cost mining operations in 2009. In 2009, we implemented a strategic response to the then weakened coal markets. As a result, we suspended certain mining operations, which in certain circumstances remained suspended through the first quarter of 2010.

 

Our Federal mine temporarily suspended active mining operations for a portion of February and March 2010, upon discovering potentially adverse atmospheric conditions in an abandoned area of the mine. As announced on March 8, 2010, we have resumed operations.

 

Segment Results of Operations

 

 

 

 

Tons Sold and Revenues

 

Revenues in the Appalachia segment were lower in the three months ended March 31, 2010 compared to the prior year primarily related to the 2009 suspension of various mines, including the Samples mine, as well as other production cuts, driven by lower demand for thermal and high-quality metallurgical coal. Additionally, we experienced lower average sales prices in the first quarter of 2010 from metallurgical coal contracts priced in a less favorable pricing environment. These decreases were partially offset by higher revenue in the first quarter of 2010 from crossover metallurgical coal, which was previously sold as thermal coal, primarily from our Panther mining complex.

 

Sales volumes in the Appalachia segment decreased in the three months ended March 31, 2010 compared to the same period in 2009 primarily due to the suspension of certain mines driven by lower demand in 2009. This decrease was partially offset by improved production volumes at our Panther complex due to improvements from equipment installed during the third quarter of 2009 and the implementation of a revised mine plan.

 

Revenues in the Illinois Basin segment were higher for the three months ended March 31, 2010 compared to the prior year primarily due to higher average sales prices. Sales volumes were comparable in the three months ended March 31, 2010 compared to the prior year.

 

Appalachia Other revenue was lower for the three months ended March 31, 2010 compared to the prior year, in part due to cash settlements received in 2009 for reduced shipments as a result of renegotiated customer agreements.

 

Segment Operating Costs and Expenses

 

Segment operating costs and expenses for Appalachia decreased in the three months ended March 31, 2010 as compared to the prior year primarily due to decreased contract mining costs ($19.5 million) and labor costs ($18.4 million) related to the closing or idling of certain contractor-operated and company-operated mines in the second half of 2009. In addition, there were decreases in maintenance and repairs ($8.8 million) and fuel and explosives costs ($4.5 million) as compared to the prior year due to reducing production to more closely align with the demand for coal. Purchased coal expense ($8.7 million) also decreased in the first three months of 2010 as compared to the prior year as a result of more favorable pricing.

 

Segment operating costs and expenses for the Illinois Basin increased in the three months ended March 31, 2010 as compared to the prior year due to increased contract service costs for additional repairs and maintenance.

 

Segment Adjusted EBITDA

 

Segment Adjusted EBITDA for Appalachia was slightly higher in the three months ended March 31, 2010 as compared to 2009, mainly reflecting the suspension or reduced production of certain mining operations, in particular some of our higher cost operations, in response to the economic recession experienced throughout much of 2009.

 

Segment Adjusted EBITDA for the Illinois Basin increased in the three months ended March 31, 2010 from the prior year primarily due to higher average sales prices.

Net Income

 

 

Past mining obligations were higher in the three months ended March 31, 2010 than the corresponding period in the prior year primarily due to a lower discount rate and other unfavorable assumption changes utilized in our actuarially-based estimate for retiree healthcare and workers’ compensation obligations.

 

Net gain on disposal or exchange of assets increased for the three months ended March 31, 2010 as compared to the corresponding period in the prior year due to a gain recorded on an exchange transaction in which we received rights to approximately 13 million tons of coal reserves contiguous to our Highland mining complex in the Illinois Basin. We recognized a gain of $24 million on this transaction.

 

Depreciation, depletion and amortization decreased in the three months ended March 31, 2010 compared to the prior year primarily due to lower volumes associated with certain mines being closed or suspended in the second half of 2009.

 

Reclamation and remediation obligation expense increased in the three months ended March 31, 2010 primarily due to remediation expense related to the liabilities assumed in the July 2008 Magnum acquisition, which was first recorded in June 2009 upon finalization of purchase accounting.

 

Net sales contract accretion decreased in the three months ended March 31, 2010 primarily due to several contracts assumed in the Magnum acquisition that expired in the second half of 2009.

 

Interest expense increased in the three months ended March 31, 2010 primarily due to the Blue Creek preparation plant capital lease that began in May 2009.

