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As filed with the Securities and Exchange Commission on February 10, 2012.
Registration Statement No. 333-177259
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 3
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ARMSTRONG ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 1221 20-8015664
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification No.)
7733 Forsyth Boulevard, Suite 1625
St. Louis, Missouri 63105
(314) 721-8202
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Martin D. Wilson
Armstrong Energy, Inc.
7733 Forsyth Boulevard, Suite 1625
St. Louis, Missouri 63105
(314) 721-8202
(Name, address, including zip code, and telephone number, including area code, of agent for service)
With copies to:
David W. Braswell, Esq. D. Rhett Brandon, Esq.
Armstrong Teasdale LLP Simpson Thacher & Bartlett LLP
7700 Forsyth Boulevard, Suite 1800 425 Lexington Avenue
St. Louis, Missouri 63105 New York, New York 10017
(314) 552-6631 (212) 455-2000
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared
effective.
If any securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.
If this Form is filed to register additional securities for an offering pursuant to Rule 462(c) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration statement for the same offering.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company
(Do not check if a smaller reporting company)
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such
date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting
an offer to buy these securities in any state where the offer of sale is not permitted.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED FEBRUARY 10,
2012
Shares
ARMSTRONG ENERGY, INC.
Common Stock
This is the initial public offering of our common stock. We are offering shares of our common stock, par value
$0.01 per share. No public market currently exists for our common stock. We currently expect the initial public offering
price to be between $ and $ per share.
We expect to apply to list our common stock on the Nasdaq Global Market (“Nasdaq”) under the symbol “ARMS.”
There is no assurance that this application will be approved.
Investing in our common stock involves risks. You should read the section entitled “Risk
Factors” beginning on page 16 for a discussion of certain risk factors that you should consider
before investing in our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of
these securities or passed upon the adequacy or accuracy of this registration statement. Any representation to the
contrary is a criminal offense.
Per Share Total
Public offering price $ $
Underwriting discount $ $
Offering proceeds to Armstrong Energy, Inc. before expenses $ $
To the extent the underwriters sell more than shares of common stock, the underwriters have an option
exercisable within 30 days from the date of this prospectus to purchase up to additional shares of common stock from
us at the public offering price, less the underwriting discount. The shares of common stock issuable upon exercise of the
underwriters’ over-allotment option have been registered under the registration statement of which this prospectus forms a
part.
The underwriters expect to deliver the shares against payment in New York, New York on or about , 2012.
FBR RAYMOND JAMES
Prospectus, dated , 2012
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Page
ABOUT THIS PROSPECTUS ii
PROSPECTUS SUMMARY 1
RISK FACTORS 16
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS 39
USE OF PROCEEDS 41
DIVIDEND POLICY 42
CAPITALIZATION 43
DILUTION 45
UNAUDITED PRO FORMA FINANCIAL INFORMATION 46
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA 52
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 54
THE COAL INDUSTRY 78
BUSINESS 88
MANAGEMENT 122
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 137
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 138
DESCRIPTION OF INDEBTEDNESS 143
DESCRIPTION OF CAPITAL STOCK 145
SHARES ELIGIBLE FOR FUTURE SALE 149
MATERIAL UNITED STATES FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO
NON-U.S. HOLDERS 151
CERTAIN ERISA CONSIDERATIONS 155
UNDERWRITING 156
CONFLICTS OF INTEREST 161
LEGAL MATTERS 162
COAL RESERVES 162
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS 162
CHANGE IN AUDITOR 162
WHERE YOU CAN FIND MORE INFORMATION 163
INDEX TO FINANCIAL STATEMENTS F-1
EX-3.4
EX-3.6
EX-4.2
EX-10.8
EX-10.9
EX-10.10
EX-10.11
EX-10.12
EX-10.13
EX-10.14
EX-10.15
EX-10.16
EX-10.34
EX-10.39
EX-10.54
EX-10.55
EX-10.60
EX-23.2
EX-23.3
No dealer, salesperson or other individual has been authorized to give any information or to make any
representation other than those contained in this prospectus in connection with the offer made by this prospectus
and, if given or made, such information or representations must not be relied upon as having been authorized by us
or the underwriters. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any
securities in any jurisdiction in which such an offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that there has been no change in our affairs or that information contained herein is correct as
of any time subsequent to the date hereof.
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ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with information different from that contained in this prospectus. If anyone
provides you with different or inconsistent information, you should not rely on it. We and the underwriters are only offering
to sell, and only seeking offers to buy, the common stock in jurisdictions where offers and sales are permitted.
The information contained in this prospectus is accurate and complete only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or of any sale of our common stock by us or the underwriters. Our business,
financial condition, results of operations and prospectus may have changed since that date.
Market data used in this prospectus has been obtained from independent industry sources and publications, as well as
from research reports prepared for other purposes. The information in these reports represents the most recently available
data from the relevant sources and publications and we believe remains reliable. We engaged Weir International, Inc., an
independent mining and geological consultant, to prepare a report regarding estimates of our proven and probable coal
reserves at December 31, 2010. In addition, we pay a subscription fee to Wood Mackenzie to obtain access to pre-prepared
reports. Except with respect to payment for Weir International, Inc.’s services in this regard and the subscription fee paid to
Wood Mackenzie, we did not fund and are not otherwise affiliated with any of the sources cited in this prospectus.
Forward-looking information obtained from these sources is subject to the same qualifications and additional uncertainties
regarding the other forward-looking statements in this prospectus.
Unless the context otherwise requires, the information in the prospectus (other than in the historical financial
statements) assumes that the underwriters will not exercise their over-allotment option.
For investors outside the United States: We have not, and the underwriters have not, done anything that would permit
this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required,
other than in the United States. Persons outside the United States who come into possession of this prospectus must inform
themselves, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of
this prospectus outside the United States.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus, but it does not contain all of the
information that you may consider important in making your investment decision. Therefore, you should read the entire
prospectus carefully, including, in particular, the “Risk Factors” section beginning on page 14 of this prospectus and the
financial statements and related notes thereto included elsewhere in this prospectus.
As used in this prospectus, unless the context otherwise requires or indicates, references to the “Company,” “we,”
“our,” and “us” are to Armstrong Energy, Inc., Armstrong Resource Partners, L.P. and their respective subsidiaries taken
as a whole, after giving effect to the Reorganization referred to herein. References to “Armstrong Resource Partners” are to
Armstrong Resource Partners, L.P. and its subsidiaries taken as a whole. References to “Armstrong Energy” are to
Armstrong Energy, Inc. and its subsidiaries, and do not include Armstrong Resource Partners.
A subsidiary of Armstrong Energy, Inc. is the general partner of, and owns a 0.4% equity interest in, Armstrong
Resource Partners. By virtue of Armstrong Energy, Inc.’s control of the general partner of Armstrong Resource Partners,
the results of Armstrong Resource Partners are consolidated in our historical consolidated financial statements contained
herein.
As described more fully below, concurrently with the offering of common stock of Armstrong Energy, Inc. being made
pursuant to this prospectus, Armstrong Resource Partners is engaging in an offering of its limited partnership units. This
prospectus relates solely to the offering of the common stock of Armstrong Energy, Inc. and does not relate to the
concurrent offering by Armstrong Resource Partners, which will be made by a separate prospectus.
About the Company
We are a diversified producer of low chlorine, high sulfur thermal coal from the Illinois Basin, with both surface and
underground mines. We market our coal primarily to electric utility companies as fuel for their steam-powered generators.
Based on 2010 production, we are the sixth largest producer in the Illinois Basin and the second largest in Western
Kentucky. We were formed in 2006 to acquire and develop a large coal reserve holding. We commenced production in the
second quarter of 2008 and currently operate six mines, including four surface and two underground, and are seeking permits
for four additional mines. We control approximately 319 million tons of proven and probable coal reserves. Our reserves and
operations are located in the Western Kentucky counties of Ohio, Muhlenberg, Union and Webster. We also own and
operate three coal processing plants which support our mining operations. The location of our coal reserves and operations,
adjacent to the Green and Ohio Rivers, together with our river dock coal handling and rail loadout facilities, allow us to
optimize our coal blending and handling, and provide our customers with rail, barge and truck transportation options. From
our reserves, we mine coal from multiple seams which, in combination with our coal processing facilities, enhances our
ability to meet customer requirements for blends of coal with different characteristics.
Our revenue has increased from zero in 2007 to $220.6 million in 2010, which we achieved despite a period of
recession-driven declines in U.S. demand for coal and a challenging environment in the credit markets. For the year ended
December 31, 2010, we generated operating income of $19.2 million and Adjusted EBITDA of $41.1 million. Our operating
income and Adjusted EBITDA for the nine months ended September 30, 2011 were $6.4 million and $32.1 million,
respectively. Adjusted EBITDA is a non-GAAP financial measure which represents net income (loss) before net interest
expense, income taxes, depreciation, depletion and amortization, non-cash stock compensation expense, non-cash charges
related to non-recourse notes, and gain on extinguishment of debt. For these purposes, “GAAP” refers to U.S. generally
accepted accounting principles. Please see “— Summary Historical and Unaudited Pro Forma Consolidated Financial and
Operating Data” for a reconciliation of Adjusted EBITDA to net income (loss).
For the year ended December 31, 2010, we produced 5.6 million tons of coal from three surface and two underground
mines. During the first nine months of fiscal 2011, we produced 5.1 million tons of coal, with seven mines in operation. We
currently expect a significant increase in our production for 2011 compared to 2010. We are contractually committed to sell
7.6 million tons of coal in 2011, which represents substantially
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all of our currently estimated production for 2011. Similarly, as of September 30, 2011, we are contractually committed to
sell 8.8 million tons of coal in 2012 and 8.1 million tons of coal in 2013, which represents 99% and 83% of our expected
total coal sales in 2012 and 2013, respectively. The following table summarizes our mines, our recent production and our
coal reserves as of December 31, 2010:
Quality Specifications
Production (As Received)(2)
Clean Recoverable Tons Nine
(Proven and Probable Year Months SO 2
Reserves)(1) Ended Ended Heat Content
Mines Mining Proven Probable December 31, September 30, Value (Lbs/ Ash
(Commenced
Operations) Method(3) Reserves Reserves Total 2010 2011 (Btu/Lb) MMBtu) (%)
(In thousands) (Tons in thousands)
Active mines
Big Run (April
2008)(4) U 2,849 242 3,091 (5) 572.1 361.5 11,822 4.3 7.4
Midway (July 2008) S 24,806 3,507 28,313 (5) 1,614.8 1,290.4 11,315 4.8 10.0
Parkway (April
2009) U 1,952 58 2,010 (5) 1,485.9 1,165.6 11,931 4.4 7.1
East Fork (June
2009)(6) S 2,633 553 3,186 (5) 1,641.1 608.6 11,136 7.6 11.2
Equality Boot
(September 2010) S 23,687 1,148 24,835 (7) 330.8 1,493.3 11,587 5.7 8.8
Lewis Creek (June
2011) S 6,650 70 6,720 (5) — 197.0 11,420 4.0 9.5
Kronos (September
2011)(8) U 18,862 3,002 21,864 — 9.6 11,792 4.5 7.6
Total active mines 81,439 8,580 90,019 5,644.7 5,126.0
Additional reserves
Lewis Creek(8) U 18,862 3,002 21,864 11,792 4.5 7.6
Ceralvo(8) U 18,862 3,002 21,864 11,792 4.5 7.6
Ken S 17,166 3,854 21,020 (5) 11,809 5.0 7.5
Union/Webster
Counties U 43,853 71,783 115,637 (9) 12,145 4.4 8.2
Other S/U 37,233 11,648 48,881 (10) 11,300 4.5 8.0
Total additional
reserves 135,976 93,289 229,265
Total 217,415 101,869 319,284
(1) For surface mines, clean recoverable tons are based on a 90% mining recovery, preparation plant yield at 1.55
specific gravity and a 95% preparation plant efficiency. For underground mines other than Union/Webster Counties,
clean recoverable tons are based on a 50% mining recovery, preparation plant yield at 1.55 specific gravity and a
95% preparation plant efficiency. For Union/Webster Counties, clean recoverable tons are based on a 50% mining
recovery, preparation plant yield at 1.60 specific gravity and a 95% preparation plant efficiency. “Proven and
probable reserves” refers to coal that can be economically extracted or produced at the time of the reserve
determination.
(2) Quality specifications displayed on an “as received” basis, assuming 11% moisture. If derived from multiple seams,
data represents an average.
(3) U = Underground; S = Surface
(4) Big Run ceased production in October 2011.
(5) Of these reserves, 39.45% of the interests controlled by Armstrong Energy are leased from Armstrong Resource
Partners.
(6) Warden and Kronos pits.
(7) Of these reserves, 39.45% of the interests controlled by Armstrong Energy are leased from Armstrong Resource
Partners. Includes 167,000 tons related to reserves for which we own or lease a 50% or more partial joint interest and
royalties on extractions may be payable to other owners.
(8) Based on internal estimates, recoverable reserves are split evenly among the three mines that will produce coal from
the underground properties and coal reserves located in Ohio County, Kentucky that are owned by Armstrong
Resource Partners and leased to Armstrong Energy (the “Elk Creek Reserves”).
(9) Includes 3,235,000 tons related to reserves for which we own or lease a 50% or more partial joint interest and
royalties on extractions may be payable to other owners.
(10) Of these reserves, 39.45% of the interests controlled by Armstrong Energy are leased from Armstrong Resource
Partners. Includes 972,000 tons related to reserves for which we own or lease a 50% or more partial joint interest and
royalties on extractions may be payable to other owners.
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The following table shows the ownership status of our reserves by mine:
Clean Recoverable Tons (Proven and Probable
Mines Reserves)(1)
(Commenced
Operations) Owned Leased Total
(In thousands)
Active mines
Big Run (April 2008)(2) 3,091 — 3,091 (3)
Midway (July 2008) 28,313 — 28,313 (3)
Parkway (April 2009) 312 1,698 2,010 (3)
East Fork (June 2009)(4) 2,302 884 3,186 (3)
Equality Boot (September 2010) 24,835 — 24,835 (5)
Lewis Creek (surface) (June 2011) 6,720 — 6,720 (3)
Kronos (September 2011)(6) 20,689 1,175 21,864
Total active mines 90,019
Additional reserves
Lewis Creek(6) 20,689 1,175 21,864
Ceralvo(6) 20,689 1,175 21,864
Ken 21,020 — 21,020 (3)
Union/Webster Counties — 115,637 115,637 (7)
Other 32,149 16,732 48,881 (8)
Total additional reserves 229,265
Total 319,284
(1) For surface mines, clean recoverable tons are based on a 90% mining recovery, preparation plant yield at 1.55 specific
gravity and a 95% preparation plant efficiency. For underground mines other than Union/Webster Counties, clean
recoverable tons are based on a 50% mining recovery, preparation plant yield at 1.55 specific gravity and a 95%
preparation plant efficiency. For Union/Webster Counties, clean recoverable tons are based on a 50% mining recovery,
preparation plant yield at 1.60 specific gravity and a 95% preparation plant efficiency. “Proven and probable reserves”
refers to coal that can be economically extracted or produced at the time of the reserve determination.
(2) Big Run ceased production in October 2011.
(3) Of these reserves, 39.45% of the interests controlled by Armstrong Energy are leased from Armstrong Resource
Partners.
(4) Warden and Kronos pits.
(5) Of these reserves, 39.45% of the interests controlled by Armstrong Energy are leased from Armstrong Resource
Partners. Includes 167,000 tons related to reserves for which we own or lease a 50% or more partial joint interest and
royalties on extractions may be payable to other owners.
(6) Based on internal estimates, recoverable reserves are split evenly among the three mines that comprise the Elk Creek
Reserves (Kronos, Lewis Creek underground and Ceralvo).
(7) Includes 3,235,000 tons related to reserves for which we own or lease a 50% or more partial joint interest and royalties
on extractions may be payable to other owners.
(8) Of these reserves, 39.45% of the interests controlled by Armstrong Energy are leased from Armstrong Resource
Partners. Includes 972,000 tons related to reserves for which we own or lease a 50% or more partial joint interest and
royalties on extractions may be payable to other owners.
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About Armstrong Resource Partners
Our affiliate, Armstrong Resource Partners, was formed to manage and lease coal properties and collect royalties in the
Western Kentucky region of the Illinois Basin. Armstrong Energy holds a 0.4% equity interest in Armstrong Resource
Partners through a wholly-owned subsidiary, Elk Creek GP, LLC (“Elk Creek GP”), which is the general partner of
Armstrong Resource Partners. The outstanding limited partnership interests (“common units”) of Armstrong Resource
Partners, representing 99.6% of its equity interests, are owned by investment funds managed by Yorktown Partners LLC
(collectively, “Yorktown”). Armstrong Energy is majority-owned by Yorktown. Of our total controlled reserves of
319 million tons, 66 million tons (21%) are owned 100% by Armstrong Resource Partners, and 138 million tons (43%) are
held by Armstrong Energy and Armstrong Resource Partners as joint tenants in common with 60.55% and 39.45% interests,
respectively.
Armstrong Energy has entered into lease agreements with Armstrong Resource Partners pursuant to which Armstrong
Resource Partners granted Armstrong Energy leases to its 39.45% undivided interest in the mining properties described
above and licenses to mine coal on those properties. Armstrong Energy is obligated to pay Armstrong Resource Partners a
production royalty equal to 7% of the sales price of the coal which Armstrong Energy mines from the properties, which at
the option of Armstrong Energy can be deferred under circumstances which give Armstrong Resource Partners the right to
acquire additional reserves from Armstrong Energy.
Armstrong Resource Partners has also entered into a lease and sublease agreement with Armstrong Energy relating to
our Elk Creek Reserves and granted Armstrong Energy a license to mine coal on those properties. The terms of this
agreement mirror those of the lease agreements described above. Armstrong Energy has paid $12 million of advance
royalties under the lease, which are recoupable against production royalties.
See “Business — About Armstrong Resource Partners” for additional information about Armstrong Resource Partners.
Based upon our current estimates of production for 2011 and 2012, we anticipate that Armstrong Energy will owe
royalties to Armstrong Resource Partners under the above-mentioned license and lease arrangements of approximately
$7.8 million and $16.6 million in 2011 and 2012, respectively, of which collectively, $7.2 million will be recoupable against
the advance royalty payment referred to above.
Concurrent Offering
Concurrent with this offering of common stock, Armstrong Resource Partners is offering common units pursuant to a
separate initial public offering (the “Concurrent ARP Offering”). Armstrong Energy indirectly holds a 0.4% equity interest
in Armstrong Resource Partners. See “Business — Our Organizational History.” If the Concurrent ARP Offering and the
related transactions between Armstrong Energy and Armstrong Resource Partners are completed, we expect to receive the
net proceeds of the Concurrent ARP Offering and to transfer to Armstrong Resource Partners additional undivided interests
in reserves controlled jointly by Armstrong Energy and Armstrong Resources Partners. See “— Corporate Structure” and
“Certain Relationships and Related Party Transactions — Concurrent Transactions with Armstrong Resource Partners.” We
expect to apply any proceeds received by Armstrong Energy from these transactions to repay borrowings under our Senior
Secured Credit Facility and to use any amounts not so applied for working capital. While Armstrong Resource Partners
intends to consummate the Concurrent ARP Offering simultaneously with this offering of common stock, the completion of
this offering is not subject to the completion of the Concurrent ARP Offering and the completion of the Concurrent ARP
Offering is not subject to the completion of this offering. This description and other information in this prospectus regarding
the Concurrent ARP Offering is included in this prospectus solely for informational purposes. Nothing in this prospectus
should be construed as an offer to sell, nor the solicitation of an offer to buy, any common units of Armstrong Resource
Partners.
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Coal Industry Overview
According to the U.S. Department of Energy’s Energy Information Administration (“EIA”), the U.S. coal industry
produced approximately 1.1 billion tons of coal in 2010, a substantial majority of which was sold by U.S. coal producers to
operators of electricity generation plants. Coal-fired electricity generation is the largest component of total world electricity
generation. The following market dynamics and trends currently impact thermal coal consumption and production in the
United States and are reshaping competitive advantages for coal producers.
• Stable long-term outlook for U.S. thermal coal market. According to the EIA, coal-fired electricity generation
accounted for approximately 45% of all electricity generation in the United States in 2010. Coal continues to be the
lowest cost fossil fuel source of energy for electric power generation. Despite recent increases in generation from
natural gas, as well as federal and state subsidies for the construction and operation of renewable energy, the EIA
projects that generation from coal will increase by 25% from 2009 to 2035 and that coal-fired generation will
remain the largest single source of electricity generation in 2035.
• Increasing demand for coal produced in the Illinois Basin. According to Wood Mackenzie, a leading commodities
consultancy, demand for coal produced from the Illinois Basin is expected to grow by 69% from 2009 through 2015
and by 126% from 2009 through 2030. We believe this is due to a combination of factors including:
Significant expansion of scrubbed coal-fired electricity generating capacity. The EIA forecasts a 32% increase
in flue gas desulfurization (“FGD”) installed on the coal-fired generation fleet from 168 gigawatts in 2009 to 222
gigawatts, or 70% of all U.S. coal-fired capacity in the electric sector, by 2035 as electricity generation operators
invest in retrofit emissions reduction technology to comply with new U.S. Environmental Protection Agency
(“EPA”) regulations under the Cross-State Air Pollution Rule and the proposed Utility Boiler Maximum
Achievable Control Technology (“MACT”) regulations. Illinois Basin coal generally has a higher sulfur content
per ton than coal produced in other regions. However, we believe that FGD utilization will enable operators to
use the most competitively priced coal (on a delivered cents per million Btu basis) irrespective of sulfur content,
and thus lead to a strong increase in demand for Illinois Basin coal.
Declines in Central Appalachian thermal coal production. Wood Mackenzie forecasts that production of
Central Appalachian thermal coal will continue to decline, falling from 128 million tons in 2010 to 64 million
tons in 2015, due to reserve depletion, regulatory-driven decreases in Central Appalachian surface thermal coal
production and more difficult geological conditions. These factors are expected to result in significantly higher
mining costs and prices for Central Appalachian thermal coal. We believe this will lead to an increase in demand
for thermal coal from the Illinois Basin due to its comparatively lower delivered cost to the major Eastern
U.S. utilities who are currently the principal users of thermal coal from Central Appalachia.
Growing demand for seaborne thermal coal. Global trade in thermal coal accounted for nearly 70% of all
global coal exports in 2010 and is projected to rise from 850 million tons in 2010 to 1.1 billion tons by 2016. We
believe that limitations on existing global export coal supply, infrastructure constraints, relative exchange rates,
coal quality and cost structure could create significant thermal coal export opportunities for U.S. coal producers,
including Illinois Basin coal producers, particularly those similar to us with transportation access to both the
Mississippi River and to rail connecting to Louisiana export terminals. In addition, we believe that certain
domestic users of U.S. thermal coal will need to seek alternative sources of domestic supply as an increasing
amount of domestic coal is sold in global export markets.
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Strategy
Our primary business strategy is to maximize returns to our stockholders. Key components of this strategy include the
following:
• Maintain safe mining operations and comply with environmental standards. We consider safety to be our greatest
operational priority. For the period October 1, 2010 through September 30, 2011, our underground and surface
mines had non-fatal days lost incidence rates that were 39% and 72%, respectively, below the national averages for
the same period. Non-fatal days lost incidence rate is an industry standard used to describe occupational injuries that
result in the loss of one or more days from an employee’s scheduled work. We intend to maintain programs and
policies designed to enable us to remain among the safest coal operations in the industry. We also intend to continue
to implement responsible, effective environmental practices throughout our operations and reclamation activities.
• Continue to grow our production. We intend to continue to increase our coal production in the coming years to
satisfy what we believe will be an increasing demand for Illinois Basin coal. We will seek to support production
growth by executing mining plans for our existing undeveloped reserves and by opportunistically acquiring
additional coal reserves that are located near our current mining operations or otherwise offer the potential for
efficient and economical development of low-cost production to serve our primary market area. We commenced
production at Lewis Creek in June 2011 and at our Kronos underground mining operation in September 2011 and
currently expect that our 2011 production will be approximately 7.2 million tons, compared with 5.6 million tons in
2010.
• Increase and diversify coal sales to utilities with base load scrubbed power plants in our primary market area and
pursue export opportunities. We expect that the demand for Illinois Basin coal will rise as a result of an increase in
power plants being retrofitted with scrubbers and the construction of new power plants throughout the Illinois Basin
market area. We intend to continue to focus our marketing efforts principally on power plants in the Mid-Atlantic,
Southeastern and Midwestern states that we expect will become consumers of Illinois Basin coal and to seek to
diversify our customer base through a combination of multi-year coal supply agreements and sales in the spot
market. As of September 30, 2011, we are contractually committed to sell 8.8 million tons of coal in 2012, and
8.1 million tons of coal in 2013, which represents 99% and 83% of our expected total coal sales in 2012 and 2013,
respectively. In addition, we believe that the relative heat, ash, sulfur content and cost of our coal, combined with
the accessibility of our coal mines and coal processing facilities to the Mississippi River and to rail connecting to
Louisiana export terminals will provide the opportunity to export our coal to overseas customers.
• Maximize profitability by maintaining low-cost mining operations. We operate our mines in a manner aimed at
keeping our product quality high while maintaining low production costs. We seek to maximize our coal production
and control our costs by continuing to improve our operating efficiency. Our efficiency is, in part, a function of the
overburden ratios (the amount of surface material needed to be removed to extract coal) that exist at our surface coal
mines. Our efficiency is also enhanced by our fleet of mobile mining equipment, substantially all of which is new,
our use of the only draglines in Kentucky, our utilization of river coal movement, our information technology
systems and our coordinated equipment utilization and maintenance management functions. We also believe that
our highly experienced operating management and well-trained workforce will continue to help in identifying and
implementing cost containment initiatives.
Competitive Strengths
We believe that the following competitive strengths will enable us to effectively execute our business strategy described
above.
• We have a demonstrated track record for successfully completing reserve acquisitions, securing required permits,
developing new mines and producing coal. Since our formation in 2006, we have successfully acquired coal
reserves and opened seven separate mines, obtained the necessary regulatory permits for
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the commencement of mining operations at those mines, and developed significant multi-year contractual
relationships with large customers in our market area. We believe this resulted from our deep management
experience and disciplined approach to the development of our operations and our focus on providing competitively
priced Illinois Basin coal. We believe this will enable us to continue to grow our customer base, production,
revenues and profitability.
• Our proven and probable reserves have a long reserve life and attractive characteristics. As of December 31,
2010, we had approximately 319 million tons of clean recoverable (proven and probable) coal reserves. Our reserves
include both surface and underground mineable coal residing in multiple seams which, in combination with our coal
processing facilities, enhances our ability to meet customer requirements for blends of coal with different
characteristics. Further, the comparatively low chlorine content of our coal relative to other Illinois Basin coal
provides us with an additional competitive advantage in meeting the desired coal fuel profile of our customers.
• Our mines are conveniently located in close proximity to our existing and potential customers and have access to
multiple transportation options for delivery. Our mines are located adjacent to the Green and Ohio Rivers and near
our preparation, loading and transportation facilities, providing our customers with rail, barge and truck
transportation options. We believe this will also enable us to sell our coal in both the domestic and export markets.
Recently, we purchased an equity interest in, and upon development will have access to, a Mississippi River coal
export terminal project in Plaquemines Parish, Louisiana, approximately 10 miles downstream of New Orleans. We
intend to oversee the design, build-out and operation of this export coal terminal to facilitate the anticipated sale of
our coal to international customers.
• We are a reliable supplier of cost competitive coal. Our highly skilled, non-union workforce uses efficient mining
practices that take advantage of economies of scale and reduce operating costs per ton in both surface and
underground mining. We are among a small number of operators of large scale dragline surface production in the
eastern United States, and our continuous miner underground mining operations are designed to provide operating
flexibility to meet production requirements and to fulfill our coal contract specifications.
• We have a highly experienced management team with a long history of acquiring, building and operating coal
businesses. The members of our senior management team have a demonstrated track record of acquiring, building
and operating coal businesses profitably and safely. In addition, members of our senior management team have
significant experience managing the financial and organizational growth of businesses, including public companies.
Recent Developments
In June 2011, we commenced operations at our Lewis Creek surface mine, and operations at our Kronos underground
mine began in September 2011. We expect that our Lewis Creek mine will have an annual production capacity of
approximately 1.0 million tons and our Kronos underground mine will have an annual production capacity of approximately
2.4 million tons. Operations at our Big Run mine ended in October 2011 and operations at our Kronos pit at the East Fork
mine ended in the fourth quarter of 2011.
In June 2011, we acquired an 8.4% equity interest in Ram Terminals, LLC (“Ram”). Ram owns 600 acres of
Mississippi Riverfront property approximately 10 miles south of New Orleans and intends to permit, design and construct a
seaborne coal export terminal capable of servicing Panamax-sized bulk carriers with an annual through-put capacity of up to
6 million tons, and up to 10 million tons per year in the event of the widening of the Panama Canal. The terminal will be
used to facilitate and ensure our access to international markets, as well as to handle export coal volumes of both
metallurgical and thermal coal of other coal companies. One of the investment funds managed by Yorktown Partners LLC, is
the controlling unitholder in Ram and will provide the funds for future capital expenditures related to the development of the
site. See “— Yorktown Partners LLC”. We will be actively involved in the design and construction of the terminal and will
provide accounting and bookkeeping assistance to Ram. Certain of our executive officers serve as officers of Ram.
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In December 2011, we entered into a series of transactions with affiliates and/or subsidiaries of Peabody Energy
Corporation (“Peabody”), pursuant to which we acquired additional property near our existing and planned mines containing
an estimated total of 7.7 million clean recoverable tons of coal and entered into leases for an estimated 14 million clean
recoverable tons. In addition we entered, into a joint venture relating to coal reserves near our Parkway mine. In connection
with the joint venture, Peabody has agreed to contribute an aggregate of approximately 25 million tons of clean recoverable
coal reserves located in Muhlenberg County, Kentucky, and we have agreed to contribute mining assets to the joint venture.
We and Peabody have also agreed to contribute 51% and 49%, respectively, of the cash sufficient to complete the
development of the mine and sufficient for down payments on mining equipment. We will manage the joint venture’s
day-to-day operations and the development of the mine in exchange for a $0.50 per ton sold management fee. Peabody will
receive a $0.25 per ton commission on all coal sales by the joint venture.
The Company and Peabody entered into an Asset Purchase Agreement pursuant to which we acquired from Peabody its
rights and interests in certain owned and leased coal reserves located in Muhlenberg County, Kentucky, in exchange for (i) a
cash payment by us of approximately $8.9 million, (ii) a promissory note in the aggregate principal amount of approximately
$4.4 million, and (iii) an overriding royalty to Peabody to the extent we mine in excess of certain tonnages from the property
as set forth in the Asset Purchase Agreement.
In December 2011, the Company and Midwest Coal Reserves of Kentucky, LLC, an affiliate of Peabody (“Midwest
Coal”), entered into a Contract to Sell and Lease Real Estate pursuant to which we acquired from Midwest Coal its right,
title and interest in and to the #9 seam coal reserves in Union County, Kentucky. In addition, Midwest Coal agreed to lease
to us approximately 2,000 acres of #9 seam of coal. In consideration of the sale and lease of real property, we agreed to
deliver (i) approximately $6.0 million in cash, (ii) a promissory note in the aggregate principal amount of approximately
$3.0 million, and (iii) an overriding royalty of 2% of the gross selling price on each ton of coal produced and sold from the
coal reserves that were purchased (thus excluding the leased coal).
In December 2011, Armstrong Resource Partners sold 200,000 Series A convertible preferred units of limited partner
interest to Yorktown in exchange for $20.0 million. Also in December 2011, we entered into a Membership Interest
Purchase Agreement with Armstrong Resource Partners pursuant to which we agreed to sell to Armstrong Resource
Partners, indirectly through contribution of a partial undivided interest in reserves to a limited liability company and transfer
of our membership interests in such limited liability company, an additional partial undivided interest in reserves controlled
by us. In exchange for our agreement to sell a partial undivided interest in those reserves, Armstrong Resource Partners paid
us $20.0 million. The partial undivided interest in additional reserves must be transferred to Armstrong Resource Partners
within 90 days after delivery of the purchase price. We used the proceeds of this sale to fund the Muhlenberg County and
Ohio County reserve acquisitions described above.
In January 2012, in connection with entry into the Fourth Amendment to our Senior Secured Credit Facility, we sold
300,000 shares of Series A convertible preferred stock to Yorktown in exchange for $30.0 million. We used the proceeds of
the sale to repay a portion of our outstanding borrowings under the Senior Secured Revolving Credit Facility and for general
corporate purposes. See “Description of Indebtedness.”
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Corporate Structure
In August 2011, Armstrong Resources Holdings, LLC merged with and into Armstrong Energy, Inc., which
subsequently changed its name to Armstrong Energy Holdings, Inc. Subsequently, Armstrong Land Company, LLC was
converted to a C-corporation and changed its name to Armstrong Energy, Inc. effective October 1, 2011 (the
“Reorganization”). In connection with the Reorganization, each owner of Armstrong Land Company, LLC received
9.25 shares of Armstrong Energy, Inc. common stock for each unit held. The following chart shows a summary of the
corporate organization of Armstrong Energy, Inc. and its principal subsidiaries, after giving effect to the Reorganization, but
prior to giving effect to the offering of common stock being made hereby or to the Concurrent ARP Offering.
(1) Reserves owned solely by Armstrong Resource Partners. These include the Kronos, Lewis Creek and Ceralvo
underground mines.
(2) Reserves controlled jointly by Armstrong Resource Partners (with a 39.45% undivided interest) and Armstrong
Energy (with a 60.55% undivided interest). If the Concurrent ARP Offering and related transactions are completed, the
undivided interest of Armstrong Resource Partners will increase, and the undivided interest of Armstrong Energy will
decrease, based on the net proceeds of the Concurrent ARP Offering paid to Armstrong Energy and the value of the
affected reserves as agreed by Armstrong Resource Partners and Armstrong Energy. See “Certain Relationships and
Related Party Transactions — Concurrent Transactions with Armstrong Resource Partners.”
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The following chart depicts the organization and ownership of Armstrong Energy, Inc. after giving effect to this
offering and the Concurrent ARP Offering.
(1) Reserves owned solely by Armstrong Resource Partners. These include the Kronos, Lewis Creek and Ceralvo
underground mines.
(2) Reserves controlled jointly by Armstrong Resource Partners (with a % undivided interest) and Armstrong Energy
(with a % undivided interest), assuming an offering price of $ per unit, the midpoint of the price range set forth
on the front cover page of the prospectus for the Concurrent ARP Offering and an estimated purchase price of $ for
Armstrong Resource Partners’ additional interest in the partially owned reserves.
Corporate Information
Our principal executive offices are located at 7733 Forsyth Boulevard, Suite 1625, St. Louis, Missouri 63105 and our
telephone number is (314) 721-8202. Our corporate website address is www.armstrongenergyinc.com. Information on, or
accessible through, our website is not part of, or incorporated by reference in, this prospectus. We are incorporated under the
laws of the State of Delaware.
Yorktown Partners LLC
Yorktown was formed in 1991 and has approximately $3.0 billion in assets under management. Yorktown invests
exclusively in the energy industry with an emphasis on North American oil and gas production, coal mining and midstream
businesses. Yorktown’s investors include university endowments, foundations, families, insurance companies and other
institutional investors.
After giving effect to this offering, Armstrong Energy will continue to be majority-owned by Yorktown. In addition,
Yorktown is represented on our board by Bryan H. Lawrence, founder and principal of Yorktown Partners LLC. As a result,
Yorktown has, and can be expected to have, a significant influence in our operations, in the outcome of stockholder voting
concerning the election of directors, the adoption or amendment of provisions in our charter and bylaws, the approval of
mergers, and other significant corporate transactions. See “Risk Factors — Yorktown will continue to have significant
influence over us, including control over decisions that require the approval of stockholders, which could limit your ability
to influence the outcome of key transactions, including a change of control.”
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The Offering
The following summary contains basic information about this offering and the shares of our common stock and is not
intended to be complete. This summary may not contain all of the information that is important to you. For a more complete
understanding of this offering and the shares of our common stock, we encourage you to read this entire prospectus,
including, without limitation, the sections of this prospectus entitled “Risk Factors” and “Description of Capital Stock,”
and the documents attached to this prospectus.
Common Stock Offered by Armstrong
Energy, Inc. shares.
Over-Allotment Option We have granted the underwriters an option to purchase up to an
additional shares of our common stock, equal to 15% of the shares
offered in this offering, at the public offering price, less the underwriters’
discount, within 30 days after the date of this prospectus.
Common Stock to be Outstanding shares (or shares if the underwriters exercise in full their
Immediately After this Offering over-allotment option).
Common Stock Held by Our Existing
Stockholders Immediately After this shares (or shares if the underwriters exercise in full their
Offering over-allotment option).
Use of Proceeds We expect to receive net proceeds from this offering of approximately
$ million (or approximately $ million if the underwriters exercise in full
their option to purchase additional shares of our common stock) after
deducting estimated underwriting discounts and commissions, and after our
offering expenses estimated at $ million, assuming the shares are offered at
$ per share, which is the midpoint of the estimated offering price range
shown on the front cover page of this prospectus. We intend to use
$ million of the net proceeds from this offering to repay a portion of our
outstanding borrowings under our Senior Secured Term Loan, and to use the
balance to repay a portion of our outstanding borrowings under our Senior
Secured Revolving Credit Facility and for general corporate purposes,
including to fund capital expenditures relating to our mining operations and
working capital.
Voting Rights Under Delaware law, each share of common stock entitles the holder to one
vote.
Dividend Policy We do not anticipate paying cash dividends on shares of our common stock
for the foreseeable future. In addition, our Senior Secured Credit Facility
contains restrictions on the payment of dividends to holders of our common
stock. See “Dividend Policy.”
Proposed Symbol ‘‘ARMS”
Risk Factors Investing in our common stock involves a high degree of risk. For a
discussion of factors you should consider in making an investment, see “Risk
Factors” beginning on page 16.
Conflicts of Interest Raymond James Bank, FSB, an affiliate of Raymond James & Associates,
Inc., one of the underwriters in this offering, is expected to receive more than
5% of the net proceeds of this offering in connection with the repayment of
our Senior Secured Term
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Loan and our Senior Secured Revolving Credit Facility. See “Use of
Proceeds.” Accordingly, this offering is being made in compliance with the
requirements of the Financial Industry Regulatory Authority (“FINRA”)
Rule 5121. Rule 5121 requires that a “qualified independent underwriter”
meeting certain standards to participate in the preparation of the registration
statement and prospectus and exercise the usual standards of due diligence
with respect thereto. FBR Capital Markets & Co. has agreed to act as a
“qualified independent underwriter” within the meaning of FINRA Rule 5121
in connection with this offering. For more information, see “Conflicts of
Interest.”
Risks Related to Our Business
Our business is subject to a number of risks of which you should be aware before making an investment decision. These
risks are discussed more fully under the caption “Risk Factors,” and include but are not limited to the following:
• Coal prices are subject to change and a substantial or extended decline in prices could materially and adversely
affect our profitability and the value of our coal reserves.
• Our coal mining operations are subject to operating risks that are beyond our control, which could result in
materially increased operating expenses and decreased production levels and could materially and adversely affect
our profitability.
• Competition within the coal industry could put downward pressure on coal prices and, as a result, materially and
adversely affect our revenues and profitability.
• Decreases in demand for electricity and changes in coal consumption patterns of U.S. electric power generators
could adversely affect coal prices and materially and adversely affect our results of operations.
• The use of alternative energy sources for power generation could reduce coal consumption by U.S. electric power
generators, which could result in lower prices for our coal. Declines in the prices at which we sell our coal could
reduce our revenues and materially and adversely affect our business and results of operations.
• Our profitability depends in part upon the multi-year coal supply agreements we have with our customers. Changes
in purchasing patterns in the coal industry could make it difficult for us to extend our existing multi-year coal supply
agreements or to enter into new agreements in the future. In addition, our multi-year coal supply agreements subject
us to renewal risks.
• The loss of, or significant reduction in purchases by, our largest customers could adversely affect our profitability.
• The amount of indebtedness we have incurred could significantly affect our business.
• The fiduciary duties of officers and directors of Elk Creek GP, as general partner of Armstrong Resource Partners,
L.P., may conflict with those of officers and directors of Armstrong Energy.
• Yorktown will continue to have significant influence over us, including control over decisions that require the
approval of stockholders, which could limit your ability to influence the outcome of key transactions, including a
change of control.
• New regulatory requirements limiting greenhouse gas emissions and existing and potential future requirements
relating to air emissions could reduce the demand for coal as a fuel source, which could cause the price and quantity
of the coal we sell to decline materially.
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Summary Historical and Unaudited
Pro Forma Consolidated Financial and Operating Data
The following table presents our summary historical and unaudited pro forma consolidated financial and operating data
for the periods indicated for Armstrong Energy, Inc. and its predecessor, Armstrong Land Company, LLC and their
respective subsidiaries (our “Predecessor”). The summary historical financial data for the years ended December 31, 2008,
2009 and 2010 and the balance sheet data as of December 31, 2008, 2009 and 2010 are derived from the audited financial
statements of our Predecessor. The summary historical financial data for the nine months ended September 30, 2010 and
2011 and the balance sheet data as of September 30, 2010 and 2011 are derived from the unaudited financial statements of
our Predecessor. The following unaudited pro forma consolidated financial data of Armstrong Energy, Inc. at September 30,
2011, for the year ended December 31, 2010, and for the nine months ended September 30, 2011, are based on the historical
consolidated financial statements of our Predecessor and pro forma assumptions and adjustments, which are included
elsewhere in this prospectus.
The unaudited pro forma consolidated balance sheet data at September 30, 2011 gives effect to (a) the issuance of
common stock in this offering and the application of the net proceeds therefrom as described in “Use of Proceeds,” (b) the
Deconsolidation of Armstrong Resource Partners, and (c) the contribution of net proceeds to Armstrong Energy, Inc. from
the Concurrent ARP Offering, as if each had occurred on September 30, 2011.
The unaudited pro forma consolidated financial data for the fiscal year ended December 31, 2010 gives effect to
(a) adjustments to interest expense as a result of the repayment of a portion of the secured promissory notes from the
proceeds of this offering, (b) the addition of interest expense associated with a long-term obligation to Armstrong Resource
Partners, net of certain allocated management fees, recognized as part of the Deconsolidation of Armstrong Resource
Partners, and (c) net adjustments to interest expense as a result of the repayment of a portion of the secured promissory notes
from the proceeds contributed from the Concurrent ARP Offering, partially offset by additional interest expense associated
with an additional long-term obligation owed to Armstrong Resource Partners, as if each had occurred on January 1, 2010.
The unaudited pro forma consolidated financial data for the nine months ended September 30, 2011 gives effect to
(a) adjustments to interest expense as a result of the repayment of a portion of the secured promissory notes from the
proceeds of this offering and reduction of subsequent borrowings in February 2011 under the Senior Secured Credit Facility,
(b) the addition of interest expense associated with a long-term obligation to Armstrong Resource Partners, net of certain
allocated management fees, recognized as part of the Deconsolidation of Armstrong Resource Partners, and (c) net
adjustments to interest expense as a result of the repayment of a portion of the secured promissory notes from the proceeds
contributed from the concurrent Armstrong Resource Partners offering of units and additional interest expense associated
with an additional long-term obligation owed to Armstrong Resource Partners, as if each had occurred on January 1, 2010. A
more complete explanation can be found in our unaudited pro forma combined financial statements included elsewhere in
this prospectus.
Historical results and unaudited pro forma consolidated financial and operating information is included for illustrative
and informational purposes only and is not necessarily indicative of results we expect in future periods. You should read the
following summary and unaudited pro forma financial data in conjunction with “Selected Historical Consolidated Financial
and Operating Data,” “Unaudited Pro Forma Financial Information” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our financial statements and related notes appearing elsewhere in this
prospectus.
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Pro Forma
Armstrong Energy, Inc.
Nine
Year Months
Predecessor Ended Ended
Nine Months Ended
Year Ended December 31, September 30, December 31, September 30,
2008 2009 2010 2010 2011 2010 2011
(Restated) 1 (Restated) 1
(Restated) 1 (Restated) 1 Unaudited Unaudited
Unaudited Unaudited
(In thousands, except per share data)
Results of Operations Data
Total revenues $ 57,069 $ 167,904 $ 220,625 $ 176,311 $ 229,980 $ $
Costs and expenses 64,667 166,686 201,473 158,169 223,551
Operating income (loss) (7,598 ) 1,218 19,152 18,142 6,429
Interest expense (14,752 ) (12,651 ) (11,070 ) (8,532 ) (6,073 )
Other income (expense), net 971 988 87 259 (36 )
Gain on extinguishment of
debt — — — — 6,954
Income (loss) before income
taxes (21,379 ) (10,445 ) 8,169 9,869 7,274
Income tax provision — — — — (809 )
Net income (loss) (21,379 ) (10,445 ) 8,169 9,869 6,465
Less: net income (loss)
attributable to
non-controlling interest (5,552 ) (1,730 ) 3,351 2,814 7,448
Net income (loss)
attributable to common
stockholders $ (15,827 ) $ (8,715 ) $ 4,818 $ 7,055 $ (983 ) $ $
Earnings (loss) per share,
basic and diluted $ (1.35 ) $ (0.50 ) $ 0.25 $ 0.37 $ (0.05 ) $ $
Balance Sheet Data (at
period end)
Total assets $ 372,674 $ 450,618 $ 478,038 $ 461,577 $ 516,299 $
Working capital (34,668 ) (17,749 ) 2,905 (32,582 ) (14,942 )
Total debt (including capital
leases) 183,337 159,730 139,871 143,539 152,207 (2)
Total stockholders’ equity 168,931 255,333 296,681 287,356 307,930
Other Data
Tons sold (unaudited) 1,398 4,674 5,387 4,339 5,481
Net cash provided by (used
in):
Operating activities $ (11,079 ) $ 3,054 $ 37,194 $ 26,804 $ 31,126
Investing activities (80,020 ) (62,476 ) (41,755 ) (24,681 ) (47,386 )
Financing activities 79,402 64,854 (3,935 ) (6,017 ) 15,706
Adjusted EBITDA(1)
(unaudited) (1,029 ) 16,567 41,099 34,874 32,125
Adjusted EBITDA is
calculated as follows
(unaudited):
Net income (loss) $ (21,379 ) $ (10,445 ) $ 8,169 $ 9,869 $ 6,465 $ $
Income tax provision — — — — 809
Depreciation, depletion and
amortization 5,810 14,464 21,979 16,562 24,420
Interest expense, net 14,377 12,482 10,872 8,389 5,955 (3) (3)
Non-cash stock
compensation expense 163 66 79 54 1,212
Non-cash charge related to
non-recourse notes — — — — 218
Gain on extinguishment of
debt — — — — (6,954 )
$ (1,029 ) $ 16,567 $ 41,099 $ 34,874 $ 32,125 $ $
1 The consolidated financial statements have been restated to correct for an error in the calculation of depreciation,
depletion, and amortization expense for the years ended December 31, 2009 and 2010 and the nine
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months ended September 30, 2010 and 2011. See Note 3 to the interim condensed consolidated financial statements.
(1) Adjusted EBITDA is a non-GAAP financial measure, and when analyzing our operating performance, investors
should use Adjusted EBITDA in addition to, and not as an alternative for, operating income and net income (loss)
(each as determined in accordance with GAAP). We use Adjusted EBITDA as a supplemental financial measure.
Adjusted EBITDA is defined as net income (loss) before net interest expense, income taxes, depreciation, depletion
and amortization, non-cash stock compensation expense, non-cash charges related to non-recourse notes, and gain on
extinguishment of debt.
Adjusted EBITDA, as used and defined by us, may not be comparable to similarly titled measures employed by other
companies and is not a measure of performance calculated in accordance with GAAP. There are significant limitations
to using Adjusted EBITDA as a measure of performance, including the inability to analyze the effect of certain
recurring and non-recurring items that materially affect our net income or loss, the lack of comparability of results of
operations of different companies and the different methods of calculating Adjusted EBITDA reported by different
companies, and should not be considered in isolation or as a substitute for analysis of our results as reported under
GAAP.
For example, Adjusted EBITDA does not reflect:
• cash expenditures, or future requirements, for capital expenditures or contractual commitments; changes in, or cash
requirements for, working capital needs;
• the significant interest expense, or the cash requirements necessary to service interest or principal payments, on
debt; and
• any cash requirements for assets being depreciated and amortized that may have to be replaced in the future.
Adjusted EBITDA does not represent funds available for discretionary use because those funds are required for debt
service, capital expenditures, working capital and other commitments and obligations. However, our management
team believes Adjusted EBITDA is useful to an investor in evaluating our company because this measure:
• is widely used by investors in our industry to measure a company’s operating performance without regard to items
excluded from the calculation of such term, which can vary substantially from company to company depending
upon accounting methods and book value of assets, capital structure and the method by which assets were acquired,
among other factors; and
• helps investors to more meaningfully evaluate and compare the results of our operations from period to period by
removing the effect of our capital structure from our operating structure, which is useful for trending, analyzing and
benchmarking the performance and value of our business.
(2) Included within pro forma total debt is $ related to the financing arrangement with Armstrong Energy, whereby
Armstrong Resource Partners acquired an undivided interest in certain of the land and mineral reserves of Armstrong
Energy.
(3) Included within pro forma interest expense, net is $ and $ for the nine months ended September 30, 2011 and
the year ended December 31, 2010, respectively, related to interest expense associated with the financing arrangement
with Armstrong Energy, whereby Armstrong Resource Partners acquired an undivided interest in certain of the land
and mineral reserves of Armstrong Energy.
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RISK FACTORS
An investment in our common stock involves significant risks. In addition to matters described elsewhere in this
prospectus, you should carefully consider the following risks involved with an investment in our common stock. You are
urged to consult your own legal, tax or financial counsel for advice before making an investment decision. The occurrence of
any one or more of the following could materially adversely affect an investment in our common stock or our business and
operating results. If that occurs, the value of our common stock could decline and you could lose some or all of your
investment.
Risks Related to Our Business
Coal prices are subject to change and a substantial or extended decline in prices could materially and adversely affect
our profitability and the value of our coal reserves.
Our profitability and the value of our coal reserves depend upon the prices we receive for our coal. The contract prices
we may receive in the future for coal depend upon factors beyond our control, including the following:
• the domestic and foreign supply and demand for coal;
• the relative cost, quantity and quality of coal available from competitors;
• competition for production of electricity from non-coal sources, which are a function of the price and availability of
alternative fuels, such as natural gas, fuel oil, nuclear, hydroelectric, wind, biomass and solar power, and the
location, availability, quality and price of those alternative fuel sources;
• legislative, regulatory and judicial developments, environmental regulatory changes or changes in energy policy and
energy conservation measures that would adversely affect the coal industry, such as legislation limiting carbon
emissions or providing for increased funding and incentives for alternative energy sources;
• domestic air emission standards for coal-fired power plants and the ability of coal-fired power plants to meet these
standards by installing scrubbers and other pollution control technologies or by other means;
• adverse weather, climatic or other natural conditions, including natural disasters;
• domestic and foreign economic conditions, including economic slowdowns;
• the proximity to, capacity of and cost of, transportation, port and unloading facilities; and
• market price fluctuations for sulfur dioxide emission allowances.
A substantial or extended decline in the prices we receive for our future coal sales contracts or on the spot market could
materially and adversely affect us by decreasing our profitability and the value of operating our coal reserves.
Our coal mining operations are subject to operating risks that are beyond our control, which could result in materially
increased operating expenses and decreased production levels and could materially and adversely affect our
profitability.
We mine coal both at underground and at surface mining operations. Certain factors beyond our control, including those
listed below, could disrupt our coal mining operations, adversely affect production and shipments and increase our operating
costs:
• poor mining conditions resulting from geological, hydrologic or other conditions that may cause instability of
mining portals, highwalls or spoil piles or cause damage to mining equipment, nearby infrastructure or mine
personnel;
• delays or challenges to and difficulties in obtaining or renewing permits necessary to produce coal or operate mining
or related processing and loading facilities;
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• adverse weather and natural disasters, such as heavy rains or snow, flooding and other natural events affecting
operations, transportation or customers;
• a major incident at the mine site that causes all or part of the operations of the mine to cease for some period of
time;
• mining, processing and plant equipment failures and unexpected maintenance problems;
• unexpected or accidental surface subsidence from underground mining;
• accidental mine water discharges, fires, explosions or similar mining accidents; and
• competition and/or conflicts with other natural resource extraction activities and production within our operating
areas, such as coalbed methane extraction or oil and gas development.
If any of these conditions or events occurs, we could experience a delay or halt of production or shipments or our
operating costs could increase significantly.
Competition within the coal industry could put downward pressure on coal prices and, as a result, materially and
adversely affect our revenues and profitability.
We compete with numerous other coal producers in the Illinois Basin and in other coal producing regions of the United
States, primarily Central Appalachia and the Powder River Basin (the “PRB”). The most important factors on which we
compete are:
• delivered price ( i.e. , the cost of coal delivered to the customer on a cents per million Btu basis, including
transportation costs, which are generally paid by our customers either directly or indirectly);
• coal quality characteristics (primarily heat, sulfur, ash and moisture content); and
• reliability of supply.
Our competitors may have, among other things, greater liquidity, greater access to credit and other financial resources,
newer or more efficient equipment, lower cost structures, partnerships with transportation companies or more effective risk
management policies and procedures. Our failure to compete successfully could have a material adverse effect on our
business, financial condition or results of operations.
International demand for U.S. coal also affects competition within our industry. The demand for U.S. coal exports
depends upon a number of factors outside our control, including the overall demand for electricity in foreign markets,
currency exchange rates, ocean freight rates, port and shipping capacity, the demand for foreign-priced steel, both in foreign
markets and in the U.S. market, general economic conditions in foreign countries, technological developments and
environmental and other governmental regulations in both U.S. and foreign markets. Foreign demand for U.S. coal has
increased in recent periods. If foreign demand for U.S. coal were to decline, this decline could cause competition among coal
producers for the sale of coal in the United States to intensify, potentially resulting in significant downward pressure on
domestic coal prices.
Decreases in demand for electricity and changes in coal consumption patterns of U.S. electric power generators could
adversely affect coal prices and materially and adversely affect our results of operations.
Our coal is used primarily as fuel for electricity generation. Overall economic activity and the associated demand for
power by industrial users can have significant effects on overall electricity demand. An economic slowdown can
significantly slow the growth of electrical demand and could result in contraction of demand for coal. Declines in
international prices for coal generally will impact U.S. prices for coal. During the past several years, international demand
for coal has been driven, in significant part, by increases in demand due to economic growth in emerging markets, including
China and India. Significant declines in the rates of economic growth in these regions could materially affect international
demand for U.S. coal, which may have an adverse effect on U.S. coal prices.
Our business is closely linked to domestic demand for electricity and any changes in coal consumption by U.S. electric
power generators would likely impact our business over the long term. In 2010, we sold
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substantially all of our coal to domestic electric power generators, and we have multi-year coal supply agreements in place
with electric power generators for a significant portion of our future production. The amount of coal consumed by electric
power generation is affected by, among other things:
• general economic conditions, particularly those affecting industrial electric power demand, such as the downturn in
the U.S. economy and financial markets in 2008 and 2009;
• environmental and other governmental regulations, including those impacting coal-fired power plants;
• energy conservation efforts and related governmental policies; and
• indirect competition from alternative fuel sources for power generation, such as natural gas, fuel oil, nuclear,
hydroelectric, wind, biomass and solar power, and the location, availability, quality and price of those alternative
fuel sources, and government subsidies for those alternative fuel sources.
According to the EIA, total electricity consumption in the United States rose by 4.3% during 2010 compared with 2009,
primarily because of the effect of the recovery from the economic downturn on industrial electricity demand in 2009, and
U.S. electric generation from coal rose by 5.2% in 2010 compared with 2009. However, decreases in the demand for
electricity could take place in the future, such as decreases that could be caused by a worsening of current economic
conditions, a prolonged economic recession or other similar events, could have a material adverse effect on the demand for
coal and on our business over the long term.
Changes in the coal industry that affect our customers, such as those caused by decreased electricity demand and
increased competition, could also adversely affect our business. Indirect competition from gas-fired plants that are cheaper to
construct and easier to permit has the most potential to displace a significant amount of coal-fired generation in the near
term, particularly older, less efficient coal-powered generators. In addition, uncertainty caused by federal and state
regulations could cause coal customers to be uncertain of their coal requirements in future years, which could adversely
affect our ability to sell coal to our customers under multi-year coal supply agreements.
Weather patterns can also greatly affect electricity demand. Extreme temperatures, both hot and cold, cause increased
power usage and, therefore, increased generating requirements from all sources. Mild temperatures, on the other hand, result
in lower electrical demand. Any downward pressure on coal prices, due to decreases in overall demand or otherwise,
including changes in weather patterns, would materially and adversely affect our results of operations.
The use of alternative energy sources for power generation could reduce coal consumption by U.S. electric power
generators, which could result in lower prices for our coal. Declines in the prices at which we sell our coal could
reduce our revenues and materially and adversely affect our business and results of operations.
In 2010, nearly all of the tons we sold were to domestic electric power generators. The amount of coal consumed for
U.S. electric power generation is affected by, among other things:
• the location, availability, quality and price of alternative energy sources for power generation, such as natural gas,
fuel oil, nuclear, hydroelectric, wind, biomass and solar power; and
• technological developments, including those related to alternative energy sources.
Gas-fired electricity generation has the potential to displace coal-fired generation, particularly from older, less efficient
coal-powered generators. We expect that many of the new power plants needed to meet increasing demand for electricity
generation may be fueled by natural gas because gas-fired plants are cheaper to construct and permits to construct these
plants are easier to obtain as natural gas-fired plants are seen as having a lower environmental impact than coal-fired plants.
In addition, state and federal mandates for increased use of electricity from renewable energy sources could have an adverse
impact on the market for our coal. Many states have mandates requiring electricity suppliers to use renewable energy sources
to generate a certain percentage of power. There have been numerous proposals to establish a similar uniform, national
energy portfolio standard in the U.S., although none of these proposals have been enacted to date. Possible
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advances in technologies and incentives, such as tax credits, to enhance the economics of renewable energy sources could
make these sources more competitive with coal. Any reduction in the amount of coal consumed by domestic electric power
generators could reduce the price of coal that we mine and sell, thereby reducing our revenues and materially and adversely
affecting our business and results of operations.
Inaccuracies in our estimates of our coal reserves could result in decreased profitability from lower than expected
revenues or higher than expected costs.
Our future performance depends on, among other things, the accuracy of our estimates of our proven and probable coal
reserves. The estimates of our reserves are based on engineering, economic and geological data assembled, analyzed and
reviewed by internal and third-party engineers and consultants. We update our estimates of the quantity and quality of
proven and probable coal reserves periodically to reflect the production of coal from the reserves, updated geological models
and mining recovery data, the tonnage contained in new lease areas acquired and estimated costs of production and sales
prices. There are numerous factors and assumptions inherent in estimating the quantities and qualities of, and costs to mine,
coal reserves, including many factors beyond our control, including the following:
• quality of the coal;
• geological and mining conditions, which may not be fully identified by available exploration data and/or may differ
from our experiences in areas where we currently mine;
• the percentage of coal ultimately recoverable;
• the assumed effects of regulation, including the issuance of required permits, taxes, including severance and excise
taxes and royalties, and other payments to governmental agencies;
• assumptions concerning the timing for the development of the reserves; and
• assumptions concerning equipment and productivity, future coal prices, operating costs, including for critical
supplies such as fuel, tires and explosives, capital expenditures and development and reclamation costs, including
the cost of reclamation bonds.
As a result, estimates of the quantities and qualities of economically recoverable coal attributable to any particular
group of properties, classifications of reserves based on risk of recovery, estimated cost of production, and estimates of
future net cash flows expected from these properties as prepared by different engineers, or by the same engineers at different
times, may vary materially due to changes in the above factors and assumptions. Actual production recovered from identified
reserve areas and properties, and revenues and expenditures associated with our mining operations, may vary materially
from estimates. Any inaccuracy in our estimates related to our reserves could result in decreased profitability from lower
than expected revenues and/or higher than expected costs.
Increases in the costs of mining and other industrial supplies, including steel-based supplies, diesel fuel, rubber tires
and explosives, or the inability to obtain a sufficient quantity of those supplies, may adversely affect our operating costs
or disrupt or delay our production.
Our coal mining operations use significant amounts of steel, electricity, diesel fuel, explosives, rubber tires and other
mining and industrial supplies. The cost of roof bolts we use in our underground mining operations depends on the price of
scrap steel. We also use significant amounts of diesel fuel and tires for the trucks and other heavy machinery we use. If the
prices of mining and other industrial supplies, particularly steel-based supplies, diesel fuel and rubber tires, increase, our
operating costs may be adversely affected. In addition, if we are unable to procure these supplies, our coal mining operations
may be disrupted or we could experience a delay or halt in our production.
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A defect in title or the loss of a leasehold interest in certain property could limit our ability to mine our coal reserves or
result in significant unanticipated costs.
We conduct part of our coal mining operations on properties that we lease. A title defect or the loss of a lease could
adversely affect our ability to mine the associated coal reserves. We may not verify title to our leased properties or
associated coal reserves until we have committed to developing those properties or coal reserves. We may not commit to
develop property or coal reserves until we have obtained necessary permits and completed exploration. As such, the title to
property that we intend to lease or coal reserves that we intend to mine may contain defects prohibiting our ability to conduct
mining operations. Similarly, our leasehold interests may be subject to superior property rights of other third parties or to
royalties owed to those third parties. In order to conduct our mining operations on properties where these defects exist, we
may incur unanticipated costs. In addition, some leases require us to produce a minimum quantity of coal and require us to
pay minimum production royalties. Our inability to satisfy those requirements may cause the leasehold interest to terminate.
We outsource certain aspects of our business to third party contractors, which subjects us to risks, including
disruptions in our business.
We contract with third parties to provide blasting services at all of our mines and loading services at our barge loadout
facility located on the Green River. In addition, we contract with third parties to provide truck transportation services
between our mines and our preparation plants. Accordingly, we are subject to the risks associated with the contractors’
ability to successfully provide the necessary services to meet our needs. If the contractors are unable to adequately provide
the contracted services, and we are unable to find alternative service providers in a timely manner, our ability to conduct our
coal mining operations and deliver coal to our customers may be disrupted.
The availability and reliability of transportation facilities and fluctuations in transportation costs could affect the
demand for our coal or impair our ability to supply coal to our customers.
We depend upon barge, rail and truck transportation systems to deliver coal to our customers. Disruptions in
transportation services due to weather-related problems, mechanical difficulties, strikes, lockouts, bottlenecks, and other
events could impair our ability to supply coal to our customers. In addition, increases in transportation costs, including the
price of gasoline and diesel fuel, could make coal a less competitive source of energy when compared to alternative fuels or
could make coal produced in one region of the United States less competitive than coal produced in other regions of the
United States or abroad. If transportation of our coal is disrupted or if transportation costs increase significantly and we are
unable to find alternative transportation providers, our coal mining operations may be disrupted, we could experience a delay
or halt of production or our profitability could decrease significantly.
Our profitability depends in part upon the multi-year coal supply agreements we have with our customers. Changes in
purchasing patterns in the coal industry could make it difficult for us to extend our existing multi-year coal supply
agreements or to enter into new agreements in the future.
We sell a majority of our coal under multi-year coal supply agreements. Under these arrangements, we fix the prices of
coal shipped during the initial year and may adjust the prices in later years. As a result, at any given time the market prices
for similar-quality coal may exceed the prices for coal shipped under these arrangements. Changes in the coal industry may
cause some of our customers not to renew, extend or enter into new multi-year coal supply agreements with us or to enter
into agreements to purchase fewer tons of coal than in the past or on different terms or prices. In addition, uncertainty caused
by federal and state regulations, including the Clean Air Act, could deter our customers from entering into multi-year coal
supply agreements.
Because we sell a majority of our coal production under multi-year coal supply agreements, our ability to capitalize on
more favorable market prices may be limited. Conversely, at any given time we are subject to fluctuations in market prices
for the quantities of coal that we are planning to produce but which we have not committed to sell. As described above under
“Coal prices are subject to change and a substantial or extended
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decline in prices could materially and adversely affect our profitability and the value of our coal reserves,” the market prices
for coal may be volatile and may depend upon factors beyond our control. Our profitability may be adversely affected if we
are unable to sell uncommitted production at favorable prices or at all. For more information about our multi-year coal
supply agreements, you should see the section entitled “Business — Sales and Marketing — Multi-Year Coal Supply
Agreements.”
Our multi-year coal supply agreements subject us to renewal risks.
We sell most of the coal we produce under multi-year coal supply agreements. As a result, our results of operations are
dependent upon the prices we receive for the coal we sell under these contracts. To the extent we are not successful in
renewing, extending or renegotiating our multi-year coal supply agreements on favorable terms, we may have to accept
lower prices for the coal we sell or sell reduced quantities of coal in order to secure new sales contracts for our coal.
Prices and quantities under our multi-year coal supply agreements are generally based on expectations of future coal
prices at the time the contract is entered into, renewed, extended or reopened. The expectation of future prices for coal
depends upon factors beyond our control, including the following:
• domestic and foreign supply and demand for coal;
• domestic demand for electricity, which tends to follow changes in general economic activity;
• domestic and foreign economic conditions;
• the price, quantity and quality of other coal available to our customers;
• competition for production of electricity from non-coal sources, including the price and availability of alternative
fuels and other sources, such as natural gas, fuel oil, nuclear, hydroelectric, wind biomass and solar power, and the
effects of technological developments related to these non-coal energy sources;
• domestic air emission standards for coal-fired power plants, and the ability of coal-fired power plants to meet these
standards by installing scrubbers and other pollution control technologies, purchasing emissions allowances or other
means; and
• legislative and judicial developments, regulatory changes, or changes in energy policy and energy conservation
measures that would adversely affect the coal industry.
For more information regarding our major customers and multi-year coal supply agreements, see “Business — Sales
and Marketing.”
The loss of, or significant reduction in purchases by, our largest customers could adversely affect our profitability.
For the year ended December 31, 2010, we derived approximately 76% of our total coal revenues from sales to our two
largest customers — Tennessee Valley Authority (“TVA”) and Louisville Gas and Electric (“LGE”). For the fiscal year
ended December 31, 2010, coal sales to TVA and LGE constituted approximately 40% and 36% of our total coal revenues,
respectively. Our multi-year coal supply agreements with TVA expire in 2013 and 2018, and our multi-year coal supply
agreements with LGE expire in 2015 and 2016; however, most of our multi-year coal supply agreements with TVA and LGE
contain reopener provisions pursuant to which either party can request reopening to renegotiate price and other terms for the
remaining term of such agreement, and, subsequent to any such reopening, the failure to reach an agreement can lead to the
termination of such agreement. In addition, one of our multi-year coal supply agreements with TVA provides that,
commencing on July 1, 2011, TVA has the unilateral right to terminate the agreement upon 60 days’ written notice, in which
case TVA is required to pay us a termination fee equal to 10% of the base price multiplied by the remaining number of tons
to be delivered under the agreement. If our multi-year coal supply agreements with TVA or LGE are terminated early
pursuant to the reopener provisions, or we fail to extend or renew our multi-year coal supply agreements with TVA or LGE,
our business and results of operations could
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be materially and adversely affected. Even if we are able to extend or renew our multi-year coal supply agreements with
TVA and LGE, if market prices for coal such agreements are low at the time of such extensions or renewals or increases in
costs during the term of such extended or renewed agreements are greater than the offsets from our cost pass-through and
inflation adjustment provisions under such extended or renewed agreements, our business and results of operations could be
materially and adversely affected.
Our multi-year coal supply agreements typically contain force majeure provisions allowing the parties to temporarily
suspend performance during specified events beyond their control. Most of our multi-year coal supply agreements also
contain provisions requiring us to deliver coal that satisfies certain quality specifications, such as heat value, sulfur content,
ash content, chlorine content, hardness and ash fusion temperature. These provisions in our multi-year coal supply
agreements could result in negative economic consequences to us, including price adjustments, purchasing replacement coal
in a higher-priced open market, the rejection of deliveries or, in the extreme, contract termination. Our profitability may be
negatively affected if we are unable to seek protection during adverse economic conditions or if we incur financial or other
economic penalties as a result of the provisions of our multi-year coal supply agreements.
If our multi-year coal supply agreements with TVA or LGE are terminated or if we fail to extend or renew our
multi-year coal supply agreements with TVA or LGE, we may be unable to timely replace such agreements. In such a case,
our business and results of operations could be materially and adversely affected.
Our assets and operations are concentrated in Western Kentucky and the Illinois Basin, and a disruption within that
geographic region could adversely affect the Company’s performance.
We rely exclusively on sales generated from products distributed from the terminals we own, which are exclusively
located in the Illinois Basin and Western Kentucky. Due to our lack of diversification in geographic location, an adverse
development in these areas, including adverse developments due to catastrophic events or weather and decreases in demand
for coal or electricity, could have a significantly greater adverse impact on our ability to operate our business and our results
of operations than if we held more diverse assets and locations.
The amount of indebtedness we have incurred could significantly affect our business.
At September 30, 2011, we had consolidated long-term indebtedness of approximately $137.1 million, which is
comprised of the following: $100.0 million in borrowings under the Senior Secured Term Loan, $34.6 million in borrowings
under the Senior Secured Revolving Credit Facility, and $2.5 million in other long-term debt. We also have significant lease
and royalty obligations, including, but not limited to, our capital lease obligations that totaled approximately $15.1 million as
of September 30, 2011 and our obligations under non-cancelable operating leases that totaled approximately $57.7 million.
Future minimum advance royalties totaled approximately $3.3 million as of September 30, 2011. In addition to advance
royalties, production royalties are payable based on the quantity of coal minded in future years and prospective changes to
mine plans. Our ability to satisfy our debt, lease and royalty obligations, and our ability to refinance our indebtedness, will
depend upon our future operating performance. Our ability to satisfy our financial obligations may be adversely affected if
we incur additional indebtedness in the future. In addition, the amount of indebtedness we have incurred could have
significant consequences to us, such as:
• limiting our ability to obtain additional financing to fund growth, working capital, capital expenditures, debt service
requirements or other cash requirements;
• exposing us to the risk of increased interest costs if the underlying interest rates rise;
• limiting our ability to invest operating cash flow in our business due to existing debt service requirements;
• making it more difficult to obtain surety bonds, letters of credit or other financing, particularly during weak credit
markets;
• causing a decline in our future credit ratings;
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• limiting our ability to compete with companies that are not as leveraged and that may be better positioned to
withstand economic downturns;
• limiting our ability to acquire new coal reserves and/or plant and equipment needed to conduct operations; and
• limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business,
the industry in which we compete and general economic and market conditions.