 

For the three months ended March 31, 2010, we recorded an income tax provision of $0.2 million related to certain state taxes. No federal income tax provision was recorded due to our anticipated tax net operating loss for the year ended December 31, 2010, and the full valuation allowance recorded against deferred tax assets. No income tax provision was recorded for the three months ended March 31, 2009 due to our anticipated tax net operating loss for the year ending December 31, 2009 and the full valuation allowance recorded against deferred tax assets. The primary difference between book and taxable income for 2010 and 2009 is the treatment of the net sales contract accretion on the below market purchase and sales contracts acquired with Magnum, with such amounts being included in the computation of book income but excluded from the computation of taxable income.

Outlook

 

Market

 

Market indicators are showing signs of increased strength in the metallurgical coal markets, while the thermal coal markets continue to struggle. Metallurgical coal markets are becoming more robust as 2010 progresses against the backdrop of growing global economies. A shortage of metallurgical coal, particularly in the Pacific Rim, is prompting steel manufacturers to turn to the U.S. coal producers to satisfy their coal requirements.

 

Thermal coal markets remain challenged. Utility thermal coal inventory levels remain higher than their 5-year averages, and natural gas pricing continues to create competition for coal. We anticipate as the economy continues to recover, the demand for electricity will rise. As thermal coal demand returns, supply constraints may keep Central Appalachia thermal coal production at reduced levels.

 

One potential cause of constrained supply may be the difficulty in obtaining mining permits. The U.S. Environmental Protection Agency recently issued comprehensive guidance relating to the issuance of surface mining permits, including new water conductivity standards to be used in the review of applications for future permits. This new guidance, along with the new conductivity standards, may make future permits more difficult to secure.

 

Recent developments related to underground mining are expected to result in greater regulatory oversight, and may result in more stringent regulations and perhaps additional legislation. These developments add further uncertainty and may cause additional supply constraints, particularly in Central Appalachia. As the economy continues to recover, demand for power should rise. Increased demand, coupled with supply constraints, could result in Central Appalachia coming into balance as early as late 2010.

 

Patriot Operations

 

As discussed more fully under “Risk Factors” in this prospectus supplement, our results of operations in the near-term could be negatively impacted by price volatility and demand; unforeseen adverse geologic conditions or equipment problems at mining locations; changes in general economic conditions; availability and costs of competing energy resources; the passage of new or expanded regulations that could limit our ability to mine, increase our mining costs, or limit our customers’ ability to utilize coal as fuel for electricity generation; existing or new environmental and coal mining laws and regulations and developments in the interpretation or enforcement thereof; labor availability and relations; the outcome of pending or future litigation; changes in the costs to provide healthcare to eligible active employees and certain retirees under postretirement benefit obligations and contribution requirements to multi-employer retiree healthcare and pension plans; reductions of purchases or deferral of deliveries by major customers; the availability and costs of credit, surety bonds and letters of credit; customer performance and credit risks; supplier and contract miner performance and the unavailability of transportation for coal shipments.

 

On a long-term basis, our results of operations could also be impacted by our ability to secure or acquire high-quality coal reserves; our ability to attract and retain skilled employees and contract miners; our ability to find replacement buyers for coal under contracts with comparable terms to existing contracts; and fluctuating prices of key supplies, mining equipment and commodities. Additionally, our cost to provide healthcare to eligible active employees and certain retirees could increase due to recent legislation.

 

Potential legislation, regulation, treaties and accords at the local, state, federal and international level, and changes in the interpretation or enforcement of existing laws and regulations, have created uncertainty and could have a significant impact on demand for coal and our future operational and financial results. For example, increased scrutiny of surface mining could make it difficult to receive permits or could otherwise cause production delays in the future. The lack of proven technology to meet selenium discharge standards creates uncertainty as to the future costs of water treatment to comply with mining permits. The imminent regulation of carbon dioxide and other greenhouse gas emissions could have an adverse effect on the financial condition of our customers and significantly impact the demand for coal. See “Risk Factors” for expanded discussion of these factors.

If upward pressure on costs exceeds our ability to realize sales increases, or if we experience unanticipated operating or transportation difficulties, our operating margins would be negatively impacted. Management has continued to focus on controlling costs, optimizing performance and responding quickly to market changes. We are seeing positive results from our ongoing emphasis on cash and cost control, as well as rationalization of higher-cost production.