If we further increase our indebtedness, the related risks that we now face, including those described above, could
intensify. In addition to the principal repayments on our outstanding debt, we have other demands on our cash resources,
including capital expenditures and operating expenses. Our ability to pay our debt depends upon our operating performance.
In particular, economic conditions could cause our revenues to decline, and hamper our ability to repay our indebtedness. If
we do not have enough cash to satisfy our debt service obligations, we may be required to refinance all or part of our debt,
sell assets or reduce our spending. We may not be able to, at any given time, refinance our debt or sell assets on terms
acceptable to us or at all.
We may be unable to comply with restrictions imposed by our Senior Secured Credit Facility and other financing
arrangements.
The agreements governing our outstanding financing arrangements impose a number of restrictions on us. For example,
the terms of our Senior Secured Credit Facility, leases and other financing arrangements contain financial and other
covenants that create limitations on our ability to, among other things:
• borrow the full amount under our Senior Secured Credit Facility;
• effect acquisitions or dispositions;
• pay dividends or distributions;
• make certain investments;
• incur certain liens or permit them to exist;
• enter into certain types of transactions with affiliates;
• transfer or otherwise dispose of assets; and
• incur additional debt.
They also require us to maintain certain financial ratios and comply with various other financial covenants. Our ability
to comply with these restrictions may be affected by events beyond our control. A failure to comply with these restrictions
could adversely affect our ability to borrow under our Senior Secured Credit Facility or result in an event of default under
these agreements. In the event of a default, our lenders and the counterparties to our other financing arrangements could
terminate their commitments to us and declare all amounts borrowed, together with accrued interest and fees, immediately
due and payable. If this were to occur, we may not be able to pay these amounts, or we may be forced to seek an amendment
to our financing arrangements, which could make the terms of these arrangements more onerous for us. As a result, a default
under our existing or future financing arrangements could have significant consequences for us. For more information about
some of the restrictions contained in our Senior Secured Credit Facility, leases and other financial arrangements, see
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital
Resources.”
Our certificate of incorporation contains a provision renouncing our interest and expectancy in certain corporate
opportunities, which could adversely affect our business or prospects.
Our certificate of incorporation provides that we will renounce any interest or expectancy in, or in being offered an
opportunity to participate in, any business opportunity that may be from time to time presented to (i) members of our board
of directors who are not our employees, (ii) their respective employers and (iii) affiliates of the foregoing (other than us and
our subsidiaries), other than opportunities expressly presented
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to such directors solely in their capacity as our director. This provision will apply even if the opportunity is one that we
might reasonably have pursued or had the ability or desire to pursue if granted the opportunity to do so. Furthermore, no
such person will be liable to us for breach of any fiduciary duty, as a director or otherwise, by reason of the fact that such
person pursues or acquires any such business opportunity, directs any such business opportunity to another person or fails to
present any such business opportunity, or information regarding any such business opportunity. None of such persons or
entities will have any duty to refrain from engaging directly or indirectly in the same or similar business activities or lines of
business as us or any of our subsidiaries. See “Description of Capital Stock.”
For example, affiliates of our non-employee directors may become aware, from time to time, of certain business
opportunities, such as acquisition opportunities, and may direct such opportunities to other businesses in which they have
invested or advise, in which case we may not become aware of or otherwise have the ability to pursue such opportunities.
Further, such businesses may choose to compete with us for these opportunities. As a result, our renouncing our interest and
expectancy in any business opportunity that may be, from time to time, presented to such persons or entities could adversely
impact our business or prospects if attractive business opportunities are procured by such persons or entities for their own
benefit rather than for ours.
The general partner of Armstrong Resource Partners, L.P. may be removed or control of Armstrong Resource
Partners, L.P. may be otherwise transferred to a third party without the consent of holders of our common stock.
Armstrong Resource Partners is majority-owned by Yorktown. Pursuant to the ARP LPA, Yorktown may remove our
subsidiary, Elk Creek GP, as general partner of Armstrong Resource Partners, L.P. or otherwise cause a change of control of
Armstrong Resource Partners, L.P. without our consent or the consent of the holders of our common stock. If such a change
in control of Armstrong Resource Partners, L.P. were to occur, our ability to enter into, or obtain renewals of, coal lease or
mining license agreements with Armstrong Resource Partners, L.P. could be adversely affected. We may then have to seek
alternative agreements or arrangements with unrelated parties and such alternative agreements or arrangements may not be
available or may be on less favorable terms.
Some officers of Armstrong Energy may spend a substantial amount of time managing the business and affairs of
Armstrong Resource Partners and its affiliates other than us.
These officers may face a conflict regarding the allocation of their time between our business and the other business
interests of Armstrong Resource Partners. Armstrong Energy intends to cause its officers to devote as much time to the
management of our business and affairs as is necessary for the proper conduct of our business and affairs, notwithstanding
that our business may be adversely affected if the officers spend less time on our business and affairs than would otherwise
be available as a result of such officers’ time being split between the management of Armstrong Energy and of Armstrong
Resource Partners.
The fiduciary duties of officers and directors of Elk Creek GP, as general partner of Armstrong Resource Partners,
L.P., may conflict with those of officers and directors of Armstrong Energy.
As the general partner of Armstrong Resource Partners, L.P., our subsidiary Elk Creek GP has a legal duty to manage
Armstrong Resource Partners, L.P. in a manner beneficial to the limited partners of Armstrong Resource Partners, L.P. This
legal duty originates in Delaware statutes and judicial decisions and is commonly referred to as a “fiduciary duty.” However,
because Elk Creek GP is owned by Armstrong Energy, the officers and directors of Elk Creek GP also have fiduciary duties
to manage the business of Elk Creek GP and Armstrong Resource Partners, L.P. in a manner beneficial to Armstrong
Energy. The board of directors of Elk Creek GP, which includes some of the directors and executive officers of Armstrong
Energy, Inc., may resolve any conflict between the interests of Armstrong Energy, Inc. and our stockholders, on the one
hand, and Armstrong Resource Partners, L.P. and its unit holders, on the other hand, and has broad latitude to consider the
interests of all parties to the conflict.
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Conflicts of interest may arise between Armstrong Energy, Inc. and Armstrong Resource Partners, L.P. with respect to
matters such as the allocation of opportunities to acquire coal reserves in the future, the terms and amount of any related
royalty payments, whether and to what extent Armstrong Resource Partners, L.P. may borrow under our Senior Secured
Credit Agreement or other borrowing facilities we may enter into and other matters. Armstrong Energy may continue to
provide credit support to Armstrong Resource Partners to support borrowings it may make in connection with any
acquisition of reserves or for other purposes, including the funding of distributions to its unit holders. In addition, we may
determine to permit Armstrong Resource Partners to engage in other activities, including the acquisition of coal reserves that
will not be used by Armstrong Energy.
As a result of these relationships, conflicts of interest may arise in the future between Armstrong Energy, Inc. and its
stockholders, on the one hand, and Armstrong Resource Partners, L.P. and its unit holders, on the other hand.
We have established a conflicts committee comprised of independent directors of Armstrong Energy to address matters
which Armstrong Energy’s board of directors believes may involve conflicts of interest. See “Management” and
“Management — Board of Directors and Board Committees — Conflicts Committee.”
Armstrong Energy’s board of directors may change the management and allocation policies relating to Armstrong
Resource Partners without the approval of our stockholders.
Armstrong Energy’s board of directors has adopted certain management and allocation policies to serve as guidelines in
making decisions regarding the relationships between and among Armstrong Energy and Armstrong Resource Partners with
respect to matters such as tax liabilities and benefits, inter-group loans, inter-group interests, financing alternatives, corporate
opportunities and similar items. These policies are not included in our certificate of incorporation or by-laws and our board
of directors may at any time change or make exceptions to these policies. Because these policies relate to matters concerning
the day to day management of our company, no stockholder approval is required with respect to their adoption or
amendment. A decision to change, or make exceptions to, these policies or adopt additional policies could disadvantage
Armstrong Energy or its stockholders.
Holders of shares of our common stock may not have any remedies if any action by our directors or officers in relation
to Armstrong Resource Partners has an adverse effect on only Armstrong Energy common stock.
Principles of Delaware law and the provisions of the certificate of incorporation and by-laws may protect decisions of
our board of directors in relation to Armstrong Resource Partners that have a disparate impact upon holders of shares of
common stock of Armstrong Energy. Under the principles of Delaware law and the Delaware business judgment rule, you
may not be able to successfully challenge decisions in relation to Armstrong Resource Partners that you believe have a
disparate impact upon the holders of shares of our common stock of Armstrong Energy if its board of directors is
disinterested and independent with respect to the action taken, is adequately informed with respect to the action taken and
acts in good faith and in the honest belief that the board is acting in the best interest of stockholders.
Our capital structure may inhibit or prevent acquisition bids for our company.
The fact that substantially all of the economic value of the equity interests in Armstrong Resource Partners is expected
to be owned by persons or entities other than us or our controlled affiliates could present complexities and in certain
circumstances pose obstacles, financial and otherwise, to an acquiring person that are not present in companies which do not
have capital structures similar to ours.
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Yorktown will continue to have significant influence over us, including control over decisions that require the approval
of stockholders, which could limit your ability to influence the outcome of key transactions, including a change of
control.
After giving effect to this offering, Yorktown is expected to beneficially own approximately % of our outstanding
common stock (or % if the underwriters exercise their option to purchase additional shares in full). As a result, Yorktown
will retain the ability to direct and control our business affairs. Yorktown has influence over our decisions to enter into any
corporate transaction regardless of whether others believe that the transaction is in our best interests. As long as Yorktown
continues to hold a large portion of our outstanding common stock, it also will have the ability to influence the vote in any
election of directors.
Yorktown is also in the business of making investments in companies and may from time to time acquire and hold
interests in businesses that compete directly or indirectly with us. Yorktown may also pursue acquisition opportunities that
are complementary to our business, and, as a result, those acquisition opportunities may not be available to us. As long as
Yorktown, or other funds controlled by or associated with Yorktown, continue to indirectly own a significant amount of our
outstanding common stock, Yorktown will continue to be able to strongly influence or effectively control our decisions. The
concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company,
could deprive stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company
and might ultimately affect the market price of our common stock.
Failure to obtain or renew surety bonds on acceptable terms could affect our ability to secure reclamation and coal
lease obligations and, therefore, our ability to mine or lease coal.
Federal and state laws require us to obtain surety bonds to secure performance or payment of certain long-term
obligations, such as mine closure or reclamation costs, federal and state workers’ compensation costs, coal leases and other
obligations. We may have difficulty procuring or maintaining our surety bonds. Our bond issuers may demand higher fees,
additional collateral, including letters of credit or other terms less favorable to us upon those renewals. Because we are
required by state and federal law to have these bonds in place before mining can commence or continue, failure to maintain
surety bonds, letters of credit or other guarantees or security arrangements would materially and adversely affect our ability
to mine or lease coal. That failure could result from a variety of factors, including lack of availability, higher expense or
unfavorable market terms, the exercise by third party surety bond issuers of their right to refuse to renew the surety and
restrictions on availability on collateral for current and future third party surety bond issuers under the terms of our financing
arrangements.
Our ability to operate our business effectively could be impaired if we fail to attract and retain key management
personnel.
Our ability to operate our business and implement our strategies depends on the continued contributions of our
executive officers and key employees. In particular, we depend significantly on our senior management’s long-standing
relationships within our industry. The loss of any of our senior executives could have a material adverse effect on our
business. In addition, we believe that our future success will depend on our continued ability to attract and retain highly
skilled management personnel with coal industry experience and competition for these persons in the coal industry is
intense. We may not be able to continue to employ key personnel or attract and retain qualified personnel in the future, and
our failure to retain or attract key personnel could have a material adverse effect on our ability to effectively operate our
business.
We are subject to various legal proceedings, which may have an adverse effect on our business.
We are involved in a number of threatened and pending legal proceedings incidental to our normal business activities.
While we cannot predict the outcome of the proceedings, there is always the potential that the costs of litigation in an
individual matter or the aggregation of many matters could have an adverse effect on our cash flows, results of operations or
financial position.
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A shortage of skilled labor in the mining industry could reduce labor productivity and increase costs, which could have
a material adverse effect on our business and results of operations.
Efficient coal mining using modern techniques and equipment requires skilled laborers in multiple disciplines such as
equipment operators, mechanics, electricians and engineers, among others. We have from time to time encountered shortages
for these types of skilled labor. If we experience shortages of skilled labor in the future, our labor and overall productivity or
costs could be materially and adversely affected. If coal prices decrease in the future or our labor prices increase, or if we
experience materially increased health and benefit costs with respect to our employees, our results of operations could be
materially and adversely affected.
Our work force could become unionized in the future, which could adversely affect the stability of our production and
materially reduce our profitability.
All of our mines are operated by non-union employees. Our employees have the right at any time under the National
Labor Relations Act to form or affiliate with a union, subject to certain voting and other procedural requirements. If our
employees choose to form or affiliate with a union and the terms of a union collective bargaining agreement are significantly
different from our current compensation and job assignment arrangements with our employees, these arrangements could
adversely affect the stability of our production through potential strikes, slowdowns, picketing and work stoppages, and
materially reduce our profitability.
Our ability to collect payments from our customers could be impaired if their creditworthiness deteriorates.
Our ability to receive payment for the coal we sell depends on the continued creditworthiness of our customers. The
current economic volatility and tightening credit markets increase the risk that we may not be able to collect payments from
our customers. A continuation or worsening of current economic conditions or other prolonged global or U.S. recessions
could also impact the creditworthiness of our customers. If the creditworthiness of a customer declines, this would increase
the risk that we may not be able to collect payment for all of the coal we sell to that customer. If we determine that a
customer is not creditworthy, we may not be required to deliver coal under the customer’s coal sales contract. If we are able
to withhold shipments, we may decide to sell the customer’s coal on the spot market, which may be at prices lower than the
contract price, or we may be unable to sell the coal at all. Furthermore, the bankruptcy of any of our customers could have a
material adverse effect on our financial position. In addition, competition with other coal suppliers could force us to extend
credit to customers and on terms that could increase the risk of payment default.
We will be required by Section 404 of the Sarbanes-Oxley Act to evaluate the effectiveness of our internal controls. We
have identified control deficiencies, including material weaknesses, in the past, which have been remediated. If we are
unable to establish and maintain effective internal controls, our financial condition and operating results could be
adversely affected.
We are in the process of evaluating our internal controls systems to allow management to report on, and our
independent auditors to audit, our internal controls over financial reporting. We are also in the process of performing the
system and process evaluation and testing (and any necessary remediation) required to comply with the management
certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We anticipate that we
will be required to comply with Section 404 for the year ending December 31, 2013.
However, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the
impact of the same on our operations. Furthermore, upon completion of this process, we may identify control deficiencies of
varying degrees of severity under applicable SEC and Public Company Accounting Oversight Board rules and regulations
that remain unremediated. As a public company, we will be required to report, among other things, control deficiencies that
constitute a “material weakness” or changes in internal controls that, or that are reasonably likely to, materially affect
internal controls over financial reporting. A “material weakness” is a deficiency or combination of deficiencies in internal
controls over financial reports that results in more than a remote likelihood that a material misstatement of the annual or
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interim consolidated financial statements will not be prevented or detected. A “significant deficiency” is a deficiency or
combination of deficiencies that is less severe than a material weakness.
We have identified deficiencies in our internal control over financial reporting, including in connection with the
financial statement close process for the year ended December 31, 2011, in which we identified an error in our calculation of
depreciation, depletion, and amortization. Although we believe this material weakness has been remediated, if we are unable
to appropriately maintain the remediation plan we have implemented and maintain any other necessary controls we
implement in the future, our management might not be able to certify, and our independent registered public accounting firm
might not be able to deliver an unqualified report on the adequacy of our internal control over financial reporting.
If we fail to implement the requirements of Section 404 in a timely manner, we might be subject to sanctions or
investigation by regulatory authorities such as the SEC. In addition, failure to comply with Section 404 or the report by us of
a material weakness may cause investors to lose confidence in our consolidated financial statements, and as a result our
common stock price may be adversely affected. If we fail to remedy any material weakness, our consolidated financial
statements may be inaccurate, we may face restricted access to the capital markets and our common stock price may be
adversely affected.
Terrorist attacks and threats, escalation of military activity in response to these attacks or acts of war could have a
material adverse effect on our business, financial condition or results of operations.
Terrorist attacks and threats, escalation of military activity or acts of war may have significant effects on general
economic conditions, fluctuations in consumer confidence and spending and market liquidity, each of which could materially
and adversely affect our business. Future terrorist attacks, rumors or threats of war, actual conflicts involving the United
States or its allies, or military or trade disruptions affecting our customers may significantly affect our operations and those
of our customers. Strategic targets, such as energy-related assets and transportation assets, may be at greater risk of future
terrorist attacks than other targets in the United States. Disruption or significant increases in energy prices could result in
government-imposed price controls. It is possible that any of these occurrences, or a combination of them, could have a
material adverse effect on our business, financial condition and results of operations.
Risks Related to Environmental, Other Regulations and Legislation
New regulatory requirements limiting greenhouse gas emissions could adversely affect coal-fired power generation
and reduce the demand for coal as a fuel source, which could cause the price and quantity of the coal we sell to decline
materially.
One major by-product of burning coal is carbon dioxide (“CO 2 ”), which is a greenhouse gas and a source of concern
with respect to global warming, also known as Climate Change. Climate Change continues to attract government, public and
scientific attention, especially on ways to reduce greenhouse gas emissions, including from coal-fired power plants. Various
international, federal, regional and state proposals are being considered to limit emissions of greenhouse gases, including
possible future U.S. treaty commitments, new federal or state legislation that may establish a cap-and-trade regime, and
regulation under existing environmental laws by the EPA and other regulatory agencies. Future regulation of greenhouse gas
emissions may require additional controls on, or the closure of, coal-fired power plants and industrial boilers and may
restrict the construction of new coal-fired power plants.
The permitting of new coal-fired power plants has also recently been contested by state regulators and environmental
advocacy organizations due to concerns related to greenhouse gas emissions. In addition, a federal appeals court has allowed
a lawsuit pursuing federal common law claims to proceed against certain utilities on the basis that they may have created a
public nuisance due to their emissions of carbon dioxide, although the U.S. Supreme Court has since held that federal
common law provides no basis for such claims. Future regulation, litigation and permitting related to greenhouse gas
emissions may cause some users of coal to switch from coal to a lower-carbon fuel, or otherwise reduce the use of and
demand for fossil fuels,
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particularly coal, which could have a material adverse effect on our business, financial condition or results of operations. See
“Business — Regulation and Laws — Climate Change.”
Extensive environmental requirements, including existing and potential future requirements relating to air emissions,
affect our customers and could reduce the demand for coal as a fuel source and cause coal prices and sales of our coal
to materially decline.
Coal contains impurities, including but not limited to sulfur, mercury, chlorine and other elements or compounds, many
of which are released into the air when coal is burned. The operations of our customers are subject to extensive
environmental requirements, particularly with respect to air emissions. For example, the federal Clean Air Act and similar
state and local laws extensively regulate the amount of sulfur dioxide (“SO 2 ”), particulate matter, nitrogen oxides (“NOx”),
and other compounds emitted into the air from electric power plants, which are the largest end-users of our coal. A series of
more stringent requirements relating to particulate matter, ozone, haze, mercury, SO 2 , NOx, toxic gases and other air
pollutants have been proposed or could become effective in coming years. In addition, concerted conservation efforts that
result in reduced electricity consumption could cause coal prices and sales of our coal to materially decline.
Considerable uncertainty is associated with these air emissions initiatives. The content of additional requirements in the
U.S. is in the process of being developed, and many new initiatives remain subject to review by federal or state agencies or
the courts. Stringent air emissions limitations are either in place or may be imposed in the short to medium term, and these
limitations will likely require significant emissions control expenditures for many coal-fired power plants. As a result, these
power plants may switch to other fuels that generate fewer of these emissions and the construction of new coal-fired power
plants may become less desirable. The EIA’s expectations for the coal industry assume there will be a significant number of
as yet unplanned coal-fired plants built in the future. Any switching of fuel sources away from coal, closure of existing
coal-fired plants, or reduced construction of new plants could have a material adverse effect on demand for and prices
received for our coal.
In addition, contamination caused by the disposal of coal combustion byproducts, including coal ash, can lead to
material liability to our customers under federal and state laws. In addition, the EPA has proposed a rule concerning
management of coal combustion residuals. New EPA regulation of such management would likely increase the ultimate
costs to our customers of coal combustion. Such liabilities and increased costs in turn could have a material adverse effect on
the demand for and prices received for our coal.
See “Business — Regulation and Laws” for more information about the various governmental regulations affecting us.
Legal requirements that we expect to significantly expand scrubbed coal-fired electricity generating capacity may be
overturned or not enacted at all, which could result in less demand for Illinois Basin coal than we anticipate and
materially and adversely affect our coal prices and/or sales.
Although a number of legal requirements have been or are in the process of being implemented that are expected to
expand significantly the scrubbed coal-fired electricity generating capacity in the U.S., regulations driving this trend are
subject to legal challenge, and could also be the subject of future legislation that withdraws any authorization for such
requirements. For example, the recently finalized Cross-State Air Pollution Rule (“CSAPR”) has been challenged in court by
a number of southern and Midwestern states and several energy companies. In December 2011, the U.S. Court of Appeals
for the District of Columbia Circuit issued a ruling to stay the CSAPR pending judicial review. The outcome of such legal
proceedings, and other possible developments including, for example, changes in presidential administration and the
administration of the EPA, or the enactment by Congress of more lenient air pollution laws than are currently in effect, could
result in significantly less expansion of scrubbed coal-fired electricity generating capacity than we anticipate. This in turn
could mean that the strong increase in demand for relatively high-sulfur Illinois Basin coal we believe will occur in the
future may not materialize, or may not materialize as soon as it otherwise would. This could adversely affect the demand for
our coal and the price we will receive, which could materially and adversely affect our coal prices and/or sales.
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Our failure to obtain and renew permits and approvals necessary for our mining operations could negatively affect our
business.
Coal production is dependent on our ability to obtain and maintain various federal and state permits and approvals to
mine our coal reserves within the timeline specified in our mining plans. The permitting rules, and the interpretations of
these rules, are complex, change frequently, and are often subject to discretionary interpretations by regulators, which may
increase the costs or possibly preclude the continuance of ongoing mining operations or the development of future mining
operations. In addition, the public, including non-governmental organizations, anti-mining groups and individuals, have
certain statutory rights to comment upon and otherwise impact the permitting process, including through court intervention.
The slowing pace at which necessary permits are issued or renewed for new and existing mines has materially impacted coal
production, especially in Central Appalachia. Permitting by the Army Corps of Engineers (the “Corps”), the EPA and the
Department of the Interior has become subject to “enhanced review” under both the Surface Mining Control and
Reclamation Act of 1977 (the “SMCRA”), and the federal Clean Water Act (the “CWA”), to reduce the harmful
environmental consequences of mountain-top mining, especially in the Appalachian region.
For example, in April 2010, the EPA issued comprehensive interim final guidance regarding the review of certain new
and renewed CWA permit applications for Appalachian surface coal mining operations. EPA’s guidance is subject to several
pending legal challenges related to its legal effect and sufficiency including consolidated challenges pending in Federal
District Court in the District of Columbia led by the National Mining Association. This guidance may apply to our
applications to obtain and maintain permits that are important to our operations. We cannot give any assurance regarding the
impact that this or any successor guidance may have on the issuance or renewal of such permits.
Typically, we submit the necessary permit applications 12 to 30 months before we plan to mine a new area. Some of
our required mining permits are becoming increasingly difficult to obtain within the time frames to which we were
previously accustomed, and in some instances we have had to delay the mining of coal in certain areas covered by the
application in order to obtain required permits and approvals. Permits could be delayed in the future if the EPA continues its
enhanced review of CWA applications. If the required permits are not issued or renewed in a timely fashion or at all, or if
permits issued or renewed are conditioned in a manner that restricts our ability to efficiently and economically conduct our
mining activities, we could suffer a material reduction in our production and our operations, and there could be a material
adverse effect on our ability to produce coal profitably. See “Business — Regulation and Laws.”
Section 404(q) of the CWA establishes a requirement that the Secretary of the Army and the Administrator of the EPA
enter into an agreement assuring that delays in the issuance of permits under Section 404 are minimized. In August 1992, the
Department of the Army and the EPA entered into such an agreement. The 1992 Section 404(q) Memorandum of Agreement
(“MOA”) outlines the current process and time frames for resolving disputes in an effort to issue timely permit decisions.
Under this MOA, the EPA may request that certain permit applications receive a higher level of review within the
Department of Army. In these cases, the EPA determines that issuance of the permit will result in unacceptable adverse
effects to Aquatic Resources of National Importance (“ARNI”). Alternately, the EPA may raise concerns over Section 404
program policies and procedures. An ARNI is a resource-based threshold used to determine whether a dispute between the
EPA and the Corps regarding individual permit cases are eligible for elevation under the MOA. Factors used in identifying
ARNIs include the economic importance of the aquatic resource, rarity or uniqueness, and/or importance of the aquatic
resource to the protection, maintenance, or enhancement of the quality of the waters.
We received notice from the EPA dated July 25, 2011 that it believes that the proposed discharge plan submitted by us
in connection with our Section 404 permit application for the expanded mining at our Midway Mine would result in
unacceptable impacts on ARNIs, and in particular, downstream waters outside the scope of the permit area. As a result, it is
possible that the Corps will deny our pending permit application, or that the EPA will elevate the permit application to a
higher level of review should the Corps proceed with the issuance of the permit notwithstanding EPA’s concerns.
Ultimately, the EPA may consider initiating a Section 404(c) “veto” of the permit. A material delay in the issuance of this
permit, or other Section 404
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permits that we may require as part of our mining operations, or the denial or veto of such permits, could have a materially
negative effect on our operations and profitability.
Federal or state regulatory agencies have the authority to order certain of our mines to be temporarily or permanently
closed under certain circumstances, which could materially and adversely affect our ability to meet our customers’
demands.
Federal or state regulatory agencies have the authority under certain circumstances following significant health and
safety incidents, such as fatalities, to order a mine to be temporarily or permanently closed. If this were to occur, capital
expenditures could be required in order for us to be allowed could be required in order for us to be allowed to reopen the
mine. In the event that these agencies order the closing of our mines, our coal sales contracts generally allow us to issue
force majeure notices which suspend our obligations to deliver coal under these contracts. However, our customers may
challenge our issuances of force majeure notices. If these challenges are successful, we may have to purchase coal from
third-party sources, if it is available, to fulfill these obligations, incur capital expenditures to reopen the mines and/or
negotiate settlements with the customers, which may include price reductions, the reduction of commitments or the
extension of time for delivery or terminate customers’ contracts. Any of these actions could have a material adverse effect on
our business and results of operations.
Extensive environmental laws and regulations impose significant costs on our mining operations, and future laws and
regulations could materially increase those costs or limit our ability to produce and sell coal.
The coal mining industry is subject to increasingly strict regulation by federal, state and local authorities with respect to
environmental matters such as:
• limitations on land use;
• mine permitting and licensing requirements;
• reclamation and restoration of mining properties after mining is completed;
• management of materials generated by mining operations;
• the storage, treatment and disposal of wastes;
• remediation of contaminated soil and groundwater;
• air quality standards;
• water pollution;
• protection of human health, plant-life and wildlife, including endangered or threatened species;
• protection of wetlands;
• the discharge of materials into the environment;
• the effects of mining on surface water and groundwater quality and availability; and
• the management of electrical equipment containing polychlorinated biphenyls.
The costs, liabilities and requirements associated with the laws and regulations related to these and other environmental
matters may be costly and time-consuming and may delay commencement or continuation of exploration or production
operations. We cannot assure you that we have been or will be at all times in compliance with the applicable laws and
regulations. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and
criminal penalties, the imposition of cleanup and site restoration costs and liens, the issuance of injunctions to limit or cease
operations, the suspension or revocation of permits and other enforcement measures that could have the effect of limiting
production from our operations. We may incur material costs and liabilities resulting from claims for damages to property or
injury to persons arising from our operations. If we are pursued for sanctions, costs and liabilities in respect of these matters,
we could be materially and adversely affected.
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New legislation or administrative regulations or new judicial interpretations or administrative enforcement of existing
laws and regulations, including proposals related to the protection of the environment that would further regulate and tax the
coal industry, may also require us to change operations significantly or incur increased costs. For example, in December
2008, the U.S. Department of the Interior’s Office of Surface Mining Reclamation and Enforcement (the “OSM”) revised the
original “stream buffer zone” rule (the “SBZ Rule”), which had been issued under the SMCRA in 1983. The SBZ Rule was
challenged in the U.S. District Court for the District of Columbia. In a March 2010 settlement with the litigation parties, the
OSM agreed to use its best efforts to adopt a final rule by June 2012. In addition, Congress has proposed, and may in the
future propose, legislation to restrict the placement of mining material in streams. The requirements of the revised SBZ Rule
or future legislation, when adopted, will likely be stricter than the prior SBZ Rule to further protect streams from the impact
of surface mining. Such changes could have a material adverse effect on our financial condition and results of operations.
See “Business — Regulation and Laws.”
If the assumptions underlying our estimates of reclamation and mine closure obligations are inaccurate, our costs
could be greater than anticipated.
SMCRA and counterpart state laws and regulations establish operational, reclamation and closure standards for all
aspects of surface mining, as well as most aspects of underground mining. We base our estimates of reclamation and mine
closure liabilities on permit requirements, engineering studies and our engineering expertise related to these requirements.
Our management and engineers periodically review these estimates. The estimates can change significantly if actual costs
vary from our original assumptions or if governmental regulations change significantly. We are required to record new
obligations as liabilities at fair value under generally accepted accounting principles. In estimating fair value, we considered
the estimated current costs of reclamation and mine closure and applied inflation rates and a third-party profit, as required.
The third-party profit is an estimate of the approximate markup that would be charged by contractors for work performed on
our behalf. The resulting estimated reclamation and mine closure obligations could change significantly if actual amounts
change significantly from our assumptions, which could have a material adverse effect on our results of operations and
financial condition.
Our operations may impact the environment or cause exposure to hazardous substances, and our properties may have
environmental contamination, which could result in material liabilities to us.
Our operations currently use hazardous materials and generate limited quantities of hazardous wastes from time to time,
which may affect runoff or drainage water or other aspects of the environment. We could become subject to claims for toxic
torts, natural resource damages and other damages as well as for the investigation and clean up of soil, surface water,
groundwater, and other media. Such claims may arise, for example, out of conditions at sites that we currently own or
operate, as well as at sites that we previously owned or operated, or may acquire. Our liability for such claims may be joint
and several, so that we may be held responsible for more than our share of the contamination or other damages, or even for
the entire share.
We maintain extensive coal refuse areas and slurry impoundments at a number of our mines. Such areas and
impoundments are subject to extensive regulation. Slurry impoundments have been known to fail, releasing large volumes of
coal slurry into the surrounding environment. Structural failure of an impoundment can result in extensive damage to the
environment and natural resources, such as bodies of water that the coal slurry reaches, as well as liability for related
personal injuries and property damages, and injuries to wildlife. Some of our impoundments overlie mined out areas, which
could pose a heightened risk of failure and of damages arising out of failure. If one of our impoundments were to fail, we
could be subject to substantial claims for the resulting environmental contamination and associated liability, as well as for
civil or criminal fines and penalties.
Drainage flowing from or caused by mining activities can be acidic with elevated levels of dissolved metals, a condition
referred to as “acid mine drainage,” which we refer to as AMD. The treating of AMD can be costly. Although we do not
currently face material costs associated with AMD, it is possible that we could incur significant costs in the future.
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These and other similar unforeseen impacts that our operations may have on the environment, as well as exposures to
hazardous substances or wastes associated with our operations, could result in costs and liabilities that could materially and
adversely affect us.
Changes in the legal and regulatory environment could complicate or limit our business activities, increase our
operating costs or result in litigation.
The conduct of our businesses is subject to various laws and regulations administered by federal, state and local
governmental agencies in the United States. These laws and regulations may change, sometimes dramatically, as a result of
political, economic or social events or in response to significant events. Certain recent developments particularly may cause
changes in the legal and regulatory environment in which we operate and may impact our results or increase our costs or
liabilities. Such legal and regulatory environment changes may include changes in:
• the processes for obtaining or renewing permits;
• costs associated with providing healthcare benefits to employees;
• health and safety standards;
• accounting standards;
• taxation requirements; and
• competition laws.
In 2006, the Federal Mine Improvement and New Emergency Response Act of 2006 (the “MINER Act”), was enacted.
The MINER Act significantly amended the Federal Mine Safety and Health Act of 1977 (the “Mine Act”), imposing more
extensive and stringent compliance standards, increasing criminal penalties and establishing a maximum civil penalty for
non-compliance, and expanding the scope of federal oversight, inspection, and enforcement activities.
Following the passage of the MINER Act, the U.S. Mine Safety and Health Administration (“MSHA”), issued new or
more stringent rules and policies on a variety of topics, including:
• sealing off abandoned areas of underground coal mines;
• mine safety equipment, training and emergency reporting requirements;
• substantially increased civil penalties for regulatory violations;
• training and availability of mine rescue teams;
• underground “refuge alternatives” capable of sustaining trapped miners in the event of an emergency;
• flame-resistant conveyor belt, fire prevention and detection, and use of air from the belt entry; and
• post-accident two-way communications and electronic tracking systems.
Subsequent to passage of the MINER Act, Illinois, Kentucky, Pennsylvania, Ohio and West Virginia have enacted
legislation addressing issues such as mine safety and accident reporting, increased civil and criminal penalties, and increased
inspections and oversight. Other states may pass similar legislation in the future. Also, additional federal and state legislation
that further increase mine safety regulation, inspection and enforcement, particularly with respect to underground mining
operations, has been considered in light of recent fatal mine accidents. In 2010, the 111th Congress introduced federal
legislation seeking to impose extensive additional safety and health requirements on coal mining. While the legislation was
passed by the House of Representatives, the legislation was not voted on in the Senate and did not become law. On
January 26, 2011, the same legislation was reintroduced in the 112th Congress by Senators Jay Rockefeller (D-W.Va.), Tom
Harkin (D-Iowa), Patty Murray (D-Wash.) and Joe Manchin III (D-W.Va.). Further workplace accidents are likely to also
result in more stringent enforcement and possibly the passage of new laws and regulations.
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The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), that was signed into law
on July 21, 2010, requires public companies to disclose in their periodic reports filed with the Securities and Exchange
Commission (the “SEC”) substantial additional information about safety issues relating to our mining operations. After
effectiveness of our registration statement, we will be subject to the provisions of the Dodd-Frank Act.
In response to the April 2010 explosion at Massey Energy Company’s Upper Big Branch Mine and the ensuing tragedy,
we expect that safety matters pertaining to underground coal mining operations may be the topic of additional new federal
and/or state legislation and regulation, as well as the subject of heightened enforcement efforts. For example, federal
authorities have announced special inspections of coal mines to evaluate several safety concerns, including the accumulation
of coal dust and the proper ventilation of gases such as methane. In addition, federal authorities have announced that they are
considering changes to mine safety rules and regulations which could potentially result in additional or enhanced required
safety equipment, more frequent mine inspections, stricter and more thorough enforcement practices and enhanced reporting
requirements. Any new environmental, health and safety requirements may be replicated in the states in which we operate
and could increase our operating costs or otherwise may prevent, delay or reduce our planned production, any of which
could adversely affect our financial condition, results of operations and cash flows.
Although we are unable to quantify the full impact, implementing and complying with new laws and regulations could
have an adverse impact on our business and results of operations and could result in harsher sanctions in the event of any
violations. See “Business — Regulation and Laws.”
Certain United States federal income tax preferences currently available with respect to coal exploration and
development may be eliminated as a result of future legislation.
President Obama’s Proposed Fiscal Year 2012 budget recommends elimination of certain key United States federal
income tax preferences relating to coal exploration and development (the “Budget Proposal”). The Budget Proposal would
(1) eliminate current deductions and 60-month amortization for exploration and development costs relating to coal and other
hard mineral fossil fuels, (2) repeal the percentage depletion allowance with respect to coal properties, (3) repeal capital
gains treatment of coal and lignite royalties, and (4) exclude from the definition of domestic production gross receipts all
gross receipts derived from the sale, exchange, or other disposition of coal, other hard mineral fossil fuels, or primary
products thereof. The passage of any legislation as a result of the Budget Proposal or any other similar changes in United
States federal income tax laws could eliminate certain tax deductions that are currently available with respect to coal
exploration and development, and any such change could increase our taxable income and negatively impact the value of an
investment in our common stock.
Risks Related to This Offering and Our Common Stock
An active, liquid trading market for our common stock may not develop.
Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which
investor interest in us will lead to the development of a trading market on Nasdaq or otherwise or how active and liquid that
market may become. If an active and liquid trading market does not develop, you may have difficulty selling any of our
common stock that you purchase.
Our stock price may change significantly following the offering, and you could lose all or part of your investment as a
result.
Even if an active trading market develops, the market price for shares of our common stock may be highly volatile and
could be subject to wide fluctuations after this offering. We and the underwriters will negotiate to determine the initial public
offering price. You may not be able to resell your shares at or above
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the initial public offering price due to a number of factors such as those listed in “— Risks Related to the Company.” Some
of the factors that could negatively affect our share price include:
• changes in oil and gas prices;
• changes in our funds from operations and earnings estimates;
• publication of research reports about us or the energy services industry;
• increase in market interest rates, which may increase our cost of capital;
• changes in applicable laws or regulations, court rulings and enforcement and legal actions;
• changes in market valuations of similar companies;
• adverse market reaction to any increased indebtedness we may incur in the future;
• additions or departures of key management personnel;
• actions by our stockholders;
• speculation in the press or investment community;
• a large volume of sellers of our common stock pursuant to our resale registration statement with a relatively small
volume of purchasers; or
• general market and economic conditions.
Furthermore, the stock market has recently experienced extreme volatility that in some cases has been unrelated or
disproportionate to the operating performance of particular companies. These broad market and industry fluctuations may
adversely affect the market price of our common stock, regardless of our actual operating performance.
In the past, following periods of market volatility, stockholders have instituted securities class action litigation. If we
were involved in securities litigation, it could have a substantial cost and divert resources and the attention of executive
management from our business regardless of the outcome of such litigation.
The offering price per share of the common stock may not accurately reflect its actual value.
The initial public offering price per share of our common stock offered under this prospectus reflects the result of
negotiations between us and the underwriters. The offering price may not accurately reflect the value of our common stock,
and may not be indicative of prices that will prevail in the open market following this offering.
We do not anticipate paying any dividends on our common stock in the foreseeable future.
For the foreseeable future, we intend to retain earnings to grow our business. Payments of future dividends, if any, will
be at the discretion of our board of directors and will depend on many factors, including general economic and business
conditions, our strategic plans, our financial results and condition, legal requirements and other factors as our board of
directors deems relevant. Our Senior Secured Credit Facility restricts our ability to pay cash dividends on our common stock
and we may also enter into credit agreements or borrowing arrangements in the future that will restrict our ability to declare
or pay cash dividends on our common stock.
We will incur increased costs as a result of being a public company.
As a privately held company, we have not been responsible for the corporate governance and financial reporting
practices and policies required of a publicly traded company. Following the effectiveness of the registration statement of
which this prospectus is a part, we will be a public company. As a public company with listed equity securities, we will need
to comply with new laws, regulations and requirements, certain corporate governance provisions of the Sarbanes-Oxley Act
of 2002, related regulations of the SEC and the
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requirements of Nasdaq or other stock exchange on which our common stock is listed, with which we are not required to
comply as a private company. Complying with these statutes, regulations and requirements will occupy a significant amount
of time of our board of directors and management and will significantly increase our costs and expenses. We will need to:
• institute a more comprehensive compliance function;
• design, establish, evaluate and maintain a system of internal controls over financial reporting in compliance with the
requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC and
the Public Company Accounting Oversight Board;
• comply with rules promulgated by the NYSE, Nasdaq or other stock exchange on which our common stock is listed;
• prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws;
• establish new internal policies, such as those relating to disclosure controls and procedures and insider trading;
• involve and retain to a greater degree outside counsel and accountants in the above activities; and
• establish an investor relations function.
In addition, we also expect that being a public company subject to these rules and regulations will require us to accept
less director and officer liability insurance coverage than we desire or to incur substantial costs to obtain coverage. These
factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly
to serve on our audit committee, and qualified executive officers.
Future sales, or the perception of future sales, of our common stock may depress our share price.
We may in the future issue our previously authorized and unissued securities. At the closing of this offering, we will be
authorized to issue shares of common stock and preferred stock with such designations, preferences and rights as
determined by our board of directors. The potential issuance of such additional shares of common stock will result in the
dilution of the ownership interests of the purchasers of our common stock in this offering and may create downward pressure
on the trading price, if any, of our common stock. The sales of substantial amounts of our common stock following the
effectiveness of the registration statement of which this prospectus is a part, or the perception that these sales may occur,
could cause the market price of our common stock to decline and impair our ability to raise capital. Based on shares of
common stock outstanding as of , 2012, upon completion of this offering, we will have shares of common stock
outstanding. Of these outstanding shares, all of the shares of our common stock sold in this offering will be freely tradable in
the public market, except for any shares held by our affiliates, as defined in Rule 144 under the Securities Act.
We, our directors, executive officers and stockholders have agreed with the underwriters, subject to certain exceptions,
not to dispose of or hedge any shares of our common stock or any securities convertible into, or exercisable or exchangeable
for, shares of our common stock for a period of 180 days from the date of this prospectus, which may be extended upon the
occurrence of specified events, except with the prior written consent of . , at any time and without notice, may release
all or any portion of the common stock subject to the lock-up agreements entered into in connection with this offering. If the
restrictions under the lock-up agreements are waived, our common stock will be available for sale into the market, which
could reduce the market value for our common stock.
After the expiration of the lock-up agreements and other contractual restrictions that prohibit transfers for at least
180 days after the date of this prospectus, up to restricted securities may be sold into the public market in the future
without registration under the Securities Act to the extent permitted under Rule 144. Of these restricted securities,
approximately shares will be available for sale approximately days after the date of this prospectus, subject to volume
or other limits under Rule 144.
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If securities or industry analysts do not publish research or reports about our business, if they adversely change their
recommendations regarding our common stock, or if our operating results do not meet their expectations, the price and
trading volume of our common stock could decline.
The trading market for our common stock will be influenced by the research and reports that securities or industry
analysts publish about us or our business. Securities analysts may elect not to provide research coverage of our common
stock. This lack of research coverage could adversely affect the price of our common stock. We do not have any control over
these reports or analysts. If any of the analysts who cover us downgrades our stock, or if our operating results do not meet
the analysts’ expectations, our stock price could decline. Moreover, if any of these analysts ceases coverage of us or fails to
publish regular reports on our business, we could lose visibility in the market, which in turn could cause our common stock
price and trading volume to decline and our common stock to be less liquid.
You will incur immediate dilution in the book value of your common stock as a result of this offering.
The initial public offering price of our common stock is considerably more than the as adjusted, net tangible book value
per share of our outstanding common stock. This reduction in the value of your equity is known as dilution. This dilution
occurs in large part because our earlier investors paid substantially less than the initial public offering price when they
purchased their shares. Investors purchasing common stock in this offering will incur immediate dilution of $ in as
adjusted, net tangible book value per share of common stock, based on the assumed initial public offering price of $ per
share, which is the midpoint of the price range listed on the front cover page of this prospectus. In addition, following this
offering, purchasers in the offering will have contributed % of the total consideration paid by our stockholders to purchase
shares of common stock. For a further description of the dilution that you will experience immediately after this offering, see
“Dilution.” In addition, if we raise funds by issuing additional securities, the newly-issued shares will further dilute your
percentage ownership of us.
Provisions in our organizational documents and under Delaware law could delay or prevent a change in control of our
company, which could adversely affect the price of our common stock.
The existence of some provisions in our organizational documents and under Delaware law could delay or prevent a
change in control of our company that a stockholder may consider favorable, which could adversely affect the price of our
common stock. The provisions in our amended and restated certificate of incorporation and bylaws that could delay or
prevent an unsolicited change in control of our company include board authority to issue preferred stock without stockholder
approval, and advance notice provisions for director nominations or business to be considered at a stockholder meeting.
These provisions may also discourage acquisition proposals or delay or prevent a change of control, which could harm our
stock price. See “Description of Capital Stock — Anti-Takeover Effects of Certain Provisions of Our Amended and Restated
Certificate of Incorporation, Bylaws and Delaware Law.”
Our management team may not be able to organize and effectively manage a publicly traded operating company, which
could adversely affect our overall financial position.
Some of our senior executive officers or directors have not previously organized or managed a publicly traded operating
company, and our senior executive officers and directors may not be successful in doing so. The demands of organizing and
managing a publicly traded operating company are much greater as compared to a private company and some of our senior
executive officers and directors may not be able to meet those increased demands. Failure to organize and effectively
manage us could adversely affect our overall financial position.
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Future offerings of debt securities, which would rank senior to our common stock upon our liquidation, and future
offerings of equity securities, which would dilute our existing stockholders, may adversely affect the market value of
common stock.
In the future, we may attempt to increase our capital resources by making offerings of debt or additional offerings of
equity securities, including commercial paper, medium-term notes, senior or subordinated notes and classes of preferred
stock. Upon liquidation, holders of our debt securities and preferred stock and lenders with respect to other borrowings will
receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute
the holdings of our existing stockholders or reduce the market value of our common stock, or both. Our preferred stock,
which could be issued without stockholder approval, if issued, could have a preference on liquidating distributions or a
preference on dividend payments that would limit amounts available for distribution to holders of our common stock.
Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our
control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our common
stock bear the risk of our future offerings reducing the market value of our common stock and diluting their share holdings in
us.
Non-U.S. holders of our common stock may be subject to United States federal income tax with respect to gain on the
disposition of our common stock.
If we are or have been a “United States real property holding corporation” within the meaning of the Internal Revenue
Code of 1986, as amended (the “Code”), at any time within the shorter of (1) the five-year period preceding a disposition of
our common stock by a non-U.S. holder (as defined below under “Material United States Federal Income and Estate Tax
Consequences to Non-U.S. Holders”), or (2) such holder’s holding period for such common stock, and assuming our
common stock is “regularly traded,” as defined by applicable United States Treasury regulations, on an established securities
market, the non-U.S. holder may be subject to United States federal income tax with respect to gain on such disposition if it
held more than 5% of our common stock at any time during the shorter of periods (1) and (2) above. We believe we are, and
will continue to be, a United States real property holding corporation.
If our common stock is not considered to be regularly traded on an established securities market during the calendar
year in which a sale or disposition occurs, the buyer or other transferee of our common stock generally will be required to
withhold tax at the rate of 10% on the sales price or other amount realized as a prepayment of a transferor’s United States
federal income tax liability, unless the transferor furnishes an affidavit certifying that it is not a foreign person in the manner
and form specified in applicable United States Treasury regulations.
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Various statements contained in this prospectus, including those that express a belief, expectation or intention, as well
as those that are not statements of historical fact, are forward-looking statements. These forward-looking statements may
include projections and estimates concerning the timing and success of specific projects and our future production, revenues,
income and capital spending. Our forward-looking statements are generally accompanied by words such as “estimate,”
“project,” “predict,” “believe,” “expect,” “anticipate,” “potential,” “plan,” “goal” or other words that convey the uncertainty
of future events or outcomes. The forward-looking statements in this prospectus speak only as of the date of this prospectus;
we disclaim any obligation to update these statements unless required by law, and we caution you not to rely on them
unduly. We have based these forward-looking statements on our current expectations and assumptions about future events.
While our management considers these expectations and assumptions to be reasonable, they are inherently subject to
significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are
difficult to predict and many of which are beyond our control. These and other important factors, including those discussed
under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” may
cause our actual results, performance or achievements to differ materially from any future results, performance or
achievements expressed or implied by these forward-looking statements. These risks, contingencies and uncertainties
include, but are not limited to, the following:
• market demand for coal and electricity;
• geologic conditions, weather and other inherent risks of coal mining that are beyond our control;
• competition within our industry and with producers of competing energy sources;
• excess production and production capacity;
• our ability to acquire or develop coal reserves in an economically feasible manner;
• inaccuracies in our estimates of our coal reserves;
• availability and price of mining and other industrial supplies, including steel-based supplies, diesel fuel, rubber tires
and explosives;
• availability of skilled employees and other workforce factors;
• disruptions in the quantities of coal produced at our operations as a consequence of weather or equipment or mine
failures;
• our ability to collect payments from our customers;
• defects in title or the loss of a leasehold interest;
• railroad, barge, truck and other transportation performance and costs;
• our ability to secure new coal supply arrangements or to renew existing coal supply arrangements;
• our relationships with, and other conditions affecting, our customers;
• the deferral of contracted shipments of coal by our customers;
• our ability to service our outstanding indebtedness;
• our ability to comply with the restrictions imposed by our Senior Secured Credit Facility and other financing
arrangements;
• the availability and cost of surety bonds;
• terrorist attacks, military action or war;
• our ability to obtain and renew various permits, including permits authorizing the disposition of certain mining
waste;
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• existing and future legislation and regulations affecting both our coal mining operations and our customers’ coal
usage, governmental policies and taxes, including those aimed at reducing emissions of elements such as mercury,
sulfur dioxide, nitrogen oxides, toxic gases, such as hydrogen chloride, particulate matter or greenhouse gases;
• the accuracy of our estimates of reclamation and other mine closure obligations;
• customers’ ability to meet existing or new regulatory requirements and associated costs, including disposal of coal
combustion waste material;
• our ability to attract/retain key management personnel;
• efforts to organize our workforce for representation under a collective bargaining agreement;
• costs to comply with the Sarbanes-Oxley Act of 2002; and
• the other factors affecting our business described below under the caption “Risk Factors.”
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USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of our common stock in this offering will be $ million, at an
assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover of this
prospectus, and after deducting estimated underwriting discounts and commissions and offering expenses estimated at
$ million. Our net proceeds will increase by approximately $ million if the underwriters’ option to purchase additional
shares is exercised in full. Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share, the
midpoint of the price range set forth on the cover of this prospectus, would increase (decrease) the net proceeds to us of this
offering by $ million, or $ million if the underwriters’ option is exercised in full, assuming the number of shares
offered by us, as set forth on the cover of this prospectus, remains the same and after deducting estimated underwriting
discounts and commissions and offering expenses.
We intend to use $ million of the net proceeds from this offering to repay a portion of our outstanding borrowings
under our Senior Secured Term Loan, $ million of the net proceeds to repay a portion of our outstanding borrowings
under our Senior Secured Revolving Credit Facility and the balance, if any, for general corporate purposes, including to fund
capital expenditures relating to our mining operations and working capital. The interest rate applicable to the Senior Secured
Term Loan and the Senior Secured Revolving Credit Facility fluctuates based on our leverage ratio and the applicable
interest option elected. The interest rate as of September 30, 2011 was 5.75%, which was reduced to 5.25% on November
14, 2011. The Senior Secured Credit Facility matures on February 9, 2016. See “Description of Indebtedness.” Raymond
James Bank, FSB, an affiliate of Raymond James & Associates, Inc. is a lender under our Senior Secured Term Loan and
our Senior Secured Revolving Credit Facility and may receive a portion of the net proceeds of this offering. See “Conflicts
of Interest.”
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DIVIDEND POLICY
Historically, we have not paid cash dividends to holders of our common stock. For the foreseeable future, we intend to
retain earnings to grow our business. Payments of future dividends, if any, will be at the discretion of our board of directors
and will depend on many factors, including general economic and business conditions, our strategic plans, our financial
results and condition, legal requirements and other factors that our board of directors deems relevant. Our Senior Secured
Credit Facility restricts our ability to pay cash dividends on our common stock, and we may also enter into credit agreements
or other borrowing arrangements in the future that will restrict our ability to declare or pay cash dividends on our common
stock.
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CAPITALIZATION
The following table shows:
• Our capitalization as of September 30, 2011; and
• Our unaudited pro forma capitalization as of September 30, 2011, as adjusted, to reflect the following: (a) the
receipt of the net proceeds from the sale by us in this offering of shares of common stock at an assumed public
offering price of $ per share, the midpoint of the range set forth on the front cover page of this prospectus, after
deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, (b) the
repayment of certain outstanding indebtedness with the application of proceeds from this offering, (c) the
application of amounts we expect to receive from the Concurrent ARP Offering and related transactions as
described in “Certain Relationships and Related Party Transactions — Concurrent Transactions with Armstrong
Resource Partners,” and (d) the recognition of new debt financing arrangements as a result of the Deconsolidation of
Armstrong Resource Partners.
We derived this table from, and it should be read in conjunction with and is qualified in its entirety by reference to, our
historical and unaudited pro forma consolidated financial statements and the accompanying notes included elsewhere in this
prospectus. You should also read this table in conjunction with “Selected Historical Consolidated Financial and Operating
Data,” “Unaudited Pro Forma Financial Information,” and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations.”
As of September 30, 2011
Pro-Forma As
Actual Adjusted(1)(2)
(In thousands)
Cash and cash equivalents $ 7,547 $
Long-term debt, including current portion:
Revolving credit facility $ 34,600 $
Term loan facility 100,000
Capital leases 15,131
Long-term obligation to related party —
Other 2,476
Total long-term debt 152,207
Stockholders’ equity:
Common stock, $0.01 par value; 70,000,000 shares authorized and
19,110,500 shares issued and outstanding on an actual basis; 70,000,000 shares
authorized and shares issued and outstanding on an as adjusted basis(3) 191
Additional paid-in-capital 206,790
Accumulated deficit (35,257 )
Accumulated other comprehensive income (1,778 )
Non-controlling interest 137,984
Total stockholders’ equity 307,930
Total capitalization $ 460,137 $
(1) Each $1.00 increase or decrease in the assumed public offering price of $ per share would increase or decrease,
respectively, each of total stockholders’ equity and total capitalization by approximately $ million, after deducting
the underwriting discount and estimated offering expenses payable by us. We may also increase or decrease the
number of shares we are offering. Each increase of 1.0 million shares offered by us, together with a concomitant $1.00
increase in the assumed offering price to $ per share, would increase total stockholders’ equity and total
capitalization by approximately
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$ million. Similarly, each decrease of 1.0 million shares offered by us, together with a concomitant $1.00 decrease
in the assumed offering price to $ per share, would decrease total stockholders’ equity and total capitalization by
approximately $ million. The information discussed above is illustrative only and will be adjusted based on the
actual public offering price and other terms of this offering determined at pricing.
(2) Each $1.00 increase or decrease in the assumed public offering price of the Concurrent ARP Offering of $ per
share if paid to us as described in “Certain Relationships and Related Party Transactions — Concurrent Transactions
with Armstrong Resource Partners” would increase or decrease, respectively, each of total stockholders’ equity and
total capitalization by approximately $ million, after deducting the underwriting discount and estimated offering
expenses payable by Armstrong Resource Partners. Armstrong Resource Partners may also increase or decrease the
number of shares it is offering. Each increase of 1.0 million shares offered by Armstrong Resource Partners, together
with a concomitant $1.00 increase in the assumed offering price of the Concurrent ARP Offering to $ per share, if
paid to us, would increase total stockholders’ equity and total capitalization by approximately $ million. Similarly,
each decrease of 1.0 million shares offered by Armstrong Resource Partners, together with a concomitant $1.00
decrease in the assumed offering price of the Concurrent ARP Offering to $ per share, if paid to us, would decrease
total stockholders’ equity and total capitalization by approximately $ million. The information discussed above is
illustrative only and will be adjusted based on the actual public offering price and other terms of this offering
determined at pricing.
(3) The number of shares of common stock issued and outstanding on a pro forma basis includes shares of common stock
outstanding, including awards of unrestricted stock to management, excludes awards of unvested restricted stock to
management, and does not reflect the repurchase of shares of common stock in connection with the cancellation of
certain indebtedness. See “Certain Relationships and Related Party Transactions — Loans to Executive Officers and
Loan Repayment” for additional information.
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DILUTION
Dilution is the amount by which the offering price paid by purchasers of common stock sold in this offering will exceed
the pro forma net tangible book value per share of common stock after the offering. As of September 30, 2011, our net
tangible book value was approximately $ , or $ per share. Net tangible book value is our total tangible assets less total
liabilities. Based on an assumed initial offering price of $ per share of common stock, on a pro forma as adjusted basis as
of , after giving effect to the offering of shares of common stock and the application of the related net proceeds, our net
tangible book value was $ million, or $ per share of common stock. Purchasers of common stock in this offering will
experience immediate and substantial dilution in net tangible book value per share for financial accounting purposes, as
illustrated in the following table:
Assumed purchase price per share of common stock $
Net tangible book value per share before this offering
Decrease in net tangible book value per share attributable to new investors
Less: Pro forma net tangible book value per share after this offering
Immediate dilution in net tangible book value per share to new investors $
A $1.00 increase in the assumed initial public offering price of $ per share (which is the midpoint of the range set
forth in the cover of this prospectus) would increase our net tangible book value after the offering by $ million, and
decrease the dilution to new investors by $ , assuming the number of shares offered by us, as set forth on the cover page of
this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
The following table sets forth, as of , 2012, the number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid by existing stockholders and to be paid by new investors
purchasing shares of common stock in this offering, after giving pro forma effect to the Deconsolidation and to the new
investors in this offering at the assumed initial public offering price of $ per share, together with the total consideration
paid and average price per share paid by each of these groups, before deducting underwriting discounts and commissions and
estimated offering expenses.
Average
Shares Purchased Total Consideration Price per
Number Percent Amount Percent Share
(In thousands)
Existing stockholders % $ % $
New investors % %
Total % $ % $
The foregoing tables do not give effect to:
(a) 109,150 shares of restricted stock outstanding held by our employees, including our executive officers; and
(b) additional shares of common stock available for future issuance under our stock option and incentive plans.
If the underwriters’ over-allotment option is exercised in full, the number of shares held by new investors will be , or
approximately, % of the total number of shares of common stock.
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UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following tables present our selected unaudited pro forma consolidated financial and operating data for the periods
indicated for Armstrong Energy. The following unaudited pro forma consolidated financial data of Armstrong Energy at
September 30, 2011, for the year ended December 31, 2010, and for the nine months ended September 30, 2011, are based
on the historical consolidated financial statements of our Predecessor, which are included elsewhere in this prospectus.
The unaudited pro forma consolidated balance sheet data at September 30, 2011 gives effect to (a) the issuance of
common stock in this offering and the application of the net proceeds therefrom as described in “Use of Proceeds,” (b) the
Deconsolidation of Armstrong Resource Partners, and (c) the contribution of net proceeds to Armstrong Energy from the
Concurrent ARP Offering, as if each had occurred on September 30, 2011.
The unaudited pro forma consolidated financial data for the fiscal year ended December 31, 2010 gives effect to
(a) adjustments to interest expense as a result of the repayment of a portion of the secured promissory notes from the
proceeds of this offering, (b) the addition of interest expense associated with a long-term obligation to Armstrong Resource
Partners, net of certain allocated management fees, recognized as part of the Deconsolidation of Armstrong Resource
Partners, and (c) net adjustments to interest expense as a result of the repayment of a portion of the secured promissory notes
from the proceeds contributed from the Concurrent ARP Offering, partially offset by additional interest expense associated
with an additional long-term obligation owed to Armstrong Resource Partners, as if each had occurred on January 1, 2010.
The unaudited pro forma consolidated financial data for the nine months ended September 30, 2011 gives effect to
(a) adjustments to interest expense as a result of the repayment of a portion of the secured promissory notes from the
proceeds of this offering and reduction of subsequent borrowings in February 2011 under the Senior Secured Credit Facility,
(b) the addition of interest expense associated with a long-term obligation to Armstrong Resource Partners, net of certain
allocated management fees, recognized as part of the Deconsolidation of Armstrong Resource Partners, and (c) net
adjustments to interest expense as a result of the repayment of a portion of the secured promissory notes from the proceeds
contributed from the Concurrent ARP Offering and additional interest expense associated with an additional long-term
obligation owed to Armstrong Resource Partners, as if each had occurred on January 1, 2010.
In connection with the Reorganization, effective October 1, 2011, Armstrong Energy converted its legal structure from
a partnership to a corporation for income tax purposes. The conversion of Armstrong Energy to a corporation would result in
the recognition of deferred tax assets and liabilities for the difference between its asset basis for financial reporting and
income tax purposes. However, consistent with the prior reporting of the subsidiary corporations, the consolidated income
tax filing group will recognize a full valuation allowance against its deferred tax assets. Therefore, there is no expected
impact to the statements of operations or financial position as a result of this transaction. As such, no income tax adjustments
from the Reorganization have been reflected in the unaudited pro forma financial information.
This unaudited pro forma consolidated financial information should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes
included elsewhere in this prospectus.
Our unaudited pro forma adjustments are based on available information and certain assumptions that we believe are
reasonable. Presentation of our unaudited pro forma consolidated financial and operating data is prepared in conformity with
Article 11 of Regulation S-X. The unaudited pro forma consolidated financial and operating data is included for illustrative
and informational purposes only and is not necessarily indicative of results we expect in future periods.
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Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 2010
(In thousands, except per share data)
Pro Forma
Pro Forma for the
for the Pro Forma Deconsolidation,
Deconsolidation for the this Offering,
and this Concurrent and the
As Reported Offering ARP Offering Concurrent ARP
for the for the for the Offering for the
Year Ended Adjustments Adjustments Year Ended Year Ended Year Ended
December 31, Related to the Related to this December 31, December 31, December 31,
2010 Deconsolidation Offering 2010 2010 2010
(Restated)
Revenue $ 220,625 $ $ $ $ $
Costs and expenses:
Operating costs and
expenses 151,838
Depreciation, depletion,
and amortization 18,892
Asset retirement
obligation expense 3,087
Selling, general, and
administrative costs 27,656 (A)
Operating income 19,152
Other income (expense):
Interest income 198
Interest expense (11,070 ) (B) (D) (E)
Other income (expense),
net (111 )
Net income 8,169
Income attributable to
non-controlling interest (3,351 ) (C)
Net income attributable to
common stockholders $ 4,818 $ $ $ $
Pro forma earnings per share
Basic and diluted $
Pro forma weighted average
shares outstanding
Basic
Diluted
(A) Represents the management fee and other legal and accounting fees charged to Armstrong Resource Partners for the
year ended December 31, 2010.
(B) Represents interest expense on the long-term obligations with Armstrong Resource Partners for the year ended
December 31, 2010.
(C) Reflects the deconsolidation of the non-controlling interest associated with Armstrong Resource Partners for the year
ended December 31, 2010.
(D) Reflects elimination of historical interest expense related to secured promissory notes repaid with proceeds from this
offering had it occurred on January 1, 2010.
(E) Reflects elimination of historical interest expense of $ million related to the secured promissory notes, as
Armstrong Energy intends to utilize the net proceeds contributed from the Concurrent ARP Offering to repay these
obligations. The amount is offset by additional interest expense of $ million associated with a long-term obligation
Armstrong Energy would enter into with Armstrong Resource Partners in exchange for an undivided interest in
additional mineral reserves.
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Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of September 30, 2011
(Dollars in thousands)
Pro Forma
for the
Deconsolidation,
Pro Forma this Offering
for the and the
Deconsolidation Adjustments Concurrent
and this Related ARP Offering
As Reported as Adjustments Adjustments Offering as of to the as of
of September 30, Related to the Related to this September 30, Concurrent September 30,
2011 Deconsolidation Offering 2011 ARP Offering 2011
(Restated)
Assets
Current assets:
Cash and cash equivalents $ 7,547 $ (F) $ $ $ (R) $
Accounts receivable 23,289
Inventories 10,887
Prepaid and other assets 3,476
Total current assets 45,199
Property, plant equipment,
and mine development, net 451,008 (G) —
Investment 2,470
Intangible assets, net 1,488
Related party other
receivables, net — (H)
Other noncurrent assets 16,134 (I) (N)
Total assets $ 516,299 $ $ $ $ $
Liabilities and
stockholders’ equity
Current liabilities:
Accounts payable $ 24,628 $ $ $ $ $
Accrued liabilities and
other 14,831 (O) (S),(T)
Construction retainage 375
Accrued interest on related
party obligations — (J)
Current portion of capital
lease obligations 4,331
Current maturities of
long-term debt 15,976
Total current liabilities 60,141
Long-term debt, less current
maturities 121,100 (P) (T)
Long-term obligation to
related party — (K) (T)
Asset retirement obligations 14,352
Long-term portion of capital
lease obligations 10,800
Other non-current liabilities 1,976
Total liabilities 208,369
Stockholders’ equity:
Accumulated deficit (35,257 ) (L) (N)
Accumulated other
comprehensive income
(loss) (1,778 )
Common stock 191 (Q)
Additional paid in capital 206,790 (Q)
Armstrong Energy, Inc.’s
equity 169,946
Non-controlling interest 137,984 (M)
Total stockholders’ equity 307,930
Total liabilities and
stockholders’ equity $ 516,299 $ $ $ $ $
(F) Represents cash held by Armstrong Resource Partners as of September 30, 2011.
(G) Reflects the mineral rights and land held by Armstrong Resource Partners as of September 30, 2011.
(H) Represents net amounts due from Armstrong Resource Partners for various expense paid on its behalf.
(I) Represents an advance royalty paid to Armstrong Resource Partners of $ million and the investment in Armstrong
Resource Partners of $ million as of September 30, 2011.
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(J) Represents accrued interest on obligations owed to Armstrong Resource Partners as of September 30, 2011.
(K) Represents obligations owed to Armstrong Resource Partners as of September 30, 2011 as a result of a financing
arrangement to mine certain mineral reserves transferred to Armstrong Resource Partners. See “Description of
Indebtedness.”
(L) Represents the impact to the results of operations.
(M) Reflects the deconsolidation of the non-controlling interest associated with Armstrong Resource Partners as of
September 30, 2011.
(N) Reflects the write-off of unamortized deferred financing costs associated with the expected repayment of a portion of
the Senior Secured Term Loan with proceeds from the offering.
(O) Reflects the expected payment of accrued interest on $ million of the Senior Secured Term Loan and $ million
of the Senior Secured Revolving Credit Facility repaid with proceeds from this offering.
(P) Reflects the expected repayment of $ million of the Senior Secured Term Loan and $ million of the Senior
Secured Revolving Credit Facility with proceeds from this offering.
(Q) Reflects the adjustments to common stock and additional paid in capital for the public offering of Armstrong Energy’s
common stock as follows (dollars in thousands):
Proceeds from this offering(1) $
Less: estimated fees and expense related with this offering
Net proceeds from this offering
Less: par value of common stock issued in this offering(2)
Additional paid in capital on shares issued in this offering $
(1) To reflect the issuance of shares of Armstrong Energy’s common stock offered hereby at an assumed initial
public offering price of $ per share (the mid point of the range set forth on the front cover page of this
prospectus).
(2) To reflect the reclassification to common stock of the par value of $0.01 per share for the shares issued in this
offering.
(R) Reflects adjustments to cash and cash equivalents for sources and uses of funds from the Concurrent ARP Offering,
summarized as follows (dollars in thousands):
Proceeds from the Concurrent ARP Offering(1), net of expenses $
Use of cash to repay Senior Secured Revolving Credit Facility
Use of cash to pay accrued but unpaid interest
Pro forma adjustment $
(1) To reflect the issuance of common units of Armstrong Resource Partners representing limited partner
interests to be offered by Armstrong Resource Partners pursuant to the concurrent ARP Offering at an assumed
initial public offering price of $ per unit (the mid point of the range set forth on the front cover page of the
prospectus related to the Concurrent ARP Offering).
(S) Reflects the expected payment of accrued interest on the portion of the Senior Secured Revolving Credit Facility
repaid with proceeds contributed from the Concurrent ARP Offering.
(T) The expected net proceeds of the Concurrent ARP Offering of $ million will be paid to Armstrong Energy to
purchase an undivided interest in additional mineral reserves of Armstrong Energy. The amount received is expected
to be utilized to repay the remaining outstanding balance of the Senior Secured Revolving Credit Facility
(approximately $ million) and related accrued interest (approximately $ million), with expected excess cash of
approximately $ million. Armstrong Energy expects to simultaneously enter into a financing arrangement with
Armstrong Resource Partners to mine the mineral reserves transferred, resulting in the recognition of an obligation of
$ million.
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Unaudited Pro Forma Consolidated Statement of Operations
For the Nine Months Ended September 30, 2011
(In thousands, except per share amount)
Pro forma for the
Deconsolidation,
Pro forma for the this Offering, and
Deconsolidation Adjustments the Concurrent
As Reported and this Offering Related ARP Offering
for the Nine Adjustments Adjustments for the Nine Months to the for the Nine
Ended
Months Ended Related to the Related to this September 30, Concurrent Months Ended
September 30,
2011 Deconsolidation Offering 2011 ARP Offering September 30, 2011
(Restated)
Revenue $ 229,980 $ $ $ $ $
Costs and expenses:
Operating costs and
expenses 170,297
Depreciation, depletion,
and amortization 21,478
Asset retirement
obligation expenses 2,942
Selling, general, and
administrative costs 28,834 (U)
Operating income 6,429
Other income (expense):
Interest income 118
Interest expense (6,073 ) (V) (Y) (Z)
Other income (expense),
net (154 ) (W)
Gain on extinguishment
of debt 6,954
Income (loss) before
income taxes 7,274
Income tax provision 809
Net income 6,465
(Income) loss
attributable to
noncontrolling
interests (7,448 ) (X)
Net income attributable to
common stockholders $ (983 )
Pro forma earnings per
share Basic and diluted
Pro forma weighted
average shares
outstanding
Basic
Diluted
(U) Represents the management fee and other legal and accounting fees charged to Armstrong Resource Partners for the
nine months ended September 30, 2011.
(V) Represents interest expense on the long term obligations with Armstrong Resource Partners for the nine months ended
September 30, 2011.
(W) Represents the fee owed of $ million to Armstrong Resource Partners for acting as a guarantor to the Company’s
Senior Secured Credit Facility.
(X) Reflects the de-consolidation of the non-controlling interest associated with Armstrong Resource Partners for the nine
months ended September 30, 2011.