 

We have the ability to adjust our future production levels as demand increases. We are currently finalizing plans to open the Black Oak metallurgical mine this fall. We have also advanced plans for additional metallurgical coal production, which will be processed through our existing infrastructure at our Rocklick, Kanawha Eagle and Logan County mining complexes.

 

In 2010, we anticipate annual sales volumes in the range of 33.0 to 35.0 million tons, including approximately 7.5 million tons of metallurgical coal. This anticipated sales volume incorporates the impact of extended mid-year moves to relocate both the Federal and the Panther longwalls to new areas within each mine.

 

Actual events and results may vary significantly from those included in, contemplated or implied by the forward-looking statements under Outlook. The guidance provided under the caption Outlook should be read in conjunction with the sections entitled “Cautionary Note Regarding Forward Looking Statements” and “Risk Factors”.

 

Liquidity and Capital Resources

 

Our primary sources of cash include sales of our coal production to customers, sales of non-core assets and financing transactions. Our primary uses of cash include our cash costs of coal production, capital expenditures, interest costs and costs related to past mining obligations. Our ability to service our debt (interest and principal) and acquire new productive assets or businesses is dependent upon our ability to continue to generate cash from the primary sources noted above in excess of the primary uses. We expect to fund all of our capital expenditure requirements with cash generated from operations or borrowed funds as necessary.

 

Net cash provided by operating activities was $32.1 million for the three months ended March 31, 2010, compared to net cash used in operating activities of $19.2 million in the same period of 2009. The increase in cash provided by operating activities primarily related to changes in working capital of $43.6 million, primarily due to increased collections on accounts receivable.

 

Net cash used in investing activities was $30.4 million for the three months ended March 31, 2010, compared to $18.1 million in the same period of 2009. The increase in cash used reflected an increase in capital expenditures of $16.1 million, additional advance mining royalties of $2.1 million and a decrease in cash proceeds from the disposal or exchange of assets of $3.6 million. These increases in cash used in investing activities were partially offset by additional proceeds from notes receivable of $9.5 million.

 

Net cash used by financing activities was $2.3 million for the three months ended March 31, 2010, compared to net cash provided by financing activities of $40.6 million in the same period of 2009. The decrease in cash provided was primarily due to no short-term borrowings at March 31, 2010.

 

Receivables Securitization

 

In March 2010, we entered into a $125 million accounts receivable securitization program, which provides for the issuance of letters of credit and direct borrowings. Trade accounts receivable are sold, on a revolving basis, to a bankruptcy-remote entity (facilitating entity), which then sells an undivided interest in all of the trade receivables to the creditors as collateral for any borrowings. As of the inception of the program and at March 31, 2010, we had commitments for up to $75 million of borrowing capacity. The availability under the program fluctuates with the balance of our trade accounts receivables. In April 2010, the borrowing capacity under the program was expanded by $50 million, bringing our total borrowing capacity to $125 million.

Based on our continuing involvement with the trade accounts receivable balances, including continued risk of loss, the facilitating entity is consolidated into our financial statements. The facilitating entity was established solely to perform its obligations under this program and holds a note receivable from the creditors and a note payable to our subsidiaries for the outstanding trade accounts receivable balance at any given point in time, which is eliminated in consolidation. The outstanding trade accounts receivable balance was $120.7 million as of March 31, 2010. Any direct borrowings will be recorded as secured borrowings. As of March 31, 2010, there were no letters of credit or direct borrowings under this program.

 

Credit Facility

 

On October 31, 2007, we entered into a $500 million, four-year revolving credit facility, which includes a $50 million swingline sub-facility and a letter of credit sub-facility. In July 2009, we increased our revolving credit facility by $22.5 million, bringing the total credit facility to $522.5 million. This facility is available for working capital requirements, capital expenditures and other corporate purposes. As of March 31, 2010, the balance of outstanding letters of credit issued against the credit facility totaled $359.5 million. There were no outstanding short-term borrowings on this facility as of March 31, 2010. Availability under the credit facility as of March 31, 2010 was $163.0 million. At March 31, 2010, we were in compliance with the covenants of our amended credit facility.