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(Y) As of the beginning of 2011, the Company’s outstanding debt included $ million of secured promissory notes,
which were repaid from proceeds from the Senior Secured Credit Facility entered into in February 2011, which
included a $100.0 million Senior Secured Term Loan and $50.0 million Senior Secured Revolving Credit Facility. Had
the offering occurred on the first day of 2010, the Company would have used the proceeds to repay $ million of
secured promissory notes. Subsequently, when the Company repaid the remaining secured promissory notes in
February 2011, the outstanding balance would have been $ million. As the secured promissory notes would have
been $ million lower at the time of the repayment, the pro forma adjustments assume the Company would have
reduced the amount of the Senior Secured Term Loan by $ million and borrowings under the Senior Secured
Revolving Credit Facility by $ million. In addition, had the amount of the Senior Secured Term Loan been reduced,
the amount of the deferred financing costs would have been reduced by approximately $ million, which would have
resulted in an additional reduction in the amount initially borrowed on Senior Secured Revolving Credit Facility by a
corresponding amount. The pro forma adjustments to historical interest expense related to the offering are as follows
(dollars in thousands):
Interest Expense
Secured promissory notes $
Senior Secured Term Loan
Senior Secured Revolving Credit Facility
Deferred financing fees
$
(Z) The expected net proceeds of the Concurrent ARP Offering of $ million will be paid to Armstrong Energy to
purchase an undivided interest in additional mineral reserves of Armstrong Energy. Had the Concurrent ARP Offering
occurred on the first day of 2010, the Company would have used the proceeds contributed by Armstrong Resource
Partners to repay $ million of the secured promissory notes. Subsequently, when the Company repaid the remaining
secured promissory notes in February 2011, the outstanding balance would have been $ million lower. As the
secured promissory notes would have been $ million lower at the time of the repayment, the pro forma adjustments
assume the Company would not have borrowed an initial amount under the Senior Secured Credit Facility or a
subsequent amount under the facility through September 30, 2011. In connection with the receipt of proceeds from
Armstrong Resource Partners, the Company will simultaneously enter into a financing arrangement with Armstrong
Resource Partners to mine the mineral reserves transferred, resulting in the recognition of a long-term obligation of
$ million. The additional interest incurred on this obligation would total approximately $ million. The pro forma
adjustments to historical interest expense related to the offering are as follows (dollars in thousands):
Interest Expense
Secured promissory notes $
Senior Secured Revolving Credit Facility
Long-term obligation to related party
$
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SELECTED HISTORICAL
CONSOLIDATED FINANCIAL
AND OPERATING DATA
The following table presents our selected historical consolidated financial and operating data for the periods indicated
for Armstrong Energy, Inc.’s predecessor, Armstrong Land Company, LLC and its subsidiaries (our “Predecessor”). The
summary historical financial data for the years ended December 31, 2007, 2008, 2009 and 2010 and the balance sheet data as
of December 31, 2007, 2008, 2009 and 2010 are derived from the audited financial statements of our Predecessor. The
selected historical financial data for the nine months ended September 30, 2010 and 2011 and the balance sheet data as of
September 30, 2010 and 2011 are derived from the unaudited financial statements of our Predecessor. Historical results are
not necessarily indicative of results we expect in future periods. You should read the following summary financial data in
conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our
financial statements and related notes appearing elsewhere in this prospectus.
Predecessor
Year Ended December 31, Nine Months Ended September 30,
2007 2008 2009 2010 2010 2011
(Restated)(1) (Restated)(1)
Unaudited (Restated)(1) (Restated)(1)
Unaudited Unaudited
(In thousands, except per share amounts)
Results of Operations Data
Total revenues $ — $ 57,069 $ 167,904 $ 220,625 $ 176,311 $ 229,480
Costs and expenses 6,369 64,667 166,686 201,473 158,169 223,551
Operating income (loss) (6,369 ) (7,598 ) 1,218 19,152 18,142 6,429
Interest expense (8,730 ) (14,752 ) (12,651 ) (11,070 ) (8,532 ) (6,073 )
Other income (expense), net 983 971 988 87 259 (36 )
Gain on extinguishment of debt — — — — — 6,954
Income (loss) before income taxes (14,116 ) (21,379 ) (10,445 ) 8,169 9,869 7,274
Income tax provision — — — — — (809 )
Net income (loss) (14,116 ) (21,379 ) (10,445 ) 8,169 9,869 6,465
Less: net income (loss) attributable to
non-controlling interest (329 ) (5,552 ) (1,730 ) 3,351 2,814 7,448
Net income (loss) attributable to common
stockholders $ (13,787 ) $ (15,827 ) $ (8,715 ) $ 4,818 $ 7,005 $ (983 )
Earnings (loss) per share, basic and
diluted $ (1.53 ) $ (1.35 ) $ (0.50 ) $ 0.25 $ 0.37 $ (0.05 )
Balance Sheet Data (at period end)
Total assets $ 222,118 $ 372,674 $ 450,618 $ 478,038 $ 461,577 $ 516,299
Working capital 15,999 (34,668 ) (17,749 ) 2,905 (32,582 ) (14,942 )
Total debt (including capital leases) 128,375 183,337 159,730 139,871 143,539 152,207
Total stockholders’ equity 83,180 168,931 255,333 296,681 287,356 307,930
Other Data
Tons sold (unaudited) — 1,398 4,674 5,387 4,339 5,481
Net cash provided by (used in):
Operating activities $ (6,109 ) $ (11,079 ) $ 3,054 $ 37,194 $ 26,804 $ 31,126
Investing activities (48,418 ) (80,020 ) (62,476 ) (41,755 ) (24,681 ) (47,386 )
Financing activities 67,505 79,402 64,854 (3,935 ) (6,017 ) 15,706
Adjusted EBITDA(2) (unaudited) (5,724 ) (1,029 ) 16,567 41,099 34,874 32,125
Adjusted EBITDA is calculated as
follows (unaudited):
Net income (loss) $ (14,116 ) $ (21,379 ) $ (10,445 ) $ 8,169 $ 9,869 $ 6,465
Income tax provision — — — — — 809
Depreciation, depletion and amortization 264 5,810 14,464 21,979 16,562 24,420
Interest expense, net 7,429 14,377 12,482 10,872 8,389 5,955
Non-cash stock compensation expense 699 163 66 79 54 1,212
Non-cash charge related to non-recourse
notes — — — — — 218
Gain on extinguishment of debt — — — — — (6,954 )
$ (5,724 ) $ (1,029 ) $ 16,567 $ 41,099 $ 34,874 $ 32,125
(1) The consolidated financial statements have been restated to correct for an error in the calculation of depreciation,
depletion, and amortization expense for the years ended December 31, 2009 and 2010 and
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the nine months ended September 30, 2010 and 2011. See Note 3 to the interim condensed consolidated financial
statements.
(2) Adjusted EBITDA is a non-GAAP financial measure, and when analyzing our operating performance, investors
Adjusted EBITDA in addition to, and not as an alternative for, operating income and net income (loss) (each as
determined in accordance with GAAP). We use Adjusted EBITDA as a supplemental financial measure.
Adjusted EBITDA is defined as net income (loss) before net interest expense, income taxes, depreciation, depletion
and amortization, non-cash stock compensation expense, non-cash charges related to non-recourse notes, and gain on
extinguishment of debt.
Adjusted EBITDA, as used and defined by us, may not be comparable to similarly titled measures employed by other
companies and is not a measure of performance calculated in accordance with GAAP. There are significant limitations
to using Adjusted EBITDA as a measure of performance, including the inability to analyze the effect of certain
recurring and non-recurring items that materially affect our net income or loss, the lack of comparability of results of
operations of different companies and the different methods of calculating Adjusted EBITDA reported by different
companies, and should not be considered in isolation or as a substitute for analysis of our results as reported under
GAAP.
For example, Adjusted EBITDA does not reflect:
• cash expenditures, or future requirements, for capital expenditures or contractual commitments; changes in, or cash
requirements for, working capital needs;
• the significant interest expense, or the cash requirements necessary to service interest or principal payments, on
debt; and
• any cash requirements for assets being depreciated and amortized that may have to be replaced in the future.
Adjusted EBITDA does not represent funds available for discretionary use because those funds are required for debt
service, capital expenditures, working capital and other commitments and obligations. However, our management
team believes Adjusted EBITDA is useful to an investor in evaluating our company because this measure:
• is widely used by investors in our industry to measure a company’s operating performance without regard to items
excluded from the calculation of such term, which can vary substantially from company to company depending
upon accounting methods and book value of assets, capital structure and the method by which assets were acquired,
among other factors; and
• helps investors to more meaningfully evaluate and compare the results of our operations from period to period by
removing the effect of our capital structure from our operating structure, which is useful for trending, analyzing and
benchmarking the performance and value of our business.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction
with “Selected Historical Consolidated Financial and Operating Data” and our audited and unaudited financial statements
and related notes appearing elsewhere in this prospectus. Our actual results may differ materially from those anticipated in
these forward-looking statements as a result of a variety of risks and uncertainties, including those described in this
prospectus under “Cautionary Statement Concerning Forward-Looking Statements” and “Risk Factors.” We assume no
obligation to update any of these forward-looking statements.
As discussed in Note 3 to the consolidated financial statements as of and for the years ended December 31, 2010 and
2009 and Note 3 to the condensed consolidated financial statements as of and for the nine months ended September 30, 2011
and 2010, our financial statements have been restated. The accompanying management discussion and analysis gives effect
to the restatement.
Overview
We are a diversified producer of low chlorine, high sulfur thermal coal from the Illinois Basin with both surface and
underground mines. We market our coal primarily to electric utility companies as fuel for their steam-powered generators.
Based on 2010 production, we are the sixth largest producer in the Illinois Basin and the second largest in Western
Kentucky. We were formed in 2006 to acquire and develop a large coal reserve holding. We commenced production in the
second quarter of 2008 and currently operate six mines, including four surface and two underground, and are seeking permits
for four additional mines. We control approximately 319 million tons of proven and probable coal reserves. Our reserves and
operations are located in the Western Kentucky counties of Ohio, Muhlenberg, Union and Webster. We also own and
operate three coal processing plants which support our mining operations. The location of our coal reserves and operations,
adjacent to the Green and Ohio Rivers, together with our river dock coal handling and rail loadout facilities, allow us to
optimize our coal blending and handling, and provide our customers with rail, barge and truck transportation options. From
our reserves, we mine coal from multiple seams which, in combination with our coal processing facilities, enhances our
ability to meet customer requirements for blends of coal with different characteristics.
We market our coal primarily to large utilities with coal-fired, base-load, scrubbed power plants under multi-year coal
supply agreements. Our multi-year coal supply agreements usually have specific and possibly different volume and pricing
arrangements for each year of the agreement. These agreements allow customers to secure a supply for their future needs and
provide us with greater predictability of sales volume and sales prices. In 2010, we sold approximately 90% of our coal
under multi-year coal supply agreements. At September 30, 2011, we had 10 multi-year coal supply agreements with terms
ranging from one to eight years. For the fiscal year ended December 31, 2010, coal sales to TVA and LGE constituted
approximately 40% and 36%, respectively, of our total coal revenues. We are contractually committed to sell 7.6 million
tons of coal in 2011, which represents substantially all of our currently estimated production for 2011. Similarly, as of
September 30, 2011, we are contractually committed to sell 8.8 million tons of coal in 2012 and 8.1 million tons of coal in
2013, which represents 99% and 83% of our expected total coal sales in 2012 and 2013, respectively.
During 2010 and the first nine months of 2011, we produced 5.6 million and 5.1 million tons of coal, respectively, and
during the same periods, we sold 5.4 million and 5.5 million tons of coal, respectively. For the year ended December 31,
2010, our revenue from coal sales was $220.6 million, and we generated operating income of $19.2 million and Adjusted
EBITDA of $41.1 million. Our revenue, operating income and Adjusted EBITDA for the nine months ended September 30,
2011 were $230.0 million, $6.4 million and $32.1 million, respectively. Our coal production increased from 1.4 million tons
in 2008 to 4.4 million tons in 2009, and to 5.6 million tons in 2010, and we estimate that we will produce approximately
7.2 million tons in 2011.
Our principal expenses related to the production of coal are labor and benefits, equipment, materials and supplies
(explosives, diesel fuel and electricity), maintenance, royalties and excise taxes. Unlike some of our
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competitors, we employ a totally non-union workforce. Many of the benefits of our non-union workforce are related to
higher productivity and are not necessarily reflected in our direct costs. In addition, while we do not pay our customers’
transportation costs, they may be substantial and are often the determining factor in a coal consumer’s contracting decision.
The location of our coal reserves and operations, adjacent to the Green and Ohio Rivers, together with our river dock coal
handling and rail loadout facilities, allow us to optimize our coal blending and handling and provide our customers with rail,
barge and truck transportation options.
Evaluating the Results of Our Operations
We evaluate the results of our operations based on several key measures:
• our coal production, sales volume and weighted average sales prices;
• our cost of coal sales; and
• our Adjusted EBITDA, a non-GAAP financial measure.
We define our coal sales price per ton, or average sales price, as total coal sales divided by tons sold. We review coal
sales price per ton to evaluate marketing efforts and for market demand and trend analysis. We define Adjusted EBITDA as
our net income (loss) before net interest expense, income taxes, depreciation, depletion and amortization, non-cash stock
compensation expense, non-cash charges related to non-recourse notes, and gain on extinguishment of debt. Adjusted
EBITDA is used as a supplemental financial measure by our management and by external users of our financial statements
such as investors, commercial banks, research analysts and others, to assess the financial performance of our assets without
regard to financing methods, capital structure or historical cost basis, the ability of our assets to generate cash sufficient to
pay interest costs and support our indebtedness, our operating performance and return on investment compared to those of
other companies in the coal energy sector, without regard to financing or capital structures, and the viability of acquisitions
and capital expenditure projects and the overall rates of return on alternative investment opportunities. Adjusted EBITDA
has several limitations that are discussed under “Prospectus Summary — Summary Historical and Unaudited Pro Forma
Consolidated Financial and Operating Data,” where we also include a quantitative reconciliation of Adjusted EBITDA to the
most directly comparable GAAP financial measure, which is net income (loss).
Coal Production, Sales Volume and Sales Prices
We evaluate our operations based on the volume of coal we produce, the volume of coal we sell and the prices we
receive for our coal. Because we sell substantially all of our coal under multi-year coal supply agreements, our coal
production, sales volume and sales prices are largely dependent upon the terms of those contracts. The volume of coal we
sell is also a function of the productive capacity of our mines and changes in our inventory levels and those of our customers.
Our multi-year coal supply agreements typically provide for a fixed price, or a schedule of fixed prices, over the
contract term. In addition, the contracts typically contain price reopeners that provide for a market-based adjustment to the
initial price after the initial years of those contracts have been fulfilled. These contracts will terminate if we cannot agree
upon a market-based price with the customer. In addition, many of our multi-year coal supply agreements have full or partial
cost pass through or inflation adjustment provisions; specifically, costs related to fuel, explosives and new government
impositions are subject to certain pass-through provisions under many of our multi-year coal supply agreements. Cost
pass-through provisions typically provide for increases in our sales prices in rising operating cost environments and for
decreases in declining operating cost environments. Inflation adjustment provisions typically provide some protection in
rising operating cost environments. We also receive premiums, or pay penalties, based upon the actual quality of the coal we
deliver, which is measured for characteristics such as heat (Btu), sulfur and moisture content.
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We evaluate the price we receive for our coal on an average sales price per ton basis. The following table provides
operational data with respect to our coal production, coal sales volume and average sales prices per ton for the periods
indicated:
Nine Months
Year Ended Ended
December 31, September 30,
2008 2009 2010 2010 2011
(In thousands, except per ton amounts)
Tons of Coal Produced 1,379 4,434 5,645 4,296 5,126
Tons of Coal Sold 1,398 4,674 5,387 4,339 5,481
Tons of Coal Sold Under Multi-Year Agreements 1,398 4,674 4,827 4,205 5,071
Average Sales Price Per Ton $ 40.82 $ 35.92 $ 40.96 $ 40.63 $ 41.96
Cost of Coal Sales
We evaluate our cost of coal sales on a cost per ton basis. Our cost of coal sales per ton produced represents our
production costs divided by the tons of coal we sell. Our production costs include labor and associated benefits, fuel,
lubricants, explosives, operating lease expenses, repairs and maintenance, royalties, and all other costs that are directly
related to our mining operations, other than the cost of depreciation, depletion and amortization (“DD&A”) expenses. Our
production costs also exclude any indirect costs, such as selling, general and administrative (“SG&A”) expenses. Our
production costs do not take into account the effects of any of the inflation adjustment or cost pass-through provisions in our
multi-year coal supply agreements, as those provisions result in an adjustment to our coal sales price.
The following table provides summary information for the dates indicated relating to our cost of coal sales per ton
produced:
Nine Months
Year Ended Ended
December 31, September 30,
2008 2009 2010 2010 2011
(In thousands, except per ton amounts)
Tons of Coal Sold 1,398 4,674 5,387 4,339 5,481
Average Sales Price Per Ton $ 40.82 $ 35.92 $ 40.96 $ 40.63 $ 41.96
Cost of Coal Sales Per Ton $ 32.77 $ 27.36 $ 28.19 $ 27.70 $ 31.07
ADJUSTED EBITDA
Although Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, our management
believes that it is useful in evaluating our financial performance and our compliance with our existing Senior Secured Credit
Facility. Adjusted EBITDA has several limitations that are discussed under “Prospectus Summary — Summary Historical
and Unaudited Pro Forma Consolidated Financial and Operating Data,” where we also include a quantitative reconciliation
of Adjusted EBITDA to the most directly comparable GAAP financial measure, which is net income (loss).
Factors that Impact Our Business
For the past three years, over 93% of our coal sales were made under multi-year coal supply agreements. We intend to
continue to enter into multi-year coal supply agreements for a substantial portion of our annual coal production, using our
remaining production to take advantage of market opportunities as they present themselves. We believe our use of multi-year
coal supply agreements reduces our exposure to fluctuations in the spot price for coal and provides us with a reliable and
stable revenue base. Using multi-year coal supply agreements also allows us to partially mitigate our exposure to rising
costs, to the extent those contracts have full or partial cost pass through provisions or inflation adjustment provisions. For
example, our contracts with LGE contain provisions that adjust the price paid for our coal in the event there is change in the
price of
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diesel fuel, a key cost component in our coal production. Certain of our other contracts, such as those with TVA, contain
provisions that permit us to seek additional price adjustments to account for changes in environmental and other laws and
regulations to which we are subject, to the extent those changes increase the cost of our production of coal. For further
information about our multi-year coal supply agreements, please see “Business — Sales and Marketing — Multi-Year Coal
Supply Agreements.”
The following table reflects the portion of our anticipated coal production that is committed and priced, committed but
unpriced, and uncommitted for sale under our multi-year coal supply agreements for the years 2011 to 2015.
2011 2012 2013 2014 2015
(In millions of tons, except price per ton data)
Committed 7.6 8.8 5.7 4.1 4.0
Committed but unpriced — — 2.4 2.8 2.8
Uncommitted — 0.1 1.6 3.6 3.7
Total 7.6 8.9 9.7 10.5 10.5
Average price per committed ton $ 40.02 $ 41.91 $ 41.56 $ 38.67 $ 39.38
Certain of our multi-year coal supply agreements contain option provisions that give the customer the right to elect to
purchase, or defer the purchase of, additional tons of coal each month during the contract term at a fixed price provided for
in the contract. Our multi-year coal supply agreements that provide for these option tons typically require the customer to
provide us with advance notice of an election to take or defer these option tons. Because the price of these option tons is
fixed under the terms of the contract, we could be obligated to deliver coal to those customers at a price that is below the
market price for coal on the date the option is exercised. If our customers elect to receive these option tons, we believe we
will have the operating flexibility to meet these requirements through increased production. Similarly, short term changes by
our customers in the amount of coal they purchase as a result of these option and deferment provisions may affect our
average sales price per ton of coal in any given month or similarly narrow window. For example, as discussed in more detail
below, our average sales price per ton during the first nine months of 2011 was higher than the average sales price per ton
during the first nine months of 2010, partially as the result of certain of our customers accelerating deliveries of tonnage.
We believe the other key factors that influence our business are:
• demand for coal;
• demand for electricity;
• economic conditions;
• the quantity and quality of coal available from competitors;
• competition for production of electricity from non-coal sources;
• domestic air emission standards and the ability of coal-fired power plants to meet these standards using coal
produced from the Illinois Basin;
• legislative, regulatory and judicial developments, including delays, challenges to, and difficulties in acquiring,
maintaining or renewing necessary permits or mineral or surface rights; and
• our ability to meet governmental financial security requirements associated with mining and reclamation activities.
For additional information regarding some of the risks and uncertainties that affect our business and the industry in
which we operate, please see “Risk Factors.”
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Recent Trends and Economic Factors Affecting the Coal Industry
Coal consumption and production in the United States have been driven in recent periods by several market dynamics
and trends. Total coal consumption in the United States in 2010 increased by approximately 50 million tons, or 5.0%, from
2009 levels. The rise in U.S. domestic coal consumption during 2010 was largely a function of the recovering economic
growth following the 2008-2009 recession and the rebound in industrial electricity consumption and domestic steel making
output. According to the EIA, coal is expected to remain the dominant energy source for electric power generation for the
foreseeable future. Please read “The Coal Industry — Recent Trends and — Coal Consumption and Demand” for the recent
trends and economic factors affecting the coal industry.
Results of Operations
Factors Affecting the Comparability of Our Results of Operations
The comparability of our operating results for the years ending December 31, 2010, 2009 and 2008 is impacted by the
opening of additional mines during each of the periods. We began production of coal mid-year 2008 at one underground
mine and one surface mine. Our coal production increased substantially from 1.4 million tons in 2008 to 5.6 million tons in
2010. The increase in production was primarily the result of the opening of two additional mines in 2009 and a third in 2010.
Due to these changes in the number of operating mines during the aforementioned periods, it is difficult to provide direct
comparisons of reported results during each period. In addition, as discussed in more detail below, from late 2009 through
November 2010, we received a price incentive from LGE under one of our multi-year coal supply agreements, which added
$3.29 per ton to the sales price under that agreement.
Similarly, the comparability of our operating results for the nine months ended September 30, 2011 and 2010 is
impacted by the opening of one additional mine in the fourth quarter of fiscal 2010, one in the second quarter of fiscal 2011
and one in the third quarter of fiscal 2011. Our coal production increased from 4.3 million tons in the nine months ended
September 30, 2010 to 5.1 million tons in the nine months ended September 30, 2011. The increase in production was
primarily the result of the opening of the additional mines.
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Summary
The following table presents certain of our historical consolidated financial data for the periods indicated. The
following table should be read in conjunction with “Selected Historical Consolidated Financial and Operating Data.”
Nine Months Ended
Year Ended December 31, September 30,
2008 2009 2010 2010 2011
(Restated) (Restated) (Restated) (Restated)
(Unaudited) (Unaudited)
(In thousands, except per share and per ton amounts)
Results of Operations Data
Total revenues $ 57,069 $ 167,904 $ 220,625 $ 176,311 $ 229,980
Costs and expenses
Costs of coal sales 45,817 127,886 151,838 120,204 170,297
Depreciation, depletion and
amortization 5,451 12,480 18,892 14,017 21,478
Asset retirement obligation expenses 359 1,984 3,087 2,545 2,942
Selling, general and administrative
expenses 13,040 24,336 27,656 21,403 28,834
Total costs and expenses 64,667 166,686 201,473 158,169 223,551
Operating income (loss) (7,598 ) 1,218 19,152 18,142 6,429
Interest expense (14,752 ) (12,651 ) (11,070 ) (8,532 ) (6,073 )
Other income (expense), net 971 988 87 259 (36 )
Gain on extinguishment of debt — — — — 6,954
Income (loss) before income taxes (21,379 ) (10,445 ) 8,169 9,869 7,274
Income tax provision — — — — (809 )
Net income (loss) (21,379 ) (10,445 ) 8,169 9,869 6,465
Less: net (income) loss attributable to
non-controlling interest (5,552 ) (1,730 ) 3,351 2,814 7,448
Net income (loss) attributable to
common stockholders $ (15,827 ) $ (8,715 ) $ 4,818 $ 7,005 $ (983 )
Earnings (loss) per share, basic and
diluted $ (1.35 ) $ (0.50 ) $ 0.25 $ 0.37 $ (0.05 )
Other Data
Adjusted EBITDA (unaudited) $ (1,029 ) $ 16,567 $ 41,099 $ 34,874 $ 32,125
Adjusted EBITDA per ton sold
(unaudited) (0.74 ) 3.54 7.63 8.04 5.86
Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010
Overview
We reported revenue of $230.0 million for the nine months ended September 30, 2011 (the “2011 First Nine Months”),
compared to $176.3 million for the nine months ended September 30, 2010 (the “2010 First Nine Months”). Coal sales
increased 28% to 5.5 million tons in the 2011 First Nine Months, compared to 4.3 million tons in the 2010 First Nine
Months. Our average sales price per ton in the 2011 First Nine Months increased 3.3%, or $1.33 per ton, compared to the
2010 First Nine Months. Our net income for the 2011 First Nine Months decreased from $9.9 million for the 2010 First Nine
Months to $6.5 million for the 2011 First Nine Months. Our Adjusted EBITDA decreased to $32.1 million for the 2011 First
Nine Months from $34.9 million for the 2010 First Nine Months.
Coal Production and Sales Volume
Our tons of coal produced increased 18.6% to 5.1 million tons in the 2011 First Nine Months from 4.3 million tons in
the 2010 First Nine Months. This increase is primarily attributable to the commencement
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of production at the Equality Boot surface mine, which increased our sales by 1.7 million tons for the 2011 First Nine
Months, as compared to the 2010 First Nine Months. This increase was partially offset by lower production at our other
surface mines as a result of high levels of rainfall, decreases at our East Fork operation of 0.8 million tons as a portion of the
mine was depleted and MSHA mandates that impacted production at the Big Run mine. Sales volume during the 2011 First
Nine Months was slightly lower than anticipated due to weather-induced high water issues on the Green and Ohio Rivers,
which delayed barge deliveries to two of our customers. However, the reduction in barge-delivered tons was partially offset
by an increase in the number of tons delivered by truck. In addition, maintenance cycles at the primary plants receiving our
coal under our contracts with TVA resulted in the deferment of approximately 320,000 tons of scheduled deliveries during
the 2011 First Nine Months.
Average Sales Price Per Ton
Our average sales price per ton increased 3.3% to $41.96 in the 2011 First Nine Months from $40.63 in the 2010 First
Nine Months. This $1.33 per ton increase resulted from the combination of: (a) higher pricing on our long-term contracts due
to the annual increases under the majority of our multi-year coal supply agreements, and (b) spot sales that did not occur in
the 2010 First Nine Months. These increases were partially offset by the elimination of the $3.29 per ton price adjustment in
December 2010 that we received from LGE pending permitting approval of our Equality Boot mine.
Revenue
Our coal sales revenue for the 2011 First Nine Months increased by $53.7 million, or 30.4%, compared to the 2010
First Nine Months. This increase is primarily attributable to coal sales from our Equality Boot mine, which was opened
during January 2011 and contributed an additional $62.9 million of revenue as compared to the 2010 First Nine Months. The
positive effect of the opening of the Equality Boot mine was partially offset by record rainfall amounts that hampered barge
deliveries, the partial deferment of deliveries of scheduled tons under contract by TVA, Big Rivers and Alcoa, which are
anticipated to be partially made up over the course of the remainder of 2011.
Cost of Coal Sales (Excluding DD&A Expenses and SG&A Expenses)
Cost of coal sales (excluding DD&A expenses) increased 41.7% to $170.3 million in the 2011 First Nine Months, from
$120.2 million in the 2010 First Nine Months. This increase was primarily attributable to the opening of our Equality Boot
mine in January 2011, which resulted in operating costs of $53.5 million during the 2011 First Nine Months. On a per ton
basis, our cost of coal sales increased during the 2011 First Nine Months, compared to the 2010 First Nine Months, from
$27.70 per ton to $31.07 per ton, due to unfavorable mining conditions at our surface mines as a result of record rainfall
amounts, poor roof conditions at the Big Run mine that required additional support and reduced productivity, and reduced
production at the Parkway and East Fork mines. In addition, we experienced higher material and supplies costs in the 2011
First Nine Months, compared to the 2010 First Nine Months, related to equipment maintenance expenses, fuel and oil-related
expenses and labor costs. Specifically:
• Equipment maintenance expenses per ton sold increased 23.3% to $8.40 per ton in the 2011 First Nine Months from
$6.81 per ton in the 2010 First Nine Months. The increase of $16.2 million in the 2011 First Nine Months as
compared to the 2010 First Nine Months is primarily the result of the cost of additional equipment at our Equality
Boot mine;
• Fuel and oil-related expenses per ton sold increased 63.2% to $4.03 per ton in the 2011 First Nine Months from
$2.47 per ton in the 2010 First Nine Months. The increase of $11.2 million in the 2011 First Nine Months as
compared to the 2010 First Nine Months is the result of higher fuel prices in the 2011 First Nine Months. A portion
of the higher fuel prices will be recovered through higher revenue in future periods through fuel adjustment cost
provisions in certain of our multi-year coal supply agreements; and
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• Labor costs per ton sold increased to $9.07 per ton in the 2011 First Nine Months from $9.06 per ton in the 2010
First Nine Months. This increased production costs by $10.0 million. The increase was the result of increased labor
costs due to the opening of our Equality Boot, Lewis Creek and Kronos mines in the 2011 First Nine Months, as
well as annual wage adjustments.
Depreciation, Depletion and Amortization
DD&A expenses increased by $7.5 million, or 53.2%, during the 2011 First Nine Months, as compared to the same
period in 2010. The primary reason for the increase was a $5.1 million increase in depreciation associated with the Equality
Boot operations. Depletion and amortization expenses were also slightly higher as a result of the higher production in 2011.
Lower depreciation was realized at operations with reduced production, thereby offsetting a portion of the increases.
Asset Retirement Obligation Expense
Asset retirement obligation expense increased by $0.4 million, or 15.6%, in the 2011 First Nine Months, as compared to
the 2010 First Nine Months. The increase is due primarily to the opening of the Equality Boot mine.
Selling, General and Administrative Expenses
SG&A expenses were $28.8 million for the 2011 First Nine Months, which was $7.4 million, or 34.7%, higher than the
2010 First Nine Months. On a cost per ton sold basis for the First Nine Months of 2011, SG&A expenses were $5.26,
compared to $4.93 for the First Nine Months of 2010. Administrative expenses related to the Equality Boot mine accounted
for the majority of the increase in costs, and higher coal severance and similar costs that are directly related to the
$53.7 million, or 30.5%, increase in total sales for the 2011 First Nine Months as compared to the 2010 First Nine Months.
Interest Expense
Interest expense was $6.1 million for the 2011 First Nine Months, as compared to $8.5 million for the 2010 First Nine
Months. The decrease was principally attributable to lower interest rates associated with our Senior Secured Credit Facility
as compared to our existing debt during the 2010 First Nine Months in the form of the promissory notes that were repaid
when we entered into our Senior Secured Credit Facility in February 2011. See “Description of Indebtedness” for a more
detailed discussion of our financing activities. As a result of the aforementioned repayment, we recorded a gain on the
extinguishment of debt of $7.0 million.
Income Taxes
We recorded an income tax provision of $0.8 million for the 2011 First Nine Months while no provision was recorded
in the 2010 First Nine Months. The provision related primarily to current alternative minimum tax and certain state income
tax. The current provision is due to taxable income generated in the 2011 First Nine Months for certain subsidiaries,
compared to taxable losses generated in the same period of the prior year.
Adjusted EBITDA
Our Adjusted EBITDA for the 2011 First Nine Months was $32.1 million, or $5.86 per ton, as compared to
$34.9 million, or $8.04 per ton, for the 2010 First Nine Months. The decrease resulted from the partial deferment of
deliveries of scheduled tons under contract by TVA, Big Rivers and Alcoa until later in the year, the expiration of the price
incentive realized during the 2010 First Nine Months in connection with one of our LGE sales contracts, and the higher
operating costs attributable to the commencement of production at the Equality Boot mine during the 2011 First Nine
Months.
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Production Mix Analysis
During the 2011 First Nine Months we operated three underground mines (Big Run, Kronos, and Parkway) and four
surface mines (Midway, East Fork, Equality Boot and Lewis Creek). In contrast, during the 2010 First Nine Months, we only
had four mines in operation, as production at the Equality Boot mine did not commence until January 2011, Lewis Creek in
June 2011, and Kronos in September 2011. The following table provides information concerning our underground mines and
surface mines during both the 2010 First Nine Months and the 2011 First Nine Months.
Nine Months Ended
September 30,
2010 2011
(In thousands, except
per ton amounts)
Tons of Coal Sold
Underground Mining Operations 1,583 1,576
Surface Mining Operations 2,756 3,905
Revenue
Underground Mining Operations $ 78,054 $ 82,133
Surface Mining Operations $ 98,257 $ 147,847
Production Costs per Ton Sold
Underground Mining Operations $ 28.89 $ 29.05
Surface Mining Operations $ 20.78 $ 26.59
Plants, Dock, Other $ 3.96 $ 3.78
Sales from our surface mines increased from 2.8 million tons in the 2010 First Nine Months to 3.9 million tons in the
2011 First Nine Months. The increase in tons sold is primarily attributable to the opening of the Equality Boot mine in
January 2011 and Lewis Creek in June 2011. Our production costs on a per ton basis at our surface mining operations also
increased from $20.78 per ton produced during the 2010 First Nine Months to $26.59 per ton produced during the 2011 First
Nine Months. The increase in production costs on a per ton basis at our surface mines is the result of many factors, including
higher fuel prices, weather-related impediments, reduced production levels at the East Fork mine as one area of the mine is
depleted, and the continued development of the recently-opened Equality Boot mine.
Sales from our underground mines of 1.6 million tons during the 2010 First Nine Months were comparable to
1.6 million tons during the 2011 First Nine Months. Production costs per ton at our underground mines increased from
$28.89 per ton produced during the 2010 First Nine Months to $29.05 per ton produced during the 2011 First Nine Months.
This increase is primarily the result of increased per ton production costs at our Big Run mine due to the increased material
cost for roof bolts and the temporary replacement of a continuous miner unit for a scheduled overhaul prior to relocating to
the new underground operation at Kronos resulting in a decrease in productivity.
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Overview
We reported revenue of $220.6 million for the year ended December 31, 2010, compared to $167.9 million for 2009.
Coal sales increased 15% to 5.4 million tons in 2010, as compared to 4.7 million tons in 2009. In addition to increasing our
total production, our average sales price per ton in 2010 increased 14%, or $5.04 per ton, compared to 2009. In part as a
result of that increase in the average price per ton, we generated income from operations in 2010 of $19.2 million, as
compared to $1.2 million in 2009, and our Adjusted EBITDA increased to $41.1 million in 2010, from $16.6 million in
2009.
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Coal Production and Sales Volume
Our tons of coal produced increased 27.3% to 5.6 million tons in 2010 from 4.4 million tons in 2009. This increase is
primarily attributable to operations at our East Fork surface mine and our Parkway underground mine. The East Fork mine,
which commenced production during the second quarter of 2009, sold 1.7 million tons during 2010, as compared to
0.9 million tons in 2009. Similarly, the Parkway underground mine, which also commenced production during the second
quarter of 2009, sold 1.5 million tons in 2010 compared to 0.7 million tons in 2009. Sales volume during the fourth quarter
of 2010 was slightly less than anticipated due to a delay in the opening of our Equality Boot surface mine until 2011 and its
corresponding effect on budgeted spot market sales. During 2010, sales to our two largest customers, LGE and TVA,
accounted for 76% of our total sales, representing 36% and 40% of total sales respectively.