 

Private Convertible Notes Issuance

 

On May 28, 2008, Patriot completed a private offering of $200 million in aggregate principal amount of 3.25% Convertible Senior Notes due 2013. We utilized an interest rate of 8.85% to reflect the nonconvertible market rate of our offering upon issuance, which resulted in a $44.7 million discount to the convertible note balance and an increase to “Additional paid-in capital” to reflect the value of the conversion feature. The nonconvertible market interest rate was based on an analysis of similar securities trading in the market at the pricing date of the issuance, taking into account company specific data such as credit spreads and implied volatility. In addition, we allocated the financing costs related to the issuance of the convertible instruments between the debt and equity components. We are amortizing the debt discount over the contractual life of the convertible notes, resulting in additional interest expense above the contractual coupon amount.

 

At March 31, 2010, the debt discount was $30.4 million, resulting in a long-term convertible note balance of $169.6 million. At December 31, 2009, the debt discount was $32.5 million, resulting in a long-term convertible note balance of $167.5 million. For the three months ended March 31, 2010, interest expense for the convertible notes was $3.7 million, which included debt discount amortization of $2.1 million. For the three months ended March 31, 2009, interest expense for the convertible notes was $3.5 million, which included debt discount amortization of $1.9 million.

 

Newly Adopted Accounting Pronouncements

 

Transfers of Financial Assets

 

In June 2009, the Financial Accounting Standards Board (FASB) issued authoritative guidance regarding the accounting for transfers of financial assets, which requires enhanced disclosures about the continuing risk exposure to a transferor resulting from its continuing involvement with transferred financial assets. This guidance is effective for fiscal years beginning after November 15, 2009. See the description of our asset securitization program in “— Liquidity and Capital Resources” above.

 

Consolidation

 

In June 2009, the FASB issued authoritative guidance, which requires a company to perform a qualitative analysis to determine whether it has a controlling financial interest in a variable interest entity, including an assessment of the company’s power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance. This guidance is effective for fiscal years beginning after November 15, 2009. Upon adoption, we performed a qualitative assessment of our existing interests in joint ventures and determined that the joint ventures were not variable interest entities.

Fair Value Disclosures

 

In January 2010, the FASB issued authoritative guidance which requires additional disclosures and clarifies certain existing disclosure requirements regarding fair value measurements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009. We adopted this guidance effective January 1, 2010. However, none of the specific additional disclosures were applicable at this time. See Note 7 to our unaudited consolidated financial statements for the three months ended March 31, 2010 included herein for our fair value measurement disclosures.

 

The following description is taken directly from “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2009 (the “10-K”) and has not been updated for subsequent events. The 10-K is incorporated by reference into this document, and we urge you to read the documents incorporated by reference in their entirety, including our Quarterly Report on Form 10-Q for the three months ended March 31, 2010 (the “First Quarter 10-Q”), because these documents contain important information and disclosures about Patriot. This discussion should be read in conjunction with the audited financial statements of Patriot (all references to Notes in this section refer to Notes to the financial statements for the year ended December 31, 2009) included herein.

 

Overview

 

We are a leading producer of thermal coal in the eastern United States, with operations and coal reserves in Appalachia and the Illinois Basin, our operating segments. We are also a leading U.S. producer of metallurgical quality coal. Our principal business is the mining, preparation and sale of thermal coal, for sale primarily to electric utilities, as well as the mining of metallurgical coal, for sale to steel mills and independent coke producers. Our operations consist of fourteen current mining complexes, which include company-operated mines, contractor-operated mines and coal preparation facilities. The Appalachia and Illinois Basin segments consist of our operations in West Virginia and Kentucky, respectively.

 

We ship coal to electric utilities, industrial users, steel mills and independent coke producers. In 2009, we sold 32.8 million tons of coal, of which 83% was sold to domestic electric utilities and 17% was sold to domestic and global steel producers. In 2008, we sold 28.5 million tons of coal, of which 79% was sold to domestic electric utilities and 21% was sold to domestic and global steel producers. Coal is shipped via various company-owned and third-party loading facilities, multiple rail and river transportation routes and ocean-going vessels.

 

We typically sell coal to utility and steel-making customers under contracts with terms of one year or more. Approximately 83% and 78% of our sales were under such contracts during 2009 and 2008, respectively.

 

Effective October 31, 2007, Patriot was spun off from Peabody Energy Corporation (Peabody). The spin-off was accomplished through a dividend of all outstanding shares of Patriot, resulting in Patriot becoming a separate, public company traded on the New York Stock Exchange (symbol PCX).

 

On July 23, 2008, Patriot completed the acquisition of Magnum Coal Company (Magnum). Magnum was one of the largest coal producers in Appalachia, operating eight mining complexes with production from surface and underground mines and controlling more than 600 million tons of proven and probable coal reserves. Magnum’s results are included as of the date of the acquisition.

 

Results of Operations

 

Segment Adjusted EBITDA

 

The discussion of our results of operations below includes references to and analysis of our Appalachia and Illinois Basin Segments’ Adjusted EBITDA results. Adjusted EBITDA is defined as net income (loss) before deducting net interest income and expense; income taxes; reclamation and remediation obligation expense; depreciation, depletion and amortization; restructuring and impairment charge; and net sales contract accretion. Net sales contract accretion represents contract accretion excluding back-to-back coal purchase and sales contracts. The contract accretion on the back-to-back coal purchase and sales contracts reflects the accretion related to certain coal purchase and sales contracts existing on July 23, 2008, whereby Magnum purchased coal from third parties to fulfill tonnage commitments on sales contracts. Segment Adjusted EBITDA is used by management primarily as a measure of our segments’ operating performance. Because Segment Adjusted EBITDA is not calculated identically by all companies, our calculation may not be

comparable to similarly titled measures of other companies. Adjusted EBITDA is reconciled to its most comparable measure under generally accepted accounting principles in Item 6. Selected Consolidated Financial Data. Segment Adjusted EBITDA is calculated the same as Adjusted EBITDA but also excludes selling, general and administrative expenses, past mining obligation expense and gain on disposal or exchange of assets and is reconciled to its most comparable measure below, under Net Income.

 

Geologic Conditions

 

Our results of operations are impacted by geologic conditions as they relate to coal mining. These conditions refer to the physical nature of the coal seam and surrounding strata and its effect on the mining process. Geologic conditions that can have an adverse effect on underground mining include thinning coal seam thickness, rock partings within a coal seam, weak roof or floor rock, sandstone channel intrusions, groundwater and increased stresses within the surrounding rock mass due to over mining, under mining and overburden changes. The term “adverse geologic conditions” is used in general to refer to these and similar situations where the geologic setting can negatively affect the normal mining process. Adverse geologic conditions would be markedly different from those that would be considered typical geologic conditions for a given mine. Since approximately 70% of our 2009 production was sourced from underground operations, geologic conditions can be a major factor in our results of operations.

 

Year ended December 31, 2009 compared to year ended December 31, 2008

 

Summary

 

Revenues were $2,045.3 million, an increase of $390.7 million, and Segment Adjusted EBITDA was $302.9 million, an increase of $116.8 million, for the year ended December 31, 2009. The increase in revenue and Segment Adjusted EBITDA resulted from the addition of Magnum, the successful implementation of our Management Action Plan and improved performance at our longwall mines.

 

Beginning in the third quarter of 2008, the global recession resulted in decreased worldwide demand for steel and electricity, leading to weakened coal markets. Early in 2009, we implemented a Management Action Plan as a strategic response to the weakened coal markets. The Management Action Plan included output and cost reductions, workforce and capital redeployment and sales contract renegotiations. As a result of this plan, during 2009 we suspended certain company-operated and contract mines, including suspension of operations at our Samples surface mine, deferred production start up at one newly-developed mining complex and cancelled certain operating shifts at various other mining complexes. Additionally, we restructured certain below-market legacy coal supply agreements.

 

Our 2009 results reflect the inclusion of a full year of the Magnum operations, which were acquired on July 23, 2008. The increased revenue from the acquired Magnum operations was partially offset by lower customer demand throughout the year and increased customer deferrals during 2009.

 

Both our Federal and Panther longwalls encountered some adverse geologic conditions in 2009, but significantly less than the difficulties encountered in 2008. The improved production in 2009 reflects the benefits of mine plan adjustments made in late 2008 to minimize the impact of difficult geology. In the third quarter of 2009, significant upgrades were made to certain components of the Panther longwall mining equipment. Both of the longwalls were performing well by the end of 2009. In the fourth quarter of 2009, Federal had its best production quarter in 2009 and Panther had its best quarter since the Magnum acquisition.