Average Sales Price Per Ton
Our average sales price per ton increased 14% to $40.96 in 2010 from $35.92 in 2009. This $5.04 per ton increase was
primarily the result of a combination of factors, including: (a) a contractually-based price incentive in one of our multi-year
coal supply agreements with LGE, which provided for a $3.29 per ton increase from September 2009 through November
2010; (b) the renegotiation of another of our multi-year coal supply agreements, which resulted in an increase in the price per
ton of $8.73; (c) a price adjustment with respect to one of our contracts with TVA pursuant to which governmental
imposition reimbursements increased our price per ton by $2.00; (d) the annual escalation of prices contained in the majority
of our multi-year coal supply agreements, and (e) the execution of a new multi-year coal supply agreement with OMU,
pursuant to which we obtained an average sales price of $43.27 per ton. Our ability to obtain short-term sales at prices and
volumes higher than in previous years also contributed to the increase in our average sales price per ton.
Revenue
Our coal sales revenue in 2010 increased by $52.7 million, or 31.4%, compared to 2009. This increase is primarily
attributable to coal sales from our East Fork surface mine and Parkway underground mine, both of which were opened
during 2009 and thus experienced their first full year of production during 2010. As a result, the combined sales from the
East Fork and Parkway mines during 2010 exceeded their aggregate 2009 sales by 1.5 million tons. In addition, our revenue
increased as a result of the increase in the average price per ton at which we sold our coal for the reasons set forth
immediately above.
Cost of Coal Sales (Excluding DD&A Expenses and SG&A Expenses)
In 2010, cost of coal sales (excluding DD&A expenses and SG&A expenses) increased 18.7%, to $151.8 million, from
$127.9 million in 2009, which was primarily attributed to the 15.3% increase in the total tons of coal we sold during the
same period, combined with a 3% per ton increase in our operating costs of $0.83 during 2010, compared to 2009. The
increase in our operating costs per ton was due in part to the progression into areas at our Midway and East Fork surface
mines where we experienced higher mining ratios, thus increasing the costs required to produce each ton of coal, as well as
the need to incur additional overtime labor costs at those surface mines to meet contractual sales requirements in light of the
delay in the opening of the Equality Boot surface mine. These per ton cost increases were partially offset by a decrease in the
operating costs at our Parkway and Big Run underground mines resulting from improved productivity over the course of
2010 at those mines. In addition, we experienced higher equipment maintenance expenses, fuel and oil-related expenses and
royalties in 2010, compared to 2009. Specifically:
• Equipment maintenance expenses per ton sold increased 11% to $7.10 per ton in 2010 from $6.37 per ton in 2009.
The increase of $8.5 million resulted from increased production, as two mines were added during 2009, and higher
mining ratios during 2010;
• Fuel and oil-related expenses per ton sold increased 25% to $2.53 per ton in 2010, from $2.02 per ton in 2009. This
represents a $4.2 million increase and is the result of higher production levels and higher fuel prices in 2010; and
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• Royalties (which were incurred as a percentage of coal sales or based on coal volumes) increased $0.17 per ton sold
in 2010, compared to 2009, primarily as a result of increased average coal sales prices and our increase in the total
volume of production and sales.
Depreciation, Depletion and Amortization Expenses
DD&A expenses for 2010 were $18.9 million, which was $6.4 million, or 51.4%, higher, as compared to 2009. This
was due to a $2.4 million increase in depletion and amortization expense that resulted from our increase in total production
in 2010, as well as a $4.0 million increase in depreciation as operations expanded with new equipment additions and a full
year of expenses that we incurred at our East Fork and Parkway mines, as compared to the partial year of expenses at those
mines during 2009, the year in which they commenced production.
Asset Retirement Obligation Expense
Asset retirement obligation expense increased by $1.1 million, or 55.5%, in 2010, as compared to the prior year. The
increase is due primarily to having a full year of expense in 2010 related to the Parkway and East Fork mines, which were
added in the second quarter of 2009.
Selling, General and Administrative Expenses
SG&A expenses were $27.7 million for 2010, which was $3.3 million higher than 2009, but on a cost per ton sold basis
decreased from $5.21 per ton to $5.13 per ton. While total sales increased in 2010 by 31.4%, a proportional increase in
sales-related costs was partially offset by the generally fixed legal, accounting and other professional fee expenses we incur
that were spread across a greater number of tons.
Interest Expense
Interest expense decreased by $1.6 million in 2010 as compared to 2009, from $12.7 million to $11.1 million, primarily
as a result of the repayment in June 2009 of one of the promissory notes made in connection with the acquisition of the Elk
Creek Reserves in March 2008.
Adjusted EBITDA
Our Adjusted EBITDA was $24.5 million higher in 2010 as compared to 2009, increasing 148% from $16.6 million, or
$3.54 per ton, to $41.1 million, or $7.63 per ton sold. The increase primarily resulted from the annual increase in the sales
prices contained in the majority of our multi-year coal supply agreements, the renegotiation of the sales price under another
of our contracts, and a price-based incentive of $3.29 per ton contained in one of our contracts with LGE that increased the
sales price under that contract through November 2010.
Production Mix Analysis
During 2010, we operated two underground mines (Big Run and Parkway) and three surface mines (Midway, East Fork
and Equality Boot), although the production from Equality Boot during 2010 was recorded and capitalized as part of the
mine’s development costs. In contrast, during 2009, we only had four mines in operation — Big Run, Parkway, Midway and
East Fork, and the Parkway mine only began
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production during April 2009, followed shortly thereafter by the East Fork mine in June 2009. The following table provides
information concerning our underground and surface mines during both 2009 and 2010.
Year Ended December 31,
2009 2010
(In thousands, except per ton amounts)
Tons of Coal Sold
Underground Mining Operations 1,356 2,066
Surface Mining Operations 3,318 3,321
Revenue
Underground Mining Operations $ 61,373 $ 102,109
Surface Mining Operations $ 106,531 $ 118,516
Production Costs per Ton Sold
Underground Mining Operations $ 36.36 $ 28.54
Surface Mining Operations $ 17.38 $ 21.84
Plants, Dock, Other $ 4.38 $ 3.46
Our production costs on a per ton basis at our surface mining operations also increased from $17.38 per ton during 2009
as compared to $21.84 per ton during 2010. The increase in production costs on a per ton basis at our surface mines is the
result of many factors, including higher stripping ratios encountered in our mining operations, increased explosives costs due
to mining wet areas early in the calendar year, and additional overtime costs for labor needed to meet sales contract
requirements due to the delay in the opening of the Equality Boot mine.
Sales from our underground mines also increased from 1.4 million tons during 2009 to 2.1 million tons during 2010.
The majority of the increase in sales is attributable to the opening of our second underground mine at Parkway during June
2009. Production costs per ton at our underground mines decreased from $36.36 per ton during 2009 to $28.54 per ton
during 2010, reflecting a 21.5% decrease. This decrease is primarily the result of the lower mining costs experienced at our
Parkway mine ($23.84 per ton), which were partially offset by the slightly higher production costs incurred at our Big Run
underground mine attributable to unexpected continuous miner repairs, larger than anticipated transportation expenses and
the costs of complying with new governmental regulations.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Overview
We reported revenue of $167.9 million for the year ended December 31, 2009, compared to $57.1 million for 2008.
Total tons sold increased 234% to 4.67 million tons in 2009 as compared to 1.40 million tons in 2008. Our average sales
price per ton in 2009 decreased 12%, or $4.90 per ton, compared to 2008. As a result of the increase in the sales volume, we
generated operating income of $1.2 million in 2009, as compared to a loss of $7.6 million in 2008, and our Adjusted
EBITDA increased to $16.6 million in 2009 from $(1.0) million in 2008.
Coal Production and Sales Volume
Our tons of coal produced increased 221.5% to 4.4 million tons in 2009 from 1.4 million tons in 2008. This increase is
primarily attributable to operations at our East Fork surface mine and our Parkway underground mine. The East Fork mine,
which commenced production during the second quarter of 2009, sold 0.9 million tons in 2009. Similarly, the Parkway
underground mine, which also commenced production during the second quarter of 2009, sold 0.7 million tons in 2009.
During 2009, our sales to our two largest customers, LGE and TVA, accounted for 79% of our total sales, representing 42%
and 37% of total sales, respectively.
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Average Sales Price Per Ton
Our average sales price per ton decreased 12% to $35.92 in 2009, from $40.82 in 2008. This $4.90 per ton decrease was
primarily the result of increased shipments under lower priced agreements and the lack of higher priced spot sales that did
not occur in 2009.
Revenue
Our coal sales revenue in 2009 increased by $110.8 million, or 194%, compared to 2008. This increase is primarily
attributable to coal sales from our East Fork surface mine and Parkway underground mine, both of which were opened
during 2009. As a result, the combined sales from the East Fork and Parkway mines during 2009 was 1.7 million tons, or
$71.4 million. In addition, the Midway mine that opened in July 2008, benefited from a full year of production, which
increased our tons sold by 1.6 million in 2009.
Cost of Coal Sales (Excluding DD&A Expenses and SG&A Expenses)
Cost of coal sales (excluding DD&A expenses and SG&A expenses) in 2009 increased 179%, to $127.9 million, from
$45.8 million in 2008, which was primarily attributed to the 234% increase in the total tons of coal we sold during the same
period, offset with a per ton decrease in our operating costs of $5.41 during 2009, which represents a 16.5% decrease as
compared to 2008. The decrease in our operating costs per ton was primarily the result of the efficiencies achieved at the
higher production levels.
Depreciation, Depletion and Amortization
DD&A expenses for 2009 were $12.5 million, which was $7.0 million, or 129%, higher, as compared to 2008. This was
due to (i) the increase in depletion and amortization expense that resulted from our increase in total production in 2009,
(ii) an increase in depreciation as operations expanded with new equipment additions and a full year of expenses that we
incurred at our Midway mine, and (iii) the East Fork and Parkway mines having a partial year of expenses during 2009 (the
year in which they commenced production).
Asset Retirement Obligation Expense
Asset retirement obligation expense increased by $1.6 million, or 453%, in 2009, as compared to 2008. The increase is
due to the addition of the East Fork and Parkway mines in the second quarter of 2009, as well as a full year of expense
related to the Midway mine in 2009.
Selling, General and Administrative Expenses
SG&A expenses were $24.3 million for 2009, which was $11.3 million higher than 2008 On a cost per ton sold basis,
SG&A expenses decreased from $9.33 per ton in 2008 to $5.21 per ton in 2009. While total sales increased in 2009 by
194%, a proportional increase in sales-related costs was more than offset by the generally fixed legal, accounting and other
professional fee expenses we incur that were spread across a greater number of tons.
Interest Expense
Interest expense decreased by $2.1 million in 2009 as compared to 2008, from $14.8 million to $12.7 million, primarily
as the result of the repayment in June 2009 of one of the promissory notes made in connection with the acquisition of the Elk
Creek Reserves in March 2008.
Adjusted EBITDA
Our Adjusted EBITDA was $17.6 million higher in 2009 as compared to 2008, increasing from $(1.0) million, or
$(0.74) per ton, to $16.6 million, or $3.54 per ton. The increase primarily resulted from the annual increase in the sales
prices contained in the majority of our multi-year coal supply agreements, the renegotiation of the sales price under another
of our contracts, and a price-based incentive contained in one of our contracts with LGE that increased the sales price under
that contract through November 2010.
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Production Mix Analysis
During 2009, we operated four mines (Big Run, Parkway, Midway and East Fork) as compared to only two mines (Big
Run and Midway) during 2008. The following table provides information concerning our underground and surface mines
during 2008 and 2009.
Year Ended December 31,
2008 2009
(In thousands, except per ton amounts)
Tons of Coal Sold
Underground Mining Operations 609 1,356
Surface Mining Operations 789 3,318
Revenue
Underground Mining Operations $ 25,650 $ 61,373
Surface Mining Operations $ 31,419 $ 106,531
Production Costs per Ton Sold
Underground Mining Operations $ 27.76 $ 36.36
Surface Mining Operations $ 26.22 $ 17.38
Plants, Dock, Other $ 5.88 $ 4.38
Sales from our surface mines increased from 0.8 million tons in 2008 to 3.3 million tons in the 2009. The increase in
sales is primarily attributable to the opening of the East Fork mine in mid-year 2009, and we benefited from an entire year of
production at the Midway mine. Our production costs on a per ton basis at our surface mining operations also decreased
from $26.22 per ton during 2008 to $17.38 per ton during 2009. The decrease in production costs on a per ton basis at our
surface mines is the result of higher production levels and lower stripping ratios encountered in our mining operations.
Sales from our underground mines also increased from 0.6 million tons during 2008 to 1.4 million tons during 2009.
The majority of the increase in sales is attributable to the opening of our second underground mine at Parkway during June
2009. Production costs per ton at our underground mines increased from $27.76 per ton during 2008 to $36.36 per ton during
2009. This increase is primarily the result of less favorable geologic conditions at our Big Run mine and inefficiencies
encountered during the start of operations at our Parkway mine.
Liquidity and Capital Resources
Liquidity
Our business is capital intensive and requires substantial capital expenditures for purchasing, upgrading and
maintaining equipment used in mining our reserves, as well as complying with applicable environmental laws and
regulations. Our principal liquidity requirements are to finance current operations, fund capital expenditures, including
acquisitions from time to time, and to service our debt. Our primary sources of liquidity to meet these needs have been cash
generated by our operations, borrowings under our Senior Secured Credit Facility and contributions from Yorktown.
We believe that cash generated from operations and borrowings under our Senior Secured Credit Facility will be
sufficient to meet working capital requirements, anticipated capital expenditures and scheduled debt payments for at least the
next several years. We manage our exposure to changing commodity prices for our long-term coal contract portfolio through
the use of multi-year coal supply agreements. We enter into fixed price, fixed volume supply contracts with terms greater
than one year with customers with whom we have historically had limited collection issues. Our ability to satisfy debt
service obligations, to fund planned capital expenditures, to make acquisitions, will depend upon our future operating
performance, which will be affected by prevailing economic conditions in the coal industry and financial, business and other
factors, some of which are beyond our control.
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The principal indicators of our liquidity are our cash on hand and availability under our Senior Secured Credit Facility.
As of September 30, 2011, our available liquidity was $22.9 million, comprised of cash on hand of $7.5 million and
$15.4 million available under our Senior Secured Credit Facility.
Cash Flows
The following table reflects cash flows for the applicable periods:
Nine Months
Year Ended Ended
December 31, September 30,
2008 2009 2010 2010 2011
(In thousands)
Net cash provided by (used in):
Operating Activities $ (11,079 ) $ 3,054 $ 37,194 $ 26,804 $ 31,126
Investing Activities $ (80,020 ) $ (62,476 ) $ (41,755 ) $ (24,681 ) $ (47,386 )
Financing Activities $ 79,402 $ 64,854 $ (3,935 ) $ (6,017 ) $ 15,706
Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010
Net cash provided by operating activities was $31.1 million for the nine months ended September 30, 2011, an increase
of $4.3 million from net cash provided by operating activities of $26.8 million for the same period of 2010. The increase in
cash provided by operating activities was principally attributable to the expansion of our operations with the opening of the
Equality Boot, Lewis Creek and Kronos mines in September 2010, June 2011, and September 2011, respectively. The
additional mines and higher production levels resulted in increased depreciation, depletion, and amortization expense in the
current year, as well as impacted our cash flows from operating assets and liabilities, primarily by leading to an increase in
accounts payable and payroll and other accrued incentives in the current year. Negatively impacting cash flows from
operations was a year over year decline in net income due to higher overall operating costs and the inclusion of a non-cash
gain on early extinguishment of debt recognized in the nine months ended September 30, 2011.
Net cash used in investing activities was $47.4 million for the nine months ended September 30, 2011 compared to
$24.7 million for the same period of 2010. This $22.7 million increase was primarily attributable to capital expenditures on
equipment and mine development for our Kronos and Lewis Creek mines, as well as an investment in an affiliate for the
planned construction of an export facility on the lower Mississippi River.
Net cash provided in financing activities was $15.7 million for the nine months ended September 30, 2011 compared to
net cash used in financing activities of $6.0 million for the nine months ended September 30, 2010. This difference was
primarily attributable to the closing of our Senior Secured Credit Facility and the repayment of our existing long-term debt in
connection therewith. See “Description of Indebtedness” for a more detailed discussion of our financing activities.
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Net cash provided by operating activities was $37.2 million for 2010, an increase of $34.1 million from net cash
provided by operating activities of $3.1 million for 2009. The increase in cash provided by operating activities was
principally attributable to an increase in net income and depreciation, amortization, and depletion expense of $18.6 million
and $6.4 million, respectively, due primarily to the continued expansion of our business through the opening of the Equality
Boot mine in September 2010 and having a full year of production from the Parkway and East Fork mines, which opened in
2009. In addition, average sales price per ton increased approximately 14% from 2009 to 2010 due primarily to certain price
incentives received and annual price escalations contained in our long-term supply contracts. The change in interest on long
term obligations of $9.9 million added to the increase in cash flows from operations due to the timing of interest payments.
Partially offsetting this increase in cash flows from operations is the decline in the net change in operating assets and
liabilities. The change in accounts receivable and inventory of $16.3 million and ($4.2 million), respectively, is due to the
timing of shipments at year-end. The increase in the use of cash associated with other non-current
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assets of $3.0 million relates primarily to an increase in collateral posted on surety bonds and cash bonds to secure the
performance of our reclamation obligations as a result of our additional mine being commissioned in 2010. The decline in
cash provided by accounts payable and accrued liabilities of $10.1 million is primarily related to the timing of payments
associated with general operating expenses and royalties.
Net cash used in investing activities was $41.8 million for 2010 compared to $62.5 million for the 2009. This
$20.7 million decrease was primarily attributable to a reduction in capital expenditures as higher capital was required in
2009 to start the new mining operations that began in 2009.
Net cash used in financing activities was $3.9 million for 2010 compared to net cash provided by financing activities of
$64.9 million for the 2009. This difference was primarily attributable to $55.2 million of member contributions recorded
during 2009 which were not made during 2010 and an additional $8.5 million of minority contributions made in 2009.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Net cash provided by operating activities was $3.1 million for 2009, an increase of $14.2 million from net cash used by
operating activities of $11.1 million for 2008. The increase in cash provided by operating activities was principally
attributable to a reduction in our net loss and increase in depreciation, amortization, and depletion expense of $10.9 million
and $8.7 million, respectively, due to better leveraging of our operating expenses and the increased output from our
operations. Partially offsetting the increase in cash flows was the $5.7 million increase in net operating assets and liabilities.
The change in accounts receivable of $4.1 million is due to the timing of shipments at year-end. The decrease in the use of
cash associated with other non-current assets of $5.1 million is due largely to deposits made during 2008 for the purchase of
machinery and equipment to be utilized as we expand our operations. The increase in cash provided by accounts payable and
accrued liabilities of $5.3 million is primarily related to the timing of payments associated with general operating expenses
and royalties. The change in interest on long term obligations of $11.5 million reduced cash flows from operations due to the
timing of interest payments.
Net cash used in investing activities was $62.5 million for 2009 compared to $80.0 million for 2008. This $17.5 million
decrease was primarily attributable to lower capital expenditures.
Net cash provided by financing activities was $64.9 million for 2009 compared to net cash provided by financing
activities of $79.4 million for 2008. This difference is due primarily to higher minority contributions in 2008.
Senior Secured Credit Facility
In February 2011, we repaid certain promissory notes that were delivered in connection with the acquisition of our coal
reserves (see “Business — Our Operational History”) and entered into the Senior Secured Credit Facility, which is
comprised of the Senior Secured Term Loan and the Senior Secured Revolving Credit Facility. The Senior Secured Term
Loan is a $100.0 million term loan, and the Senior Secured Revolving Credit Facility is a $50.0 million revolving credit
facility. As a result of the repayment of the existing debt obligations, we recognized a gain of approximately $7.0 million in
the quarter ended March 31, 2011. The Senior Secured Term Loan is a five-year term loan that requires principal payments
in the amount of $5.0 million each on the first day of each quarter commencing on January 1, 2012 through January 1, 2016,
with a final balloon payment due upon maturity on February 9, 2016. Interest payments are also payable quarterly in arrears
on the first day of each quarter. The interest rate fluctuates based on our leverage ratio and the applicable interest option
elected. The interest rate as of September 30, 2011 was 5.75%. The Senior Secured Revolving Credit Facility provides for
quarterly interest payments in arrears that fluctuate on the same terms as our term loan. The Senior Secured Revolving
Credit Facility also provides for a commitment fee based on the unused portion of the facility at certain times. As of
September 30, 2011, we had $34.6 million outstanding, with $15.4 million available for borrowing under our Senior Secured
Revolving Credit Facility. The obligations under the credit agreement are secured by a first lien on substantially all of our
assets, including but not limited to certain of our mines, coal reserves and related fixtures. The credit agreement contains
certain customary covenants as well as certain limitations on, among other things,
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additional debt, liens, investments, acquisitions and capital expenditures, future dividends, and asset sales. We incurred
approximately $3.3 million in fees related to the new credit agreement which will be amortized over the term of the Senior
Secured Term Loan. We entered into an interest rate swap agreement, effective January 1, 2012, to hedge our exposure to
rising interest rates. Pursuant to this agreement, we are required to make payments at a fixed interest rate of 2.89% to the
counterparty on an initial notional amount of $47.5 million (amortizing thereafter) in exchange for receiving variable
payments based on the greater of 1.0% or the three-month LIBOR rate, which was 0.37433% as of September 30, 2011. This
agreement has quarterly settlement dates and matures on February 9, 2016.
On July 1, 2011, we entered into the First Amendment to our Senior Secured Credit Facility which, among other things,
amended the provisions of the loan documents so as to permit an offering of our securities and the completion of the
Reorganization. The amendment also made certain changes to our financial covenants, including our maximum leverage
ratio. In addition, our interest rate increased to 5.75%, which can be reduced in future periods to the extent our results
improve. Pursuant to such provision, on November 15, 2011, our interest rate was reduced to 5.25%. We incurred
approximately $1.1 million of fees related to this amendment, which will be amortized over the remaining term of the Senior
Secured Term Loan. We entered into the Second Amendment to our Senior Secured Credit Facility on September 29, 2011,
pursuant to which restrictions to the consummation of this offering were eliminated. Additionally, on December 29, 2011,
we entered into the Third Amendment to our Senior Secured Credit Facility which, among other things, amended the
provisions of the loan documents so as to permit the acquisition of additional coal reserves. On February 8, 2012, we entered
into the Fourth Amendment to our Senior Secured Credit Facility which, among other things, amended the provisions of the
loan documents so as to modify the consolidated EBITDA threshold, eliminate the minimum fixed charge coverage ratio,
add a minimum interest coverage ratio beginning in 2013 and make certain changes to our financial covenants, including our
maximum leverage ratio and our minimum consolidated EBITDA. In connection with entry into the Third and Fourth
Amendments to the Senior Secured Credit Facility, we paid fees in the aggregate amount of $1.125 million.
Contractual Obligations
We have various commitments primarily related to long-term debt, including capital leases and operating lease
commitments related to equipment. We expect to fund these commitments with cash on hand, cash generated from
operations and borrowings under our Senior Secured Credit Facility. The following table provides details regarding our
contractual cash obligations as of December 31, 2010:
Payments Due by Period
More Than Five
Total Less Than One Year 1-3 Years 3-5 Years Years
(In thousands)
Long-term debt obligations
(principal and interest)(1) $ 142,116 $ 55,279 $ 80,307 $ 6,507 $ 23
Operating lease obligations 61,765 15,328 29,488 16,949 —
Capitalized lease obligations
(principal and interest) 18,235 4,730 8,839 4,127 539
Purchase obligations 5,371 5,371 — — —
Total $ 227,487 $ 80,708 $ 118,634 $ 27,583 $ 562
(1) At December 31, 2010, the payments to be made in 2011 were classified as long-term on our audited balance sheet
since these debt obligations were repaid in February 2011 from proceeds from the Senior Secured Credit Facility and
no amounts were due in 2011 under the new credit agreement. The Senior
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Secured Credit Facility is comprised of the $100 million Senior Secured Term Loan and the $50 million Senior Secured
Revolving Credit Facility. Of the proceeds from borrowings under the Senior Secured Credit Facility totaling
$118.5 million, $115.7 million was used to repay the outstanding secured promissory notes. As of September 30, 2011,
principal and interest on the term loan of $21.2 million, $48.3 million, $47.7 million and $0 is due in less than
12 months, one to three years, three to five years and after five years, respectively.
On February 9, 2011, Armstrong Resource Partners exercised its option to acquire a 39.45% undivided interest in
certain of our mineral reserves and land in satisfaction of certain indebtedness owed by us, the payment of $5.0 million and
as repayment of the accrued advanced royalty payments owed by us. Simultaneous with this transaction, we entered into a
lease agreement with a subsidiary of Armstrong Resource Partners to mine the acquired mineral reserves. The lease has a
term of 10 years that can be extended for additional periods until all the respective merchantable and mineable coal is
removed. Armstrong Energy accounted for the aforementioned lease transaction as a financing arrangement due to
Armstrong Energy’s continuing involvement in the land and mineral reserves transferred. This has resulted in the recognition
of an initial obligation of $69.5 million. As the financial results of Armstrong Resource Partners have historically been
consolidated, this transaction has not impacted our results of operations or financial condition through September 30, 2011.
As noted above, effective October 1, 2011, we amended the ARP LPA, which resulted in the deconsolidation of Armstrong
Resource Partners. Subsequently, the long-term obligation will be reflected on our balance sheet and will continue to be
amortized through 2031 at an annual rate of 7% of the estimated gross revenue generated from the sale of the coal
originating from the leased mineral reserves. As of September 30, 2011, the outstanding principal balance of the long-term
obligations to Armstrong Resource Partners was $70.3 million.
Capital Expenditures
Our mining operations require investments to expand, upgrade or enhance existing operations and to comply with
environmental regulations. Our anticipated total capital expenditures for 2011 are estimated in a range of $60.0 to
$70.0 million. Management anticipates funding 2011 capital requirements with cash flows provided by operations,
borrowing available under our Senior Secured Credit Facility as discussed below, leases and the proceeds of this offering.
We will continue to have significant capital requirements over the long-term, which may require us to incur debt or seek
additional equity capital. The availability and cost of additional capital will depend upon prevailing market conditions, the
market price of our securities and several other factors over which we have limited control, as well as our financial condition
and results of operations.
Equality Boot Mine Development
Mine development costs are capitalized until production commences, other than production incidental to the mine
development process, and are amortized on a units of production method based on the estimated proven and probable
reserves. Mine development costs represent costs incurred in establishing access to mineral reserves and include costs
associated with sinking or driving shafts and underground drifts, permanent excavations, roads and tunnels. The end of the
development phase and the beginning of the production phase takes place when construction of the mine for economic
extraction is substantially complete. Our estimate of when construction of the mine for economic extraction is substantially
complete is based upon a number of assumptions, such as expectations regarding the economic recoverability of reserves, the
type of mine under development, and completion of certain mine requirements, such as ventilation. Coal extracted during the
development phase is incidental to the mine’s production capacity and is not considered to shift the mine into the production
phase. During the last four months of 2010, as we completed development of the dragline pits at our Equality Boot surface
mine, certain costs related thereto were capitalized and will be amortized over the life of the mine. These costs are reduced
by any revenue generated during the development stage. The net amount capitalized with respect to these activities in 2010
was $8.2 million.
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Kronos Underground Mine Development
The Kronos underground mine will initially be a two unit underground mine. The majority of the equipment for the
mine will be transferred from our existing Big Run underground mine. Notwithstanding the fact that we will initially begin
production on the Kronos mine as a two unit mine, the infrastructure will be developed so as to facilitate expansion for up to
four units as demand warrants such increased production. The saleable production from the mine is estimated to be
1.2 million saleable tons annually. As and when the mine is expanded to four units, production is estimated to double to
approximately 2.4 million tons annually. The estimated total cost of development of the Kronos underground mine,
including the planned expansion to four units, is approximately $59 million. Capitalized development costs in 2010 were
$4.4 million.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to certain off-balance sheet arrangements. These arrangements include
guarantees and financial instruments with off-balance sheet risk, such as surety bonds and performance bonds. No liabilities
related to these arrangements are reflected in our consolidated balance sheet, and we do not expect any material adverse
effects on our financial condition, results of operations or cash flows to result from these off-balance sheet arrangements.
Federal and state laws require us to secure certain long-term obligations such as mine closure and reclamation costs and
other obligations. We typically secure these obligations by using surety bonds, an off-balance sheet instrument. The use of
surety bonds is less expensive for us than the alternative of posting a 100% cash bond. To the extent that surety bonds
become unavailable, we would seek to secure our reclamation obligations with letters of credit, cash deposits or other
suitable forms of collateral. We also post performance bonds to secure our performance of various contractual obligations.
As of September 30, 2011, we had approximately $16.5 million in surety bonds outstanding to secure the performance
of our reclamation obligations, which were supported by approximately $4.0 million of cash posted as collateral. As of
September 30, 2011, we had approximately $1.0 million of performance bonds outstanding, none of which were secured by
collateral.
Critical Accounting Policies and Estimates
Our preparation of financial statements in conformity with GAAP requires that we make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and accompanying notes. We base our judgments,
estimates and assumptions on historical information and other known factors that we deem relevant. Estimates are inherently
subjective as significant management judgment is required regarding the assumptions utilized to calculate accounting
estimates. The most significant areas requiring the use of management estimates and assumptions relate to
units-of-production amortization calculations, asset retirement obligations, useful lives for depreciation of fixed assets and
estimates of fair values for asset impairment purposes. This section describes those accounting policies and estimates that we
believe are critical to understanding our historical consolidated financial statements and that we believe will be critical to
understanding our consolidated financial statements subsequent to this offering.
Inventory
Inventory consists of coal that has been completely uncovered or that has been removed from the pit and stockpiled for
crushing, washing or shipment to customers. Inventory also consists of supplies, primarily spare parts and fuel. Inventory is
valued at the lower of average cost or market. The cost of coal inventory includes labor, equipment operating expenses and
certain transportation and operating overhead.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures that extend the useful lives of existing plant and
equipment are capitalized. Maintenance and repairs that do not extend the useful life or increase
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productivity are charged to operating expense as incurred. Plant and equipment are depreciated principally on the
straight-line method over the estimated useful lives of the assets.
There are numerous uncertainties inherent in estimating quantities of reserves, including many factors beyond our
control. Estimates of coal reserves necessarily depend upon a number of variables and assumptions, any one of which may
vary considerably from actual results. These factors and assumptions relate to: geological and mining conditions, which may
not be fully identified by available exploration data and/or differ from our experiences in areas where we currently mine; the
percentage of coal in the ground ultimately recoverable; historical production from the area compared with production from
other producing areas; the assumed effects of regulation and taxes by governmental agencies; and assumptions concerning
future coal prices, operating costs, capital expenditures, severance and excise taxes and development and reclamation costs.
For these reasons, estimates of the recoverable quantities of coal attributable to any particular group of properties,
classifications of reserves based on risk of recovery and estimates of future net cash flows expected from these properties as
prepared by different engineers, or by the same engineers at different times, may vary substantially. Actual production,
revenue and expenditures with respect to our reserves will likely vary from estimates, and these variations may be material.
Certain account classifications within our financial statements such as depreciation, depletion, and amortization and certain
liability calculations such as asset retirement obligations may depend upon estimates of coal reserve quantities and values.
Accordingly, when actual coal reserve quantities and values vary significantly from estimates, certain accounting estimates
and amounts within our consolidated financial statements may be materially impacted. Coal reserve values are reviewed
annually, at a minimum, for consideration in our consolidated financial statements.
Advance Royalties
A substantial portion of our reserves are leased. Advance royalties are advance payments made to lessors under terms of
mineral lease agreements that are recoupable through a reduction in royalties payable on future production. Amortization of
leased coal interests is computed using the units-of-production method over estimated recoverable tonnage.
Long-Lived Assets
We review the carrying value of long-lived assets and certain identifiable intangibles whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. Long-lived assets and certain intangibles are not
reviewed for impairment unless an impairment indicator is noted. Several examples of impairment indicators include: a
significant decrease in the market price of a long-lived asset; a significant adverse change in legal factors or in the business
climate that could affect the value of a long-lived asset; or a significant adverse change in the extent or manner in which a
long-lived is being used or in its physical condition. The foregoing factors are not all inclusive, and management must
continually evaluate whether other factors are present that would indicate a long-lived asset may be impaired. The amount of
impairment is measured by the difference between the carrying value and the fair value of the asset. We have not recorded
an impairment loss for any of the periods presented.
Asset Retirement Obligation
Our asset retirement obligations primarily consist of spending estimates for surface land reclamation and support
facilities at both surface and underground mines in accordance with applicable reclamation laws in the U.S. as defined by
each mining permit. Asset retirement obligations are determined for each mine using various estimates and assumptions
including, among other items, estimates of disturbed acreage as determined from engineering data, estimates of future costs
to reclaim the disturbed acreage and the timing of these cash flows, discounted using a credit-adjusted, risk-free rate. As
changes in estimates occur (such as mine plan revisions, changes in estimated costs, or changes in timing of the reclamation
activities), the obligation and asset are revised to reflect the new estimate after applying the appropriate credit-adjusted,
risk-free rate. If our assumptions do not materialize as expected, actual cash expenditures and costs that we incur could be
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materially different than currently estimated. Moreover, regulatory changes could increase our obligation to perform
reclamation and mine closing activities. Asset retirement obligation expense for the year ended December 31, 2010 was
$2.4 million. See Note 13 to our consolidated financial statements for additional details regarding our asset retirement
obligations.
Income Taxes
We account for income taxes in accordance with accounting guidance which requires deferred tax assets and liabilities
be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded
assets and liabilities. The guidance also requires that deferred tax assets be reduced by a valuation allowance if it is “more
likely than not” that some portion or the entire deferred tax asset will not be realized. In our evaluation of the need for a
valuation allowance, we take into account various factors, including the expected level of future taxable income and
available tax planning strategies. If actual results differ from the assumptions made in our evaluation, we may record a
change in valuation allowance through income tax expense in the period such determination is made. We believe that the
judgments and estimates are reasonable; however, actual results could differ.
Revenue Recognition and Accounts Receivable
Revenues from coal sales are recognized when title passes to the customer as the coal is shipped. Some coal supply
agreements provide for price adjustments based on variations in quality characteristics of the coal shipped. In certain cases, a
customer’s analysis of the coal quality is binding and the results of the analysis are received on a delayed basis. In these
cases, we estimate the amount of the quality adjustment and adjust the estimate to actual when the information is provided
by the customer. Historically such adjustments have not been material.
Our accounts receivable are recorded at the invoiced amount. Our sales are primarily to large utilities that have
excellent credit. We evaluate the need for an allowance for doubtful accounts based on anticipated recovery and industry
data. If any of our customers were to encounter financial difficulties that restricted their ability to make payments, our
estimate of an appropriate allowance for doubtful accounts could change. As of December 31, 2010 and 2009, we had not
established an allowance for accounts receivable.
Stock-Based Compensation
We account for stock-based compensation in accordance with the authoritative guidance on stock compensation. Under
the fair value recognition provisions of this guidance, stock-based compensation is measured at the grant date based on the
fair value of the award and is recognized as expense, net of estimated forfeitures, over the requisite service period, which is
generally the vesting period of the respective award.
The primary stock-based compensation tool used by us for our employee base is through awards of restricted stock. The
majority of restricted stock awards generally cliff vest after two to three year of service. The fair value of restricted stock is
equal to the fair market value of our common stock at the date of grant and is amortized to expense ratably over the vesting
period, net of forfeitures. Because our common stock is not publicly traded, we must estimate the fair market value based on
multiple valuation methods. The valuations of our common stock were determined in accordance with the guidelines
outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company
Equity Securities Issued as Compensation by a third-party valuation specialist. The assumptions we use in the valuation
model are based on future expectations combined with management judgment. In the absence of a public trading market, our
board of directors with input from management exercised significant judgment and considered numerous objective and
subjective factors to determine the fair value of our common stock as of the date of each option grant, including the
following factors:
• our operating and financial performance;
• current business conditions and projections;
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• the likelihood of achieving a liquidity event for the shares of common stock underlying these restricted stock grants,
such as an initial public offering or sale of our company, given prevailing market conditions;
• our stage of development;
• any adjustment necessary to recognize a lack of marketability for our common stock;
• the market performance of comparable publicly traded companies; and
• the U.S. and global capital market conditions.