Segment Results of Operations

 

 

 

 

Tons Sold and Revenues

 

The increase in Appalachia revenue for the year ended December 31, 2009 compared to the prior year primarily related to the $318.8 million net increase in revenues from the acquired Magnum operations, due to an additional seven months of activity during 2009, as well as higher sales prices at certain complexes. These increases were partially offset by lower customer demand and increased customer deferrals.

 

Sales volumes in the Appalachia segment increased in 2009, primarily from the incremental 5.9 million tons sold from the acquired Magnum operations, partially offset by the overall decline in customer demand for both metallurgical and thermal coal including lower sales due to customer shipment deferrals and settlements. The overall decline in customer demand led to the suspension of certain operations and decreased operating shifts at other operations.

 

Illinois Basin revenue decreased slightly in 2009 compared to the prior year primarily due to lower sales volume caused by lower customer demand, unfavorable weather conditions early in the year and increased downtime due to regulatory inspections. Lower sales volumes were partially offset by higher average sales prices.

Appalachia Other Revenue was higher in 2009 primarily due to cash settlements received for reduced shipments as a result of renegotiated customer agreements. In addition to royalty income, Appalachia Other Revenue in 2008 included a structured settlement on a property transaction, a settlement for past due coal royalties which had previously been fully reserved due to the uncertainty of collection, and gains on the sale of purchased coal in the first quarter.

 

Segment Operating Costs and Expenses

 

Segment operating costs and expenses represent consolidated operating costs and expenses less past mining obligations.

 

Segment operating costs and expenses for Appalachia increased in 2009 as compared to the prior year primarily due to the incremental $278.9 million of costs for the full year of the acquired Magnum operations. Excluding the impact of Magnum, operating costs were higher due to increased purchased coal ($12.8 million) and increased materials and supplies costs primarily related to equipment rebuilds at various locations ($8.7 million). We purchased coal to cover certain sales commitments at some of our suspended operations. The increased costs were partially offset by decreased labor costs primarily due to reduced shifts and mine suspensions as a result of lower customer demand ($10.6 million) and lower royalties resulting from decreased production at certain mines ($7.1 million).

 

Operating costs and expenses for Illinois Basin decreased in 2009 as compared to the prior year primarily due to decreased costs for purchased coal ($9.6 million) and lower diesel fuel and explosives costs ($6.5 million). In 2008, higher priced spot sale opportunities were available which resulted in more purchased coal to fulfill sales commitments. The decreased costs were partially offset by higher repair and maintenance and outside services costs primarily due to major non-recurring repairs including equipment rebuilds, belting and component upgrades ($7.8 million).

 

Segment Adjusted EBITDA

 

Segment Adjusted EBITDA for Appalachia increased in 2009 from the prior year primarily due to the contribution from the additional volume associated with the acquired Magnum operations. Additionally, during 2009, we received cash settlements for reduced shipments. These cash settlements approximated the financial impact associated with cancelled customer commitments.

 

Segment Adjusted EBITDA for the Illinois Basin decreased in 2009 primarily due to lower production volumes attributable to lower customer demand and severe winter storms. This decrease also reflected higher repair and maintenance and outside services costs that were primarily due to major non-recurring repairs including equipment rebuilds, belting and component upgrades. These decreases were partially offset by higher average sales prices and lower diesel fuel and explosives costs.

Net Income

 

 

Past Mining Obligation Expense

 

Past mining obligation expenses were higher in 2009 than the prior year primarily due to a full year of retiree healthcare obligation expenses ($24.4 million) and multi-employer retiree healthcare and pension costs ($5.8 million) from the acquired Magnum operations in 2009 versus only five months in 2008; costs related to suspended mines ($9.9 million), primarily Samples; and higher subsidence expense. These increases were partially offset by lower spending at our closed locations ($2.6 million).

 

Selling and Administrative Expenses

 

Selling and administrative expenses for the year ended December 31, 2009 increased compared to the prior year primarily due to increased headcount and expenses due to the addition and integration of Magnum operations, which were acquired July 23, 2008.

 

Depreciation, Depletion and Amortization

 

Depreciation, depletion and amortization for 2009 increased compared to the prior year primarily due to the full year impact from the addition of the Magnum assets.

 

Reclamation and Remediation Obligation Expense

 

Reclamation and remediation obligation expense increased in 2009 as compared to the prior year primarily due to the full year impact from the acquisition of Magnum.

 

Sales Contract Accretion

 

Sales contract accretion resulted from the below market coal sale and purchase contracts acquired in the Magnum acquisition and recorded at fair value in purchase accounting. The net liability generated from applying fair value to these contracts is being accreted over the life of the contracts as the coal is shipped.

Restructuring and Impairment Charge

 

The restructuring and impairment charge in 2009 related to certain infrastructure and thermal coal reserves near our Rocklick complex that were deemed uneconomical to mine, as well as a restructuring charge related to the discontinued use of a beltline into the Rocklick preparation plant during the fourth quarter.

 

Interest Expense

 

Interest expense increased for 2009 compared to the prior year primarily due to interest and debt discount expense related to our convertible notes that were issued in May 2008 and higher letter of credit fees related to the Magnum acquisition. This increase was partially offset by the commitment fee expensed due to the termination of a bridge loan facility related to our assumption of Magnum’s debt during the second quarter of 2008. See “— Liquidity and Capital Resources” below for details concerning our outstanding debt and credit facility.

 

Income Tax Provision

 

For the years ended December 31, 2009 and 2008, no income tax provision was recorded due to net operating losses for the year and our full valuation allowance recorded against deferred tax assets. For 2009 and 2008, the primary difference between book and taxable income was the treatment of the net sales contract accretion on the below market purchase and sales contracts acquired in the Magnum acquisition, with such amounts being included in the computation of book income but excluded from the computation of taxable income.

 

Basis of Presentation Related to Periods Prior to the Spin-Off from Peabody

 

The statements of operations and cash flows for the twelve months ended December 31, 2007, and related discussions below primarily relate to our historical results prior to the spin-off from Peabody. These results may not necessarily reflect what our results of operations and cash flows would have been as a stand-alone company. The consolidated financial statements presented herein for this period includes allocations of Peabody expenses, assets and liabilities through the date of the spin-off, including the following items:

 

Selling and Administrative Expenses

 

For the periods prior to spin-off, our historical selling and administrative expenses were based on an allocation of Peabody general corporate expenses to all of its mining operations, both foreign and domestic, based on principal activity, headcount, tons sold or revenues as appropriate. The allocated expenses generally reflect service costs for marketing and sales, general accounting, legal, finance and treasury, public relations, human resources, environmental, engineering and internal audit.

 

Interest Expense

 

For the periods prior to the spin-off, our historical interest expense primarily related to fees for letters of credit and surety bonds used to guarantee our reclamation, workers’ compensation, retiree healthcare and lease obligations as well as interest expense related to intercompany notes with Peabody. Our capital structure changed following our spin-off from Peabody, and effective October 31, 2007, we entered into a four-year revolving credit facility. See “— Liquidity and Capital Resources — Credit Facility” below for information about our credit facility. The intercompany notes totaling $62.0 million with Peabody were forgiven at spin-off.

 

Income Tax Provision

 

Income taxes are accounted for using a balance sheet approach in accordance with authoritative guidance. We account for deferred income taxes by applying statutory tax rates in effect at the date of the balance sheet to differences between the book and tax basis of assets and liabilities. A valuation allowance is established if it is “more likely than not” that the related tax benefits will not be realized. In determining the appropriate

valuation allowance, we consider projected realization of tax benefits based on expected levels of future taxable income, available tax planning strategies and the overall deferred tax position.

 

Authoritative guidance specifies that the amount of current and deferred tax expense for an income tax return group are to be allocated among the members of that group when those members issue separate financial statements. For purposes of the consolidated financial statements prepared for the twelve months ended December 31, 2007 and for the other periods prior to the spin-off, our income tax expense was recorded as if we filed a consolidated tax return separate from Peabody, notwithstanding that a majority of the operations were historically included in the U.S. consolidated income tax return filed by Peabody. Our valuation allowance for these periods was also determined on the separate tax return basis. Additionally, our tax attributes (i.e., net operating losses and Alternative Minimum Tax credits) for these periods have been determined based on U.S. consolidated tax rules describing the apportionment of these items upon departure (spin-off) from the Peabody consolidated group.

 

Peabody was managing its tax position for the benefit of its entire portfolio of businesses. Peabody’s tax strategies are not necessarily reflective of the tax strategies that we would have followed or have followed as a stand-alone company, nor were they necessarily strategies that optimized our stand-alone position.