We granted restricted stock awards with the following grant date fair values between January 1, 2009 and the date of
this prospectus:
Number of
Shares
Underlying the Grant-Date
Grant
Date Award Fair Value
January 2010 18,500 6.49
August 2010 16,650 5.95
June 2011 83,250 13.93
September 2011 9,250 14.80
The fair value of our common stock was determined by our Board of Directors based on multiple valuation
methodologies utilizing both quantitative and qualitative factors. Significant factors considered by our board of directors and
the valuation methodology used to determine the fair value of our common stock at these grant dates include:
January 2010
In September 2009, we sold 1,387,500 shares of common stock to our majority stockholder at $10.81 per share. As our
financial forecast and expected growth rate had not materially changed from this date and the demand for Illinois Basin coal
remained strong, we utilized $10.81 was a reasonable undiscounted fair value of our common stock for the restricted stock
grant made in January 2011. Through the use of a third party specialist, a non-marketability discount of 40% was derived
due to the unlikely nature of a liquidity event occurring in the near future, resulting in an overall fair value of $6.49 per
share.
August 2010
Between February 2010 and August 2010, the economic factors impacting our business had not changed significantly,
and, thus, we assumed the undiscounted fair value of our common stock had remained unchanged at $10.81 per share.
Through the use of a third party specialist, a non-marketability discount of 45% was derived based on the likelihood of a
liquidity event, resulting in an overall fair value of $5.95 per share.
June 2011
Between September 2010 and June 2011, we experienced significant growth in our business due primarily to two
additional mines commencing operations. In addition, due to the continued strength in the coal markets during this period,
we concluded the likelihood of a liquidity event had increased in order to support our future growth plans. In June 2011, we
granted restricted stock awards to certain executive and non-executive employees. The undiscounted fair value of our
common stock, which totaled $17.41 per share, was determined by a third party specialist based on both a market approach
using the comparable company method and an income approach using the discounted cash flow method. Given a liquidity
event was expected to occur within approximately one year, a non-marketability discount of 20% was applied to determine
an overall fair value per share. Based on this valuation and the factors discussed above, the overall fair value per share was
determined to be $13.93.
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September 2011
Between July 2011 and September 2011, our outlook on the industry remained positive and the likelihood of a liquidity
event became more probable. In September 2011, a non-executive employee was granted a restricted stock award. As our
financial forecasts and expectations for growth had not changed significantly from June 2011, we concluded the
undiscounted fair value of our common stock had remained unchanged from our previous grant at $17.41 per share. Given a
liquidity event was expected to occur within approximately six to nine months, a non-marketability discount of 15% was
determined by a third party specialist and applied to determine an overall fair value per share. Based on this valuation and
the factors discussed above, the overall fair value per share was determined to be $14.80.
Stock compensation expense totaled $1.2 million, $0.1 million, $0.1 million, $0.1 million and $0.2 million for the nine
months ended September 30, 2011 and 2010 and the years ended December 31, 2010, 2009, and 2008, respectively. Stock
compensation expense to be recognized on non-vested restricted stock awards as of September 30, 2011 was approximately
$1.2 million.
New Accounting Standards Issued and Adopted
In January 2010, the Financial Accounting Standards Board (the “FASB”) issued accounting guidance that requires new
fair value disclosures, including disclosures about significant transfers into and out of Level 1 and Level 2 fair-value
measurements and a description of the reasons for the transfers. In addition, the guidance requires new disclosures regarding
activity in Level 3 fair value measurements, including a gross basis reconciliation. The new disclosure requirements became
effective for interim and annual periods beginning January 1, 2010, except for the disclosure of activity within Level 3 fair
value measurements, which became effective January 1, 2011. The new guidance did not have an impact on our consolidated
financial statements.
New Accounting Standards Issued and Not Yet Adopted
In June 2011, the FASB amended requirements for the presentation of other comprehensive income (loss), requiring
presentation of comprehensive income (loss) in either a single, continuous statement of comprehensive income or on
separate but consecutive statements, the statement of operations and the statement of other comprehensive income (loss).
The amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, or
March 31, 2012 for us. The adoption of this guidance will not impact our financial position, results of operations or cash
flows and will only impact the presentation of other comprehensive income (loss) on the financial statements.
In May 2011, the FASB amended the guidance regarding fair value measurement and disclosure. The amended
guidance clarifies the application of existing fair value measurement and disclosure requirements. The amendment is
effective for interim and annual periods beginning after December 15, 2011, or March 31, 2012 for us. Early adoption is not
permitted. The adoption of this amendment is not expected to materially affect our consolidated financial statements.
Quantitative and Qualitative Disclosures about Market Risk
We define market risk as the risk of economic loss as a consequence of the adverse movement of market rates and
prices. We believe our principal market risks are commodity price risks and interest rate risk.
Commodity Price Risk
We sell most of the coal we produce under multi-year coal supply agreements. Historically, we have principally
managed the commodity price risks from our coal sales by entering into multi-year coal supply agreements of varying terms
and durations, rather than through the use of derivative instruments. See “— Results of Operations — Factors that Impact
our Business” for more information about our multi-year coal supply agreements.
Some of the products used in our mining activities, such as diesel fuel, explosives and steel products for roof support
used in our underground mining, are subject to price volatility. Through our suppliers, we utilize forward purchases to
manage a portion of our exposure related to diesel fuel volatility. A hypothetical increase
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of $0.10 per gallon for diesel fuel would have reduced net income by $0.6 million for the year ended December 31, 2010. A
hypothetical increase of 10% in steel prices would have reduced net income by $0.7 million for the year ended December 31,
2010. A hypothetical increase of 10% in explosives prices would have reduced net income by $1.1 million for the year ended
December 31, 2010.
Interest Rate Risk
We have exposure to changes in interest rates on our indebtedness associated with our Senior Secured Credit Facility.
In 2011, we entered into an interest rate swap agreement, effective January 1, 2012, to hedge our exposure to rising interest
rates. Pursuant to this agreement, we are required to make payments at a fixed interest rate of 2.89% to the counterparty on
an initial notional amount of $47.5 million (amortizing thereafter) in exchange for receiving variable payments based on the
greater of 1.0% or the three-month LIBOR rate, which was 0.37433% as of September 30, 2011. This agreement has
quarterly settlement dates and matures on February 9, 2016.
A hypothetical increase or decrease in interest rates by 1% would have changed our interest expense by $0.7 million for
the nine months ended September 30, 2011, $1.7 million for the year ended December 31, 2010 and $1.9 million for the year
ended December 31, 2009.
Seasonality
Our business has historically experienced some variability in its results due to the effect of seasons. Demand for
coal-fired power can increase due to unusually hot or cold weather as power consumers use more air conditioning or heating.
Conversely, mild weather can result in softer demand for our coal. Adverse weather conditions, such as floods or blizzards,
can impact our ability to mine and ship our coal and our customers’ ability to take delivery of coal.
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THE COAL INDUSTRY
Overview
Coal is an abundant natural resource that serves as the primary fuel source for the generation of electric power and as a
key ingredient in the production of steel. According to the World Coal Association (“WCA”), approximately 42% of the
world’s electricity generation and approximately 68% of global steel production is fueled by coal. Global hard coal and
brown coal production totaled more than 7.5 billion tons in 2009 according to the WCA.
Coal is the most abundant fossil fuel in the United States. The EIA estimates that there are approximately 261 billion
tons of recoverable coal reserves in the United States, more than in any other country, which represents over 200 years of
domestic coal supply based on current production rates. The United States is second only to China in annual coal production,
producing approximately 1.1 billion tons in 2010, according to the EIA.
Coal is ranked by heat content, with anthracite, bituminous, subbituminous and lignite coal representing the highest to
lowest carbon and heat ranking, respectively. Coal is also characterized by end use market as either thermal coal or
metallurgical coal. Thermal coal is used by utilities and independent and industrial power producers to generate electricity
and/or steam or heat and metallurgical coal is used by steel companies to produce metallurgical coke for use in the steel
making process. Important factors in evaluating thermal coal quality are its Btu or heat content, sulfur, ash and moisture
content, while metallurgical coal is evaluated on the additional metrics of contained volatile matter and coking
characteristics, including expansion, plasticity and strength.
Electricity generation accounts for 68% of global coal consumption (2008) while industrial consumption accounts for
nearly 36% of global coal production. Thermal coal’s abundance and relatively wide in-situ global resource distribution have
contributed to its relative ease of availability and competitive cost versus other electricity generating fuels. Global thermal
coal trade is expected to grow to 1.1 billion annual tons in 2016 from 850 million tons in 2010, driven largely by increased
electricity demand in the developing world, a significant portion of which is expected to be supplied by coal-fired power
plants. The U.S. domestic thermal coal market consumption, which accounts for close to 90% of U.S. domestic coal
production, is expected to grow by 25% by 2035 from 2009 levels, according to the EIA, and coal-fired electricity
generation is expected to continue to be the largest single fuel source of U.S. electricity (43% in 2035).
Recent Trends
U.S. and international coal market supply, demand and prices are influenced by many factors including relative coal
quality, available capacity and costs of transportation and related infrastructure (such as rail, barge and river or export
terminals), mining production costs, and the relative costs of generating electricity with competing fuels (natural gas, fuel
oil, hydro, nuclear and renewable such as wind and solar power). U.S. domestic thermal coal demand and global thermal
coal demand are strongly correlated with the pace of domestic and global economic growth.
Our operations are located in the Western Kentucky region of the Illinois Basin and we produce thermal coal for
consumption by electricity generators operating scrubbed power plants in the Eastern United States and along the
Mississippi River and for international coal consumers who are capable of utilizing our coal. We compete with other
producers of similar quality coal in the Illinois Basin, as well as with producers of other thermal coal in other
U.S. production regions including the Powder River Basin and Northern, Central and Southern Appalachia.
According to the EIA, the U.S. coal industry produced approximately 1.1 billion tons of coal in 2010, a substantial
majority of which was sold by U.S. coal producers to operators of electricity generation plants. Coal-fired electricity
generation is the largest component of total world electricity generation. The following market dynamics and trends
currently impact thermal coal consumption and production in the United States and are reshaping competitive advantages for
coal producers.
• Stable long-term outlook for U.S. thermal coal market. According to the EIA, coal-fired electricity generation
accounted for approximately 45% of all electricity generation in the United States in 2010. Coal continues to be the
lowest cost fossil fuel source of energy for electric power generation. Despite recent increases in generation from
natural gas, as well as federal and state subsidies for the construction and
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operation of renewable energy, the EIA projects that generation from coal will increase by 25% from 2009 to 2035
and that coal-fired generation will remain the largest single source of electricity generation in 2035.
• Increasing demand for coal produced in the Illinois Basin. According to Wood Mackenzie, a leading commodities
consultancy, demand for coal produced from the Illinois Basin is expected to grow by 69% from 2009 through 2015
and by 126% from 2009 through 2030. We believe this is due to a combination of factors including:
Significant expansion of scrubbed coal-fired electricity generating capacity. The EIA forecasts a 32% increase
in FGD installed on the coal-fired generation fleet from 168 gigawatts in 2009 to 222 gigawatts, or 70% of all
U.S. coal-fired capacity in the electric sector, by 2035, as electricity generation operators invest in retrofit
emissions reduction technology to comply with new EPA regulations under the Cross-State Air Pollution Rule
and the proposed Utility Boiler MACT regulations. Illinois Basin coal generally has a higher sulfur content per
ton than coal produced in other regions. However, we believe that FGD utilization will enable operators to use
the most competitively priced coal (on a delivered cents per million Btu basis) irrespective of sulfur content, and
thus lead to a strong increase in demand for Illinois Basin coal.
Declines in Central Appalachian thermal coal production. Wood Mackenzie forecasts that production of
Central Appalachian thermal coal will continue to decline, falling from 128 million tons in 2010 to 64 million
tons in 2015, due to reserve depletion, regulatory-driven decreases in Central Appalachian surface thermal coal
production and more difficult geological conditions. These factors are expected to result in significantly higher
mining costs and prices for Central Appalachian thermal coal. We believe this will lead to an increase in demand
for thermal coal from the Illinois Basin due to its comparatively lower delivered cost to the major Eastern
U.S. utilities who are currently the principal users of thermal coal from Central Appalachia.
Growing demand for seaborne thermal coal. Global trade in thermal coal accounted for nearly 70% of all
global coal exports in 2010 and is projected to rise from 850 million tons in 2010 to 1.1 billion tons by 2016. We
believe that limitations on existing global export coal supply, infrastructure constraints, relative exchange rates,
coal quality and cost structure could create significant thermal coal export opportunities for U.S. coal producers,
including Illinois Basin coal producers, particularly those similar to us with transportation access to the
Mississippi River and to rail connecting to Louisiana export terminals. In addition, we believe that certain
domestic users of U.S. thermal coal will need to seek alternative sources of domestic supply as an increasing
amount of domestic coal is sold in global export markets.
Coal Consumption and Demand
The vast majority of thermal coal consumed in the United States is used to generate electricity, with the balance used by
a variety of industrial users to heat and power a range of manufacturing and processing facilities. Metallurgical coal is
primarily used in steelmaking blast furnaces. In 2009, coal-fired power plants produced approximately 45% of all electric
power generation, more than natural gas and nuclear, the two next largest domestic fuel sources, combined. Thermal coal
used by electric utilities and other power producers accounted for 976 million tons or 93.1% of total coal consumption in
2010, an increase of 42 million tons or 4.5% over 2009 consumption levels.
Total coal consumption in the United States in 2010 increased by approximately 51 million tons, or 5.1%, from 2009
levels. The rise in U.S. domestic coal consumption during 2010 was largely a function of the recovering economic growth
following the 2008-2009 recession and the rebound in industrial electricity consumption and domestic steel making output.
In 2010, electricity consumption in the United States increased approximately 4.3% from 2009, and the average growth rate
in the decade prior to 2010 was approximately 0.7% per year according to EIA estimates. Because coal-fired generation is
used in most cases to meet base load electricity demand requirements, coal consumption has generally grown at the pace of
electricity demand growth. Among coal’s primary advantages are its relatively low cost and ease of transportation ability
compared to other fuels used to generate electricity. According to the EIA, coal is expected to remain the dominant energy
source for electric power generation for the foreseeable future.
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Over the long term, the EIA forecasts in its 2011 reference case that total coal consumption will grow by approximately
32% through 2035, primarily due to steady increases in coal-fired electric power generation and the introduction of
coal-to-liquids plants.
The following table sets forth historical and forecasted U.S. coal consumption as aggregated by the EIA for the periods
indicated.
U.S. Coal Consumption by Sector
(tons in millions)
Actual Actual Forecast Forecast Forecast Forecast Forecast
2008 2009 2015 2020 2025 2030 2035
Electric Power 1,041 937 928 989 1,066 1,094 1,119
Industrial 54 45 49 49 48 48 47
Steel Production 22 15 22 22 21 20 18
Residential/Commercial 4 3 3 3 3 3 3
Coal-to-Liquids — — 11 13 44 82 128
Total U.S. Consumption 1,121 1,000 1,013 1,076 1,182 1,247 1,315
Source: EIA 2011 Energy Outlook
Illinois Basin Coal Market
We market and deliver our coal to electricity generating customers both in close proximity to our production area in
Western Kentucky along the Green and Ohio Rivers and to customers along the Mississippi River and in the Southeastern
United States. In 2010, 49.1% of the electricity in our market area was generated by coal-fired power plants. The table below
compares the total electricity generation in our market area to that which was coal-fired for 2010.
2010 Total
2010 Coal-Fired Electricity
Electricity Generation
Generation Percent of
GWh GWh Total
Total-Our Primary Market Area(1) 2,765,970 1,357,670 49.1 %
Total United States 4,120,028 1,850,750 44.9 %
(1) Any state east of the Mississippi River, as well as Minnesota, Iowa, Missouri, Arkansas and Louisiana.
Source: EIA
The number of new coal-fired power plants in the Illinois Basin coal market is expected to increase, as eight new plants
have recently been built or are permitted and under construction. The table below represents the EIA Form 860 information
and/or public filing data on these new and under construction coal-fired units, which represent over 5,000mw of nameplate
capacity.
Under
Construction MW Effective
Utility Plant
Name Name State County Region Nameplate Year
Virginia Electric & Power Co. Virginia City Hybrid Energy
Center VA Wise RFC 585 2012
Duke Energy Carolinas LLC Cliffside NC Cleveland SERC 800 2011
Duke Energy Indiana Inc. Edwardsport (IGCC) IN Knox RFC 618 2011
Cash Creek Generating LLC Cash Creek (Coal Gasification) KY Henderson SERC 640 2011
GenPower Longview Power LLC WV Monongalia RFC 695 2011
Louisiana Gas & Electric Trimble County KY Trimble SERC 834 2010
City Utilities of Springfield Southwest Power Station MO Greene SERC 300 2010
Dynegy Services Plum Point Inc. Plum Point Energy Station AR Mississippi SERC 665 2010
Source: EIA
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More importantly, the progressive tightening by the EPA of SO 2 , NOx and other hazardous air pollutant emissions
standards from coal-fired electricity generation plants is expected to result in additional significant increases in the number
of generating stations retrofitted with FGD systems.
U.S. Scrubber Market
The 1990 amendments to the Clean Air Act imposed progressively stringent regulations on the emissions of SO 2 and
NOx. Among the coal-fired electricity generation industry’s response to these regulations was the development of emission
control technologies to reduce SO 2 emissions released in the burning of coal, such as FGD systems, also known as
“scrubbers.” Scrubbers have the additional benefit of being able to reduce mercury emissions, which are soon to be restricted
under the EPA’s hazardous air pollutants regulations.
To implement requirements under the Clean Air Act, in July 2011, the EPA adopted the CSAPR (aimed at SO 2 and
NOx). In December 2011, the U.S. Court of Appeals for the District of Columbia Circuit issued a ruling to stay the CSAPR
pending judicial review. The EPA is also presently developing additional rules to further reduce the release of certain
combustion by-product emissions from fossil fuel power plants. These rules include the proposed Utility Boiler MACT that
would regulate the emission of other air pollutants, including mercury and other metals, fine particulates, and acid gases such
as hydrogen chloride (HCl).
To comply with the expected tightening of emissions limitations, operators of coal-fired electricity generation have
increasingly invested in FGD, selective and non-selective catalytic reduction systems and other advanced control
technologies at their large, base load power plants. 199gw of the current 316gw of U.S. coal-fired generation is presently
equipped with FGD emissions systems. We believe that with the implementation of the CSAPR and MACT, new FGD
systems will likely be installed on additional coal-fired generation increasing the total amount of generation capacity to
approximately 70% of all U.S. capacity in the electric sector capacity by 2035.
Today, the number of scrubbers being installed at coal-fired power plants across the United States is growing, and the
operating and economic profile use of this technology has become well understood and broadly applied. We expect that the
continuation of this trend will substantially increase the demand for higher sulfur coal given the competitive cost of Illinois
Basin coal, and will expand the competitive reach of our coal and our primary market area.
The following table contains Wood Mackenzie’s forecasts of additional generation capacity by installing and utilizing
FGD units and the related affected coal consumption potential from 2010 through 2014. The scrubbed generation unit
additions are expected to impact over 250 million tons of coal consumption at these units which may position higher sulfur
coal from the Illinois Basin to effectively compete for a greater share of supply to these units.
Projected Affected Tons Due to Announced Scrubbing
(in millions)
2010 2011 2012 2013 2014
Actual Forecast Forecast Forecast Forecast
MW Scrubbed (U.S. Total) 37,448 10,629 9,940 11,987 9,121
Coal Tons Affected (Million Tons) 120 34 32 38 29
Source: Wood Mackenzie Illinois Basin Market Outlook, March 2011
Wood Mackenzie forecasts that the U.S. domestic electricity generation coal consumption will grow from a projected
975 million tons in 2011 to 985 million tons by 2015. More importantly, the Wood Mackenzie forecast projects Illinois
Basin coal production growth from 114 million tons in 2011 to 167 million tons by 2015 (43% growth) and then to over
200 million tons by 2020.
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Long-Term U.S. Thermal Coal Outlook — Fall 2011: Summary Table of Key Data
(in millions)
2011 2012 2013 2014 2015 2020 2025 2030
Supply (Mst) 1,112 1,109 1,113 1,108 1,145 1,139 1,179 1,240
Powder River Basin 467 487 483 486 508 481 508 552
Central Appalachia 115 89 76 64 64 46 56 71
Illinois Basin 117 130 144 157 167 204 216 224
Northern Appalachia 116 121 129 134 136 132 125 124
Metallurgical (not
including Thermal
Cross Over) 86 84 82 69 70 81 87 93
Imports 10 8 5 3 3 5 5 5
Other (including Refuse
or Petcoke) 201 190 195 196 197 190 131 171
Stockpile Increase
(Decrease) 41 — — — — — — —
Demand (Mst) 1,154 1,109 1,113 1,108 1,145 1,139 1,179 1,240
Electricity Generation 975 942 942 967 985 954 837 794
Industrial 59 52 51 52 52 53 54 54
Thermal Export 33 32 38 21 38 52 200 299
Metallurgical Demand
(includes Thermal
Cross Over) 86 84 82 69 70 81 87 93
Source: Wood Mackenzie Long Term US Thermal Coal Market Outlook, October 2011
Wood Mackenzie estimates that demand for Illinois Basin coal will grow at a compound annual rate of 3.7%, taking
total consumption from 114 million tons in 2011 to more than 225 million tons by 2030. This is compared to total U.S. coal
production, which Wood Mackenzie estimates will grow at a compound annual rate of 0.2% over the same period.
Importantly, Illinois Basin coal production is projected to grow more sharply over the 2010-2020 period (6.3% CAGR) than
over the latter part of the 20-year projection period.
Source: Wood Mackenzie
Global Thermal Coal Markets
Global coal production accounted for 30% of global primary energy consumption in 2010, according to BP.
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2009 Global Primary Energy Consumption by Fuel
Source: BP Statistical Review of World Energy, June 2011
Thermal coal fueled 44% of electricity generation in 2007 and is projected by EIA to fuel 43% of world electricity
generation in 2035. Coal’s relative abundance, wide distribution, competitive pricing and favorable transportation profile has
facilitated its global adoption as a reliable electricity generation fuel. The rapid industrialization of the emerging Asian
economies, particularly China and India, are supporting forecasts for significant increases in seaborne thermal coal trade. In
2010, Asia accounted for 66% of world thermal coal imports.
The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) projects world thermal coal
trade will grow by 4% annually to 1.1 billion tons in 2016, with Asia accounting for more than 717 million tons of import
demand, up from 562 million tons in 2010.
In the Atlantic thermal coal market, European Union and other European coal imports are projected to rise from
207 million tons in 2010 to 246 million tons by 2016.
We believe the projected robust growth in global thermal coal trade to satisfy growing demand for electricity generation
will create substantial opportunities for U.S. coal producers with competitive transportation advantages to profitably export
thermal coal.
The Illinois Basin coal production region is strategically well positioned with access to the Green, Ohio and Mississippi
River systems to deliver coal to New Orleans or Port of Mobile coal export terminals for delivery of coal to growing Atlantic
and Pacific import coal consumers.
Costs and Pricing Trends
Coal prices are influenced by a number of factors and vary materially by region. As a result of these regional
characteristics, prices of coal by product type within a given major coal producing region tend to be relatively consistent
with each other. The price of coal within a region is influenced by market conditions, coal quality, transportation costs
involved in moving coal from the mine to the point of use and mine operating costs. For example, higher carbon and lower
ash content generally result in higher prices, and higher sulfur and higher ash content generally result in lower prices within
a given geographic region.
The cost of coal at the mine is also influenced by geologic characteristics such as seam thickness, overburden ratios and
depth of underground reserves. It is generally cheaper to mine coal seams that are thick and located close to the surface than
to mine thin underground seams. Within a particular geographic region,
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underground mining is generally more expensive than surface mining. This is due to typically higher capital costs, including
costs for construction of extensive ventilation systems, and higher per unit labor costs arising from lower productivity
associated with underground mining.
During the past decade, the price of coal has fluctuated like any commodity as a result of changes in supply and
demand. For example, when coal supplies declined from 2003 to part of 2006 and subsequently for a short time in 2007 and
2008, the prices for coal reached record highs in the United States. The increased worldwide demand for coal is being driven
by higher prices for oil, together with overseas economic expansion in countries such as China and India who rely heavily on
coal-fired electricity generation. At the same time, infrastructure, weather-related production interruptions and supply
restrictions on exports from China and Indonesia have contributed to a tightening of worldwide thermal coal supply,
affecting global prices of coal.
Coal Characteristics
The quality of coal is measured primarily by its heat content in British thermal units per pound (“Btu/lb”). However,
sulfur, ash and moisture content, and volatile content and coking characteristics are also important variables in the ranking
and marketing of coal. These characteristics help producers determine the best end use of a particular type of coal. The
following is a description of these general coal characteristics:
Heat Value. In general, the carbon content of coal supplies most of its heating value, but other factors also influence
the amount of energy it contains per unit of weight. Coal with higher heat value is priced higher than coal with lower heat
value because less coal is needed to generate the same quantity of electric power. Coal is generally classified into four
categories, ranging from lignite, subbituminous, bituminous and anthracite, reflecting the progressive response of individual
deposits of coal to increasing heat and pressure. Anthracite is coal with the highest carbon content and, therefore, the highest
heat value, nearing 15,000 Btus/lb. Bituminous coal, used primarily to generate electricity and to make coke for the steel
industry, has a heat value ranging between 10,500 and 15,500 Btus/lb. Subbituminous coal ranges from approximately 8,000
to 9,500 Btus/lb and is generally used for electric power generation. Finally, lignite coal is a geologically young coal and has
the lowest carbon content, with a heat value ranging between approximately 4,000 and 8,000 Btus/lb.
Sulfur Content. When coal is burned, SO 2 and other air emissions are released. Federal and state environmental
regulations limit the amount of SO 2 that may be emitted as a result of combustion. Following the implementation of the
Clean Air Act Title IV amendments, coal’s sulfur content could be categorized as “compliance” or “non-compliance.”
Compliance coal is coal that emits less than 1.2 lbs of SO 2 per million Btu and complies with applicable Clean Air Act
environmental regulations without the use of scrubbers. Higher sulfur coal can be burned in utility plants fitted with
sulfur-reduction technology. Coal-fired power plants can also comply with SO 2 emission regulations by utilizing coal with
sulfur content below 1.2 lbs. per million Btu and/or purchasing emission allowances on the open market.
Ash. Ash is the inorganic residue remaining after the combustion of coal. Ash content is an important characteristic of
coal because it impacts boiler performance, and electric generating plants must handle and dispose of ash following
combustion. The composition of the ash, including the proportion of sodium oxide and fusion temperature, help determine
the suitability of the coal to end users.
Moisture. Moisture content of coal varies by the type of coal, the region where it is mined and the location of the coal
within a seam. In general, high moisture content decreases the heat value and increases the weight of the coal, thereby
making it more expensive to transport. Moisture content in coal, on an as-sold basis, can range from approximately 2% to
over 15% of the coal’s weight.
Other. Users of metallurgical coal measure certain other characteristics, including fluidity, swelling capacity and
volatility to assess the strength of coke (which is the solid fuel obtained from coal after removal of volatile components)
produced from coal or the amount of coke that certain types of coal will yield. These coking characteristics may be important
elements in determining the value of the metallurgical coal. We do not produce metallurgical coal or own any metallurgical
coal reserves at this time.
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U.S. Coal Producing Regions
Coal is mined from coal basins throughout the United States, with the major production centers located in three regions:
Appalachia, the Interior and the Western region. Within those three regions, the major producing centers are Northern and
Central Appalachia, the Illinois Basin in the Interior region, and the Powder River Basin in the Western region. The type,
quality and characteristics of coal vary by, and within each, region.
Appalachian Region. The Appalachian region is divided into the Northern, Central and Southern regions, with the
Northern and Central areas being the largest coal producers in the region. Northern Appalachia includes Ohio, Pennsylvania,
Maryland and northern West Virginia. The area includes reserves of bituminous coal with heat content ranging from 10,300
to 13,000 Btu/lb) and sulfur content ranging from 1.0% to 2.0%. Coal produced in Northern Appalachia is marketed
primarily to electric utilities, industrial consumers and the export market, with some metallurgical coal marketed to
steelmakers.
Central Appalachia includes eastern Kentucky, southern West Virginia, Virginia and northern Tennessee. The area
includes reserves of bituminous coal with a typical heat content of 12,000 Btu/lb or greater and sulfur content ranging from
0.5% to 1.5%. Coal produced in Central Appalachia is marketed primarily to electric utilities, with metallurgical coal
marketed to steelmakers. The combination of reserve depletion and increasing regulatory enforcement, mining costs and
geologic complexity in Central Appalachia is expected to lead to substantial production declines over the long term. In fact,
actual production has declined from approximately 257 million tons in 2000 to 186 million tons in 2010. In addition, the
widespread installation of scrubbers is expected to enable higher sulfur coal from Northern Appalachia and the Illinois Basin
to displace coal from Central Appalachia.
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Interior Region. The major coal producing center of the Interior region is the Illinois Basin, which includes Illinois,
Indiana and western Kentucky. The area includes reserves of bituminous coal with a heat content ranging from 10,100 to
12,600 Btu/lb and sulfur content ranging from 1.0% to 4.3%. Despite its high sulfur content, coal from the Illinois Basin can
generally be used by some electric power generation facilities that have installed pollution control devices, such as
scrubbers, to reduce emissions. Most of the coal produced in the Illinois Basin is used in the generation of electricity, with
small amounts used in industrial applications. The EIA forecasts that production of high sulfur coal in the Illinois Basin,
which has trended down since the early 1990s when many coal-fired plants switched to lower sulfur coal to reduce SO 2
emissions after the passage of the Title IV amendments to the Clean Air Act, will significantly rebound as existing coal-fired
capacity is retrofitted with scrubbers and new coal-fired capacity with scrubbers is added.
Western Region. The Western United States region includes, among other areas, the Powder River Basin, the Western
Bituminous region (including the Uinta Basin) and the Four Corners area. The Powder River Basin, the Western Region’s
largest coal producing area, is located in Wyoming and Montana. This area produces subbituminous coal with sulfur content
ranging from 0.2% to 0.9% and heat content ranging from 8,000 to 9,500 Btu/lb. After strong growth in production over the
past 20 years, growth in demand for Powder River Basin coal is expected to moderate in the future due to the slowing
demand for low sulfur, low Btu coal as more scrubbers are installed and concerns about increases in rail transportation rates
and rising operating costs grow.
Mining Methods
Coal is mined utilizing underground or surface mining methods depending upon the geology and most economical
means of coal recovery.
Underground Mining
Underground mines in the United States are typically operated using one of two different methods: room and pillar
mining or longwall mining. In room and pillar mining, rooms are cut into the coal bed leaving a series of pillars, or columns
of coal, to help support the mine roof and control the flow of air. Continuous mining equipment is used to cut the coal from
the mining face, and shuttle cars are generally used to transport coal to a conveyor belt for subsequent delivery to the
surface. Once mining has advanced to the end of a panel, retreat mining may begin to mine as much coal as can be safely
and feasibly be mined from each of the pillars created.
The other underground mining method commonly used in the United States is the longwall mining method. In longwall
mining, a rotating drum is trammed mechanically across the face of coal, and a hydraulic system supports the roof of the
mine while it advances through the coal. Chain conveyors then move the loosened coal to an underground mine conveyor
system for delivery to the surface. We currently do not, nor do we plan to in the near future, produce coal using longwall
mining techniques.
Surface Mining
Surface mining produces the majority of U.S. coal output, accounting for approximately 69% of U.S. production in
2010. Surface mining is generally used when coal is found relatively close to the surface, when multiple seams in close
vertical proximity are being mined or when conditions otherwise warrant. Surface mining involves the removal of
overburden (earth and rock covering the coal) with heavy earth moving equipment and explosives, loading out the coal,
replacing the overburden and topsoil after the coal has been excavated and reestablishing approximate original counter,
vegetation and plant life, and making other improvements that have local community and environmental benefit. Overburden
is typically removed at mines using explosives in combination with large, rubber-tired diesel loaders or more efficient
draglines. Surface mining can recover nearly 90% of the coal from a reserve deposit.
There are four primary surface mining methods in use in Appalachia and the Illinois Basin: area, contour, auger and
highwall. Area mines are surface mines that remove shallow coal over a broad area where the land is relatively flat. After the
coal has been removed, the overburden is placed back into the pit. Contour mines are surface mines that mine coal in steep,
hilly or mountainous terrain. A wedge of overburden is removed along the coal outcrop on the side of a hill, forming a bench
at the level of the coal. After the coal is
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removed, the overburden is placed back on the bench to return the hill to its natural slope. Highwall mining is a form of
mining in which a remotely controlled continuous miner extracts coal and conveys it via augers, belt or chain conveyors to
the outside. The cut is typically a rectangular, horizontal cut from a highwall bench, reaching depths of several hundred feet
or deeper. A highwall is the unexcavated face of exposed overburden and coal in a surface mine. Mountaintop removal
mines are special area mines not present in the Illinois Basin that are used where several thick coal seams occur near the top
of a mountain. Large quantities of overburden are removed from the top of the mountains, and this material is used to fill in
valleys next to the mine.
Transportation
The U.S. coal industry is dependent on the availability of a transportation network connecting the mining regions to the
U.S. and international distribution markets. Most U.S. coal is transported via railroad and barge, though trucks and conveyor
belts are used to move coal over shorter distances. The method of transportation and the delivery distance can impact the
total cost of coal delivered to the consumer.
Coal used for domestic consumption is generally sold free-on-board at the mine, which means the purchaser normally
bears the transportation costs. Transportation can be a large component of a coal purchaser’s total delivered cost. Although
the purchaser typically pays the freight, transportation costs are important to coal mining companies because the purchaser
may choose a supplier largely based on the total delivered cost of coal, which includes the cost of transportation.
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BUSINESS
Overview
About the Company
We are a diversified producer of low chlorine, high sulfur thermal coal from the Illinois Basin with both surface and
underground mines. We market our coal primarily to electric utility companies as fuel for their steam-powered generators.
Based on 2010 production, we are the sixth largest producer in the Illinois Basin and the second largest in Western
Kentucky. We were formed in 2006 to acquire and develop a large coal reserve holding. We commenced production in the
second quarter of 2008 and currently operate six mines, including four surface and two underground, and are seeking permits
for four additional mines. We control approximately 319 million tons of proven and probable coal reserves. Our reserves and
operations are located in the Western Kentucky counties of Ohio, Muhlenberg, Union and Webster. We also own and
operate three coal processing plants which support our mining operations. The location of our coal reserves and operations,
adjacent to the Green and Ohio Rivers, together with our river dock coal handling and rail loadout facilities, allow us to
optimize our coal blending and handling, and provide our customers with rail, barge and truck transportation options. From
our reserves, we mine coal from multiple seams which, in combination with our coal processing facilities, enhances our
ability to meet customer requirements for blends of coal with different characteristics.