 

Year ended December 31, 2008 compared to year ended December 31, 2007

 

Summary

 

Revenues were $1,654.6 million, an increase of $581.3 million, and Segment Adjusted EBITDA was $186.1 million, an increase of $84.4 million, for the year ended December 31, 2008. Net income attributable to Patriot was $142.7 million in 2008 compared to a net loss attributable to Patriot of $106.9 million in 2007. The increase in revenue, Segment Adjusted EBITDA and net income attributable to Patriot was mainly driven by the newly-acquired Magnum operations including the impact of purchase accounting. The results of operations of Magnum are included in the Appalachia Mining Operations segment from the date of acquisition.

 

2008 was a volatile year in the coal markets. Coal prices significantly increased during the first half of the year, peaked in July and then declined in the later part of the year in conjunction with the overall economic downturn. Sales for our Appalachia and Illinois Basin segments reflected higher contract and spot prices. Offsetting this increase, several of our mining complexes experienced adverse geologic conditions that impacted production levels as well as higher costs related to labor, fuel, and materials and supplies.

 

Segment Results of Operations

 

 

 

 

Tons Sold and Revenues

 

The increase in Appalachia revenue for the year ended December 31, 2008 compared to 2007 primarily related to $413.0 million of sales associated with the newly-acquired Magnum operations. Excluding the impact of Magnum, revenues were also affected by higher average sales prices, partially offset by lower sales volumes at the Federal and Rocklick mining complexes.

 

Average sales prices increased at our mining complexes, reflecting higher sales contract pricing, including the repricing of a major coal supply agreement with Peabody as part of the spin-off, and cost recovery under certain contracts for increased regulatory costs.

 

Sales volumes in the Appalachia segment increased in 2008, primarily due to 7.2 million tons sold from the newly-acquired Magnum operations. Excluding Magnum, sales volume decreased primarily due to production shortfalls at our Federal complex, the completion of the final longwall panel at the Harris mine during the second quarter, labor shortages for much of the year and reduced productivity at several mines.

 

Illinois Basin revenue increased in 2008 primarily related to higher average sales prices. Compared to the prior year, sales volumes increased slightly.

 

Other Appalachia revenues increased in 2008. In addition to increased royalty income, other revenues included a structured settlement on a property transaction, a settlement for past due coal royalties, which had previously been fully reserved due to the uncertainty of collection, and gains on the sale of purchased coal in the first quarter.

 

Segment Operating Costs and Expenses

 

Segment operating costs and expenses represent consolidated operating costs and expenses less past mining obligations.

 

Operating costs and expenses for Appalachia increased in 2008 as compared to the prior year primarily due to $382.4 million of costs associated with the newly-acquired Magnum operations. Excluding the impact of Magnum, operating costs were higher in 2008 due to start-up costs as we ramped up production at our Big Mountain ($22.4 million) and Kanawha Eagle ($16.2 million) mining complexes, as well as higher contract mining costs ($16.3 million) primarily related to higher material and supply and labor costs. Material and supply costs were primarily impacted by higher fuel, explosives and steel-related costs. Higher labor costs were reflective of an overall labor shortage in the Appalachia region.

Operating costs and expenses for Illinois Basin increased in 2008 as compared to the prior year primarily due to increased costs for purchased coal ($9.3 million), increased labor costs ($6.1 million) and higher materials and supplies cost due to higher diesel fuel, explosives and steel-related costs ($6.6 million). Purchased coal resulted from diverting tons to higher priced spot sales and fulfilling sales commitments with purchased tons.

 

Segment Adjusted EBITDA

 

Segment Adjusted EBITDA for Appalachia increased in 2008 from the prior year primarily due to the contribution from the newly-acquired Magnum operations and, to a lesser extent, higher sales prices, partially offset by lower sales volumes and higher operating costs as described above. Segment Adjusted EBITDA for Appalachia also increased in 2008 due to the previously mentioned gains on the sale of purchased coal in the first quarter and the structured settlements in the second quarter.

 

Segment Adjusted EBITDA for the Illinois Basin increased in 2008 primarily due to higher average sales prices, offset by increased labor costs and higher diesel fuel, explosives and steel-related costs as described above.

 

Net Income (Loss)