We are majority - owned by Yorktown. After giving effect to this offering, we will continue to be majority - owned by
Yorktown. In addition, Yorktown is represented on our board by Bryan H. Lawrence, founder and principal of Yorktown
Partners LLC. As a result, Yorktown has, and can be expected to have, a significant influence in our operations, in the
outcome of stockholder voting concerning the election of directors, the adoption or amendment of provisions in our charter
and bylaws, the approval of mergers, and other significant corporate transactions. See “Risk Factors — Yorktown will
continue to have significant influence over us, including control over decisions that require the approval of stockholders,
which could limit your ability to influence the outcome of key transactions, including a change of control.”
Our revenue has increased from zero in 2007 to $220.6 million in 2010, which we achieved despite a period of
recession-driven declines in U.S. demand for coal and a challenging environment in the credit markets. For the year ended
December 31, 2010, we generated operating income of $19.2 million and Adjusted EBITDA of $41.1 million. Our operating
income and Adjusted EBITDA for the nine months ended September 30, 2011 were $6.4 million and $32.1 million,
respectively. Adjusted EBITDA is a non-GAAP financial measure which represents net income (loss) before net interest
expense, income taxes, depreciation, depletion and amortization, non-cash stock compensation expense, non-cash charges
related to non-resource notes, and gain on extinguishment of debt. Please see “Prospectus Summary — Summary Historical
and Unaudited Pro Forma Consolidated Financial and Operating Data” for a reconciliation of Adjusted EBITDA to net
income (loss).
We are headquartered in St. Louis, Missouri, and maintain a regional office in Madisonville, Kentucky.
Strategy
Our primary business strategy is to maximize returns to our stockholders. Key components of this strategy include the
following:
• Maintain safe mining operations and comply with environmental standards. We consider safety to be our greatest
operational priority. For the period October 1, 2010 through September 30, 2011, our underground and surface
mines had non-fatal days lost incidence rates that were 39% and 72%, respectively, below the national averages for
the same period. Non-fatal days lost incidence rate is an industry standard used to describe occupational injuries that
result in the loss of one or more days from an employee’s scheduled work. We intend to maintain programs and
policies designed to enable us to remain among the safest coal operations in the industry. We also intend to continue
to implement responsible, effective environmental practices throughout our operations and reclamation activities.
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• Continue to grow our production. We intend to continue to increase our coal production in the coming years to
satisfy what we believe will be an increasing demand for Illinois Basin coal. We will seek to support production
growth by executing mining plans for our existing undeveloped reserves and by opportunistically acquiring
additional coal reserves that are located near our current mining operations or otherwise offer the potential for
efficient and economical development of low-cost production to serve our primary market area. We commenced
production at Lewis Creek in June 2011 and plan to commence production at our Kronos underground mining
operation in September 2011 and currently expect that our 2011 production will be approximately 7.2 million tons,
compared with 5.6 million tons in 2010.
• Increase and diversify coal sales to utilities with base load scrubbed power plants in our primary market area and
pursue export opportunities. We expect that the demand for Illinois Basin coal will rise as a result of an increase in
power plants being retrofitted with scrubbers and the construction of new power plants throughout the Illinois Basin
market area. We intend to continue to focus our marketing efforts principally on power plants in the Mid-Atlantic,
Southeastern and Midwestern states that we expect will become consumers of Illinois Basin coal and to seek to
diversify our customer base through a combination of multi-year coal supply agreements and sales in the spot
market. As of September 30, 2011, we are contractually committed to sell 8.8 million tons of coal in 2012, and
8.1 million tons of coal in 2013, which represents 99% and 83% of our expected total coal sales in 2012 and 2013,
respectively. In addition, we believe that the relative heat, ash, sulfur content and cost of our coal, combined with
the accessibility of our coal mines and coal processing facilities to the Mississippi River and to rail connecting to
Louisiana export terminals will provide the opportunity to export our coal to overseas customers.
• Maximize profitability by maintaining low-cost mining operations. We operate our mines in a manner aimed at
keeping our product quality high while maintaining low production costs. We seek to maximize our coal production
and control our costs by continuing to improve our operating efficiency. Our efficiency is, in part, a function of the
overburden ratios (the amount of surface material needed to be removed to extract coal) that exist at our surface coal
mines. Our efficiency is also enhanced by our fleet of mobile mining equipment, substantially all of which is new,
our use of the only draglines in Kentucky, our utilization of river coal movement, our information technology
systems and our coordinated equipment utilization and maintenance management functions. We also believe that
our highly experienced operating management and well-trained workforce will continue to help in identifying and
implementing cost containment initiatives.
Competitive Strengths
We believe that the following competitive strengths will enable us to effectively execute our business strategy described
above.
• We have a demonstrated track record for successfully completing reserve acquisitions, securing required permits,
developing new mines and producing coal. Since our formation in 2006, we have successfully acquired coal
reserves and opened seven separate mines, obtained the necessary regulatory permits for the commencement of
mining operations at those mines, and developed significant multi-year contractual relationships with large
customers in our market area. We believe this resulted from our deep management experience and disciplined
approach to the development of our operations and our focus on providing competitively priced Illinois Basin coal.
We believe this will enable us to continue to grow our customer base, production, revenues and profitability.
• Our proven and probable reserves have a long reserve life and attractive characteristics. As of December 31,
2010, we had approximately 319 million tons of clean recoverable (proven and probable) coal reserves. Our reserves
include both surface and underground mineable coal residing in multiple seams which, in combination with our coal
processing facilities, enhances our ability to meet customer requirements for blends of coal with different
characteristics. Further, the comparatively low chlorine content of our coal relative to other Illinois Basin coal
provides us with an additional competitive advantage in meeting the desired coal fuel profile of our customers.
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• Our mines are conveniently located in close proximity to our existing and potential customers and have access to
multiple transportation options for delivery. Our mines are located adjacent to the Green and Ohio Rivers and near
our preparation, loading and transportation facilities, providing our customers with rail, barge and truck
transportation options. We believe this will also enable us to sell our coal in both the domestic and export markets.
Recently, we purchased an equity interest in, and upon development will have access to, a Mississippi River coal
export terminal project in Plaquemines Parish, Louisiana, approximately 10 miles downstream of New Orleans. We
intend to oversee the design, build-out and operation of this export coal terminal to facilitate the anticipated sale of
our coal to international customers.
• We are a reliable supplier of cost competitive coal. Our highly skilled, non-union workforce uses efficient mining
practices that take advantage of economies of scale and reduce operating costs per ton in both surface and
underground mining. We are among a small number of operators of large scale dragline surface production in the
eastern United States, and our continuous miner underground mining operations are designed to provide operating
flexibility to meet production requirements and to fulfill our coal contract specifications.
• We have a highly experienced management team with a long history of acquiring, building and operating coal
businesses. The members of our senior management team have a demonstrated track record of acquiring, building
and operating coal businesses profitably and safely. In addition, members of our senior management team have
significant experience managing the financial and organizational growth of businesses, including public companies.
Our Operational History
Since 2006, we have acquired a substantial portion of our coal reserves, surface properties, mining rights and other
assets through a series of transactions including the following:
Principal
Assets Purchase
Date Acquired Price
September 2006 Surface properties and mineral reserves (both fee $25.5 million
and leasehold) in Ohio and Muhlenberg Counties,
Kentucky, including certain of the Ken and
Rockport reserves.
December 2006 Approximately 9,500 acres of surface property $41.0 million
and mineral reserves (both fee and leasehold),
including certain of the Equality Boot and
Parkway reserves.
March 2007 Properties and mineral reserves (both fee and $46.5 million
leasehold) in Ohio and Muhlenberg Counties,
Kentucky, including certain of the West Fork,
Midway, Paradise and Vogue reserves.
May 2007 Surface properties and mineral reserves (both fee $49.6 million
and leasehold) in Ohio and Muhlenberg Counties,
Kentucky, including certain of the Sunnyside,
Lewis Creek and East Fork reserves, and the idled
Big Run mine.
March 2008 Elk Creek Reserves.* $75.6 million
December 2011 Properties and mineral reserves (both fee and $13.3 million
leasehold) in Muhlenberg County, Kentucky.
December 2011 #9 seam coal reserves in union County, Kentucky $9.0 million
(both fee and leasehold interests).
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* Purchased through Armstrong Resource Partners.
These acquisitions were funded through aggregate payments of approximately $82.7 million and promissory notes with
an aggregate principal amount of approximately $177.8 million.
In October 2010, we entered into a lease that gives us the right to mine the substantial underground coal reserves
located in Union and Webster Counties, Kentucky (the “Union/Webster Counties” reserves). The Union/Webster Counties
reserves contain approximately 116 million tons of clean recoverable reserves. The lease requires us to pay minimum annual
advance royalties in the form of 16,000 tons, recoupable against earned royalties up to $500,000 per calendar year. The lease
also provides for a 6.0% earned royalty rate that may also be satisfied by the delivery of coal at the election of the lessor. We
are obligated to meet certain due diligence requirements or pay additional advance royalties prior to the commencement of
mining.
In 2009 and 2010, we borrowed an aggregate principal amount of $44.1 million from Armstrong Resource Partners, and
the proceeds of those loans were used to satisfy various installment payments required by the promissory notes referred to
above. Under the terms of these borrowings, Armstrong Resource Partners had the option to acquire interests in coal reserves
then held by Armstrong Energy in Muhlenberg and Ohio Counties in satisfaction of the loans it had made to Armstrong
Energy. On February 9, 2011, Armstrong Resource Partners exercised this option. In connection with that exercise,
Armstrong Resource Partners paid Armstrong Energy an additional $5.0 million in cash and agreed to offset $12.0 million in
accrued advance royalty payments owed by Armstrong Energy to Armstrong Resource Partners, relating to the lease of the
Elk Creek Reserves, to acquire an additional partial undivided interest in certain of the coal reserves held by Armstrong
Energy in Muhlenberg and Ohio Counties at fair market value. Through these transactions, Armstrong Resource Partners
acquired a 39.45% undivided interest as a joint tenant in common with Armstrong Energy in the majority of our coal
reserves, excluding the Union/Webster Counties reserves. The aggregate amount paid by Armstrong Resource Partners to
acquire its interest in these reserves was the equivalent of approximately $69.5 million.
In February 2011, all outstanding amounts under the promissory notes referred to above were repaid with the proceeds
of borrowings under our Senior Secured Credit Facility. See “Description of Indebtedness.”
Our Organizational History
In August 2011, Armstrong Resources Holdings, LLC merged with and into Armstrong Energy, Inc., which
subsequently changed its name to Armstrong Energy Holdings, Inc. Subsequently, Armstrong Land Company, LLC was
converted to a C-corporation and changed its name to Armstrong Energy, Inc. effective October 1, 2011. In connection with
the Reorganization, each owner of Armstrong Land Company, LLC received 9.25 shares of Armstrong Energy, Inc. common
stock for each unit held. The following chart shows a summary of the corporate organization of Armstrong Energy, Inc. and
its principal subsidiaries, after giving effect to the Reorganization, but prior to giving effect to the offering of common stock
being made hereby or to the Concurrent ARP Offering.
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(1) Reserves owned solely by Armstrong Resource Partners. These include the Kronos, Lewis Creek and Ceralvo
underground mines.
(2) Reserves controlled jointly by Armstrong Resource Partners (with a 39.45% undivided interest) and Armstrong
Energy (with a 60.55% undivided interest). If the Concurrent ARP Offering and related transactions are completed, the
undivided interest of Armstrong Resource Partners will increase, and the undivided interest of Armstrong Energy will
decrease, based on the net proceeds of the Concurrent ARP Offering paid to Armstrong Energy and the value of the
affected reserves as agreed by Armstrong Resource Partners and Armstrong Energy. See “Certain Relationships and
Related Party Transactions — Concurrent Transactions with Armstrong Resource Partners.”
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The following chart depicts the organization and ownership of Armstrong Energy, Inc. after giving effect to this
offering and the Concurrent ARP Offering.
(1) Reserves owned solely by Armstrong Resource Partners. These include the Kronos, Lewis Creek and Ceralvo
underground mines.
(2) Reserves controlled jointly by Armstrong Resource Partners (with a % undivided interest) and Armstrong Energy
(with a % undivided interest), assuming an offering price of $ per unit, the midpoint of the price range set forth
on the front cover page of the prospectus for the Concurrent ARP Offering and an estimated purchase price of $ for
Armstrong Resource Partners’ additional interest in the partially owned reserves.
About Armstrong Resource Partners
Armstrong Resource Partners was formed in 2008 to engage in the business of management and leasing of coal
properties and collection of royalties in the Western Kentucky region of the Illinois Basin. Armstrong Energy holds a 0.4%
equity interest in Armstrong Resource Partners through a wholly-owned subsidiary, Elk Creek GP, which is the general
partner of Armstrong Resource Partners. The outstanding limited partnership interests (“common units”) of Armstrong
Resource Partners, representing 99.6% of its equity interests, are owned by Yorktown. Armstrong Energy is majority-owned
by Yorktown. Yorktown is entitled to 99.6% of all distributions made by Armstrong Resource Partners. Of our total reserves
of 319 million tons, 66 million tons (21%) are owned 100% by Armstrong Resource Partners, and 138 million tons (43%)
are held by Armstrong Energy and Armstrong Resource Partners as joint tenants in common with 60.55% and 39.45%
interests, respectively.
Pursuant to the ARP LPA, Elk Creek GP has the exclusive authority to conduct, direct and manage all activities of
Armstrong Resource Partners. By virtue of Armstrong Energy’s control of Elk Creek GP, the results of Armstrong Resource
Partners are consolidated in our historical consolidated financial statements contained herein. Pursuant to the ARP LPA,
effective October 1, 2011, Yorktown unilaterally may remove Elk Creek GP as general partner in some circumstances. As a
result, Armstrong Energy will no longer consolidate
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the results of Armstrong Resource Partners in the financial statements of Armstrong Energy. See “Unaudited Pro Forma
Financial Information.”
In 2009 and 2010, Armstrong Energy borrowed an aggregate principal amount of $44.1 million from Armstrong
Resource Partners, and the proceeds of those loans were used to satisfy various installment payments required by the
promissory notes that were delivered in connection with the acquisition of our coal reserves. Under the terms of these
borrowings, Armstrong Resource Partners had the option to acquire interests in coal reserves then held by Armstrong Energy
in Muhlenberg and Ohio Counties in satisfaction of the loans it had made to Armstrong Energy. On February 9, 2011,
Armstrong Resource Partners exercised this option. In connection with that exercise, Armstrong Resource Partners paid
Armstrong Energy an additional $5.0 million in cash and agreed to offset $12.0 million in accrued advance royalty payments
owed by Armstrong Energy to Armstrong Resource Partners, relating to the lease of the Elk Creek Reserves, to acquire an
additional partial undivided interest in certain of the coal reserves held by Armstrong Energy in Muhlenberg and Ohio
Counties at fair market value. Through these transactions, Armstrong Resource Partners acquired a 39.45% undivided
interest as a joint tenant in common with Armstrong Energy in the majority of our coal reserves, excluding the
Union/Webster Counties reserves. The aggregate amount paid by Armstrong Resource Partners to acquire its interest in these
reserves was the equivalent of approximately $69.5 million.
Armstrong Resource Partners, L.P. is a co-borrower under our $100.0 million Senior Secured Term Loan and a
guarantor on the $50.0 million Senior Secured Revolving Credit Facility and the Senior Secured Term Loan. Substantially
all of our assets and the assets of Armstrong Resource Partners are pledged to secure borrowings under our Senior Secured
Credit Facility.
On February 9, 2011, Armstrong Energy entered into lease agreements with Armstrong Resource Partners pursuant to
which Armstrong Resource Partners granted Armstrong Energy leases to its 39.45% undivided interest in the mining
properties described above and licenses to mine coal on those properties. The initial term of each such agreement is ten
years, and will automatically extend for subsequent one-year terms until all mineable and merchantable coal has been mined
from the properties, unless either party elects not to renew or such agreement is terminated upon proper notice. Armstrong
Energy is obligated to pay Armstrong Resource Partners a production royalty equal to 7% of the sales price of the coal which
Armstrong Energy mines from the properties. Under the terms of these agreements, Armstrong Resource Partners retains the
surface rights to use the properties containing these reserves for non-mining purposes. Events of default under the lease
agreements include the failure by Armstrong Energy to pay royalty payments to Armstrong Resource Partners when due and
a default by Armstrong Energy under any agreement, indenture or other obligation to any creditor that, in the opinion of
Armstrong Resource Partners, may have a material adverse effect on Armstrong Energy’s ability to meet its obligations
under the lease agreements. If any event of default occurs and is not cured by Armstrong Energy, then Armstrong Resource
Partners can terminate one or more of the lease agreements. In addition, Armstrong Energy has agreed to indemnify
Armstrong Resource Partners from and against any and all claims, damages, demands, expenses, fines, liabilities, taxes and
any other losses related in any way to Armstrong Energy’s mining operations on such premises, and to reclaim the surface
lands on such premises in accordance with applicable federal, state and local laws.
The aforementioned lease transaction has been accounted for as a financing arrangement due to our continuing
involvement in the land and mineral reserves transferred . This has resulted in the recognition of an initial obligation of
$69.5 million by Armstrong Energy, which represents the fair value of the assets transferred. As the financial results of
Armstrong Resource Partners historically have been consolidated, this transaction has not impacted our results of operations
or financial condition through September 30, 2011. As noted above, the Deconsolidation was effective October 1, 2011.
Subsequently, the long-term obligation will be reflected on our balance sheet and will continue to be amortized through 2031
at an annual rate of 7% of the estimated gross revenue generated from the sale of the coal originating from the leased mineral
reserves. As of September 30, 2011, the outstanding principal balance of the long-term obligations to Armstrong Resource
Partners was $70.3 million.
Effective February 9, 2011, we entered into an agreement with Armstrong Resource Partners pursuant to which
Armstrong Resource Partners granted Armstrong Energy the option to defer payment of the 7%
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production royalty described above. In consideration for the granting of the option to defer these payments, we granted to
Armstrong Resource Partners the option to acquire an additional partial undivided interest in certain of the coal reserves held
by Armstrong Energy in Muhlenberg and Ohio Counties by engaging in a financing arrangement, under which we would
satisfy payment of any deferred fees by selling to Armstrong Resource Partners part of our interest in the aforementioned
coal reserves at fair market value for such reserves determined at the time of the exercise of such options.
On February 9, 2011, Armstrong Resource Partners also entered into a lease and sublease agreement with Armstrong
Energy relating to our Elk Creek Reserves and granted Armstrong Energy a license to mine coal on those properties. The
terms of this agreement mirror those of the lease agreements described above. Armstrong Energy has paid $12 million of
advance royalties under the lease, which are recoupable against production royalties.
Based upon our current estimates of production for 2011 and 2012, we anticipate that Armstrong Energy will owe
royalties to Armstrong Resource Partners under the above-mentioned license and lease arrangements of approximately
$7.8 million and $16.6 million in 2011 and 2012, respectively, of which collectively, $7.2 million will be recoupable against
the advance royalty payment referred to above.
Concurrent Offering
Concurrent with this offering of common stock, Armstrong Resource Partners is offering common units pursuant to a
separate initial public offering. Armstrong Energy indirectly holds a 0.4% equity interest in Armstrong Resource Partners.
See “— Our Organizational History.” If the Concurrent ARP Offering is completed, we expect that the net proceeds received
by Armstrong Resource Partners will be applied as described in “Use of Proceeds.” While we intend to consummate the
Concurrent ARP Offering simultaneously with this offering of common stock, the completion of this offering is not subject
to the completion of the Concurrent ARP Offering and the completion of the Concurrent ARP Offering is not subject to the
completion of this offering.
This description and other information in this prospectus regarding the Concurrent ARP Offering is included in this
prospectus solely for informational purposes. Nothing in this prospectus should be construed as an offer to sell, nor the
solicitation of an offer to buy, any common units of Armstrong Resource Partners.
Our Mining Operations
We currently operate six active mines, all of which are located in the Illinois Basin coal region in western Kentucky.
Our operations are comprised of four surface mines and two underground mines, and we have three preparation plants
serving these operations. In 2010, approximately 64% of the coal that we produced came from our surface mining
operations.
In addition, we are seeking permits for four additional mines. Permit applications for the Hickory Ridge surface mine
have been submitted to the Corps and the State of Kentucky but have yet to be issued. We are also in the process of
preparing permit applications relating to Ken surface mine and the Lewis Creek and Ceralvo underground mines. We intend
to submit those permit applications to the Corps and the State of Kentucky beginning in January 2012.
Our current operating mines are all located in Muhlenberg and Ohio Counties, Kentucky. The Western Kentucky
Parkway crosses our properties from Southwest to Northeast, and the Green River separates our properties in Ohio and
Muhlenberg Counties. Our barge loading facility on the Green River is located near the town of Kirtley, Kentucky. In
addition, we have a network of off-highway truck haul roads, which connect the majority of our active mines and provide
access to our barge loading and rail loadout facilities.
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The following tables provide a summary of information regarding our active mines.
Production Quality Specifications
Clean Recoverable Tons Nine (As Received)(2)
(Proven and Probable Year Months SO 2
Mines Reserves)(1) Ended Ended Heat Content
(Commenced Mining Proven Probable December 31, September 30, Value (Lbs/ Ash
Operations) Method(3) Reserves Reserves Total 2010 2011 (Btu/Lb) MMBtu) (%)
(In thousands) (Tons in thousands)
Active mines
Big Run (April 2008)(4) U 2,849 242 3,091 (5) 572.1 361.5 11,822 4.3 7.4
Midway (July 2008) S 24,806 3,507 28,313 (5) 1,614.8 1,290.4 11,315 4.8 10.0
Parkway (April 2009) U 1,952 58 2,010 (5) 1,485.9 1,165.6 11,931 4.4 7.1
East Fork (June 2009)(6) S 2,633 553 3,186 (5) 1,641.1 608.6 11,136 7.6 11.2
Equality Boot (September 2010) S 23,687 1,148 24,835 (7) 330.8 1,493.3 11,587 5.7 8.8
Lewis Creek (June 2011) S 6,650 70 6,720 (5) — 197.0 11,420 4.0 9.5
Kronos (September 2011)(8) U 18,862 3,002 21,864 — 9.6 11,792 4.5 7.6
Total active mines 81,439 8,580 90,019 5,644.7 5,126.0
(1) For surface mines, clean recoverable tons are based on a 90% mining recovery, preparation plant yield at 1.55 specific
gravity and a 95% preparation plant efficiency. For underground mines, clean recoverable tons are based on a 50%
mining recovery, preparation plant yield at 1.55 specific gravity and a 95% preparation plant efficiency. “Proven and
probable reserves” refers to coal that can be economically extracted or produced at the time of the reserve
determination.
(2) Quality specifications displayed on an “as received” basis, assuming 11% moisture. If derived from multiple seams,
data represents an average.
(3) U = Underground; S = Surface
(4) Big Run ceased production in October 2011.
(5) Of these reserves, 39.45% of the interests controlled by Armstrong Energy are leased from Armstrong Resource
Partners.
(6) Warden and Kronos pits.
(7) Of these reserves, 39.45% of the interests controlled by Armstrong Energy are leased from Armstrong Resource
Partners. Includes 167,000 tons related to reserves for which we own or lease a 50% or more partial joint interest and
royalties on extractions may be payable to other owners.
(8) Based on internal estimates, recoverable reserves are split evenly among the three mines that comprise the Elk Creek
Reserves (Kronos, Lewis Creek underground and Ceralvo). See the table and related footnotes under “Prospectus
Summary — About the Company.”
Clean Recoverable Tons (Proven Primary
and Probable Reserves)(1) Transportation
Owned Leased Total Method
(In thousands)
Active mines
Big Run (April 2008)(2) 3,091 — 3,091 (3) Rail
Midway (July 2008) 28,313 — 28,313 (3) Rail, barge & truck
Parkway (April 2009) 312 1,698 2,010 (3) Truck
East Fork (June 2009)(4) 2,302 884 3,186 (3) Rail, barge & truck
Equality Boot (September 2010) 24,835 — 24,835 (5) Barge
Lewis Creek (surface) (June 2011) 6,720 — 6,720 (3) Rail, barge & truck
Kronos (September 2011)(6) 20,689 1,175 21,864 Rail, barge & truck
Total active mines 90,019
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(1) For surface mines, clean recoverable tons are based on a 90% mining recovery, preparation plant yield at 1.55 specific
gravity and a 95% preparation plant efficiency. For underground mines other than Union/Webster Counties, clean
recoverable tons are based on a 50% mining recovery, preparation plant yield at 1.55 specific gravity and a 95%
preparation plant efficiency. For Union/Webster Counties, clean recoverable tons are based on a 50% mining recovery,
preparation plant yield at 1.60 specific gravity and a 95% preparation plant efficiency. “Proven and probable reserves”
refers to coal that can be economically extracted or produced at the time of the reserve determination.
(2) Big Run ceased production in October 2011.
(3) Of these reserves, 39.45% of the interests controlled by Armstrong Energy are leased from Armstrong Resource
Partners.
(4) Warden and Kronos pits.
(5) Of these reserves, 39.45% of the interests controlled by Armstrong Energy are leased from Armstrong Resource
Partners. Includes 167,000 tons related to reserves for which we own or lease a 50% or more partial joint interest and
royalties on extractions may be payable to other owners.
(6) Based on internal estimates, recoverable reserves are split evenly among the three mines that comprise the Elk Creek
Reserves (Kronos, Lewis Creek underground and Ceralvo).
The following map shows the locations of our mining operations and coal reserves:
In general, we have developed our mines and preparation plants at strategic locations in close proximity to rail or barge
shipping facilities. Coal is transported from our mines to customers by means of railroads, trucks, and barge lines. We
currently own or lease under long-term arrangements a substantial portion of the
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equipment utilized in our mining operations. We employ sophisticated preventative maintenance and rebuild programs and
upgrade our equipment to ensure that it is productive, well-maintained and cost-competitive. Our maintenance programs also
employ procedures designed to enhance the efficiencies of our operations.
We control approximately 204 million tons of coal available for production at our active and proposed mines in Ohio
and Muhlenberg counties in Western Kentucky, of which we lease approximately 23 million tons from various unaffiliated
landowners.
Armstrong Coal Company, Inc., our wholly-owned subsidiary (“Armstrong Coal”), has entered into leases with
Western Mineral Development, LLC (“Western Mineral”), Western Land Company, LLC (“Western Land”) and Western
Diamond, LLC (“Western Diamond”), each of which is our wholly-owned subsidiary, for the reserves described above,
excluding the Elk Creek Reserves. Those leases are for a term of ten years but can be renewed for an additional ten-year
term or until all of the mineable and merchantable coal has been mined. The leases provide for a 7% production royalty
payment to be paid by Armstrong Coal to the lessors.
Effective February 9, 2011, Armstrong Coal, Western Diamond and Western Land entered into a Royalty Deferment
and Option Agreement with Western Mineral. Pursuant to this agreement, Western Mineral agreed to grant to Armstrong
Coal and its affiliates the option to defer payment of Western Mineral’s pro rata share of the 7% production royalty
described under “— Lease Agreements” below. In consideration for Western Mineral’s granting of the option to defer these
payments, Armstrong Coal and its affiliates granted to Western Mineral the option to acquire an additional partial undivided
interest in certain of the coal reserves held by Armstrong Energy, Inc. in Muhlenberg and Ohio Counties by engaging in a
financing arrangement, under which Armstrong Coal and its affiliates would satisfy payment of any deferred fees by selling
part of their interest in the aforementioned coal reserves at fair market value for such reserves determined at the time of the
exercise of such options.
On October 11, 2011, Western Diamond and Western Land (together, the “Sellers”) entered into an agreement with
Western Mineral pursuant to which the Sellers agreed to sell an additional partial undivided interest in substantially all of the
coal reserves and real property owned by the Sellers previously subject to the options exercised by Armstrong Resource
Partners on February 9, 2011 (see “Certain Relationships and Related Party Transactions — Sale of Coal Reserves”), other
than any of Sellers’ real property and related mining rights associated with the Parkway mine. Such interest shall be equal to
a fraction, the numerator of which shall be equal to the amount of net proceeds received by Western Mineral and/or its
parents or affiliates from the Concurrent ARP Offering (see “Prospectus Summary — Concurrent Offering”), and the
denominator of which is a dollar amount the parties agree represents the aggregate fair market value of the property. The
closing of the sale, which is conditioned on the closing of the Concurrent ARP Offering, shall occur on or before 90 days
after Western Mineral and/or its parents or affiliates receives the net proceeds of the Concurrent ARP Offering.
We also lease the Elk Creek Reserves from Armstrong Resource Partners, and the terms of that lease mirror the leases
described above. The lease with Armstrong Resource Partners also recognizes and permits us to recoup a pre-existing annual
advance royalty balance of $12.0 million against production royalties as they come due.
Approximately 116 million tons of recoverable coal are located in the Union/Webster Counties reserves. We have
entered into a lease with a non-affiliated third party for such reserves, which requires us to pay minimum annual advance
royalties in the form of 16,000 tons, recoupable against earned royalties up to $500,000 per calendar year. The lease also
provides for a 6% earned royalty rate that may also be satisfied by the delivery of coal at the election of lessor. We are also
obligated to meet certain due diligence requirements or pay additional advance royalties prior to the commencement of
mining.
Big Run Mine. The Big Run mine was an underground mine located near Centertown, Kentucky that was previously
operated by Peabody Energy. In October 2011, production at Big Run ceased, and the equipment that had been used to
extract thermal coal from the West Kentucky #9 seam was relocated to the Kronos mine. The Kronos mine commenced
production in September 2011. Big Run produced approximately 0.4 million clean tons of coal in 2011, which was processed
at our Midway Preparation Plant.
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Midway Mine. Midway is a surface mine located two miles southeast of Centertown, Kentucky in Ohio County and is
west of and adjacent to the Midway Preparation Plant. The Midway Mine commenced production in April 2008 and extracts
thermal coal from the West Kentucky #13a, #13, and #11 seams. Stripping ratios for coal that has not undergone any
processing, or “run-of-mine” coal, at the Midway Mine are favorable and range from 12 to 13.5-to-1. Midway is expected to
produce approximately 1.6 million tons of clean coal in 2011 and is currently equipped with one dragline (45 yard bucket)
and a spread of surface mining equipment, including power shovels, excavators, loaders and haul trucks. Our reserve studies
have indicated that Midway has approximately 28 million tons of proven and probable reserves. Coal from the Midway mine
is transported less than one mile to the Midway Preparation Plant for processing, where it is then shipped to customers via
truck, rail or barge.
Parkway Mine. Parkway is an underground mine located northeast of Central City, Kentucky in Muhlenberg County
that extracts thermal coal primarily from the West Kentucky #9 seam and accesses that seam from an older surface mining
pit that was abandoned prior to our acquisition of Parkway. Parkway consists of two working super sections, and each
section is currently equipped with two continuous miners that operate concurrently. Parkway is expected to produce
approximately 1.6 million tons of clean coal in 2011. Additional reserves that we do not currently control are located
adjacent to the current Parkway reserves that could extend the life of the Parkway mine. The majority of the coal from the
Parkway mine is transported to the surface stockpile where it is processed at the Parkway Preparation Plant and trucked to a
single customer via a seven mile private haul road.
East Fork Mine. East Fork is a surface mine located three miles west of Centertown, Kentucky. The East Fork
complex consists of two pits, the Warden and Kronos pits, which extract thermal coal from the West Kentucky #14 seam.
The Kronos pit commenced operations in June 2009, and the Warden pit commenced operations in August 2009. East Fork
is expected to produce approximately 0.8 million tons of clean coal in 2011, and there were approximately 3.2 million tons
of proven and probable reserves at the East Fork mine at December 2010. We currently anticipate that production at the
Kronos pit will continue until late 2011 while production at the Warden pit will continue through 2013. East Fork
run-of-mine coal is trucked 3.6 miles to the Armstrong Dock Preparation Plant via a private haul road where it is processed,
blended and shipped to customers.
Equality Boot Mine. Equality Boot is a surface mining operation located eight miles southwest of Centertown,
Kentucky, which commenced operations in September 2010. The Equality Boot mine extracts thermal coal from the West
Kentucky #14, #13, #12 and #11 seams and is expected to produce approximately 2.3 million tons of coal in 2011. The
Equality Boot mine uses two draglines equipped with 45 yard buckets and a spread of surface equipment, including power
shovels, excavators, loaders and haul trucks to remove overburden and interburden and construct the dragline bench.
Run-of-mine stripping ratios at the Equality Boot mine are favorable and have averaged less than 10-to-1, a trend we expect
to continue. Equality Boot has approximately 25 million tons of proven and probable reserves. Coal from the Equality Boot
mine is transported less than one mile by truck to the Equality Boot run-of-mine facility, where a 4,400 foot overland
conveyor system is used to transport the coal to the 2,500 tons per hour barge loadout facility located on the Green River.
The coal is then loaded onto barges and transported approximately 5 miles to the Armstrong Dock Preparation Plant where it
is unloaded, processed, reloaded onto barges and then shipped to its customers.
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Lewis Creek Mine. The Lewis Creek mine is a surface mine located approximately five miles south of Centertown,
Kentucky and approximately 3.5 miles from the Midway Preparation Plant. Production commenced in June 2011 at Lewis
Creek, and thermal coal is being mined from the West Kentucky seams #13A and #13. Lewis Creek is expected to produce
approximately 0.5 million tons of clean coal in 2011. A dragline equipped with a 20 yard bucket is used in conjunction with
mobile mining equipment to remove overburden and construct the dragline bench at Lewis Creek. There are approximately
7 million tons of proven and probable reserves at the Lewis Creek surface mine. Coal mined at Lewis Creek is transported
by truck to the Midway Preparation Plant for processing and subsequent delivery to our customers.
Kronos Mine. The Kronos mine, which commenced operations in September 2011, is an underground mine located
approximately three miles southwest of Centertown, Kentucky. It will extract thermal coal from the West Kentucky #9 seam
and is expected to produce approximately 0.4 million tons of clean coal in 2011. The mine currently utilizes two continuous
miner super sections, but we expect to increase to four super sections in early 2012. At that time, we expect that the mine’s
annual production will be 2.4 million tons. There are approximately 22 million tons of proven and probable reserves at the
Kronos mine. Coal mined at Kronos is transported by truck to the Midway Preparation Plan and the Armstrong Dock
Preparation Plant for processing and delivery.
Future Underground Mines. We anticipate opening the Lewis Creek underground mine in 2013 and the Ceralvo
underground mine in 2015 in Ohio County, Kentucky, assuming that we receive all necessary permits for operation of those
mines. Both mines will produce coal from the West Kentucky #9 seam utilizing two continuous miner super sections
operating concurrently. Once fully operational, the Lewis Creek and Ceralvo underground mines are projected to produce
approximately 1 million tons each of clean coal per year. There are approximately 22 million tons of proven and probable
reserves at each of the Lewis Creek and Ceralvo reserves.
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Future Surface Mines. We anticipate opening the Hickory Ridge, Ken and Maddox surface mines in 2013 and 2014.
These surface mines will produce thermal coal from primarily the West Kentucky #14, #13, #13A and #11 seams.
Conventional truck-and-shovel operations are anticipated to be used at all of the mines. The Hickory Ridge, Ken and
Maddox surface mines have approximately 23 million tons in the aggregate of proven and probable reserves.
Our Coal Preparation Facilities
The majority of coal from each of our mining operations is processed at a coal preparation plant located near the mine
or connected to the mine by an overland conveyor system. Currently, we have three preparation plants, Midway, Parkway
and Armstrong Dock. These coal preparation plants allow us to treat the coal we extract from our mines to ensure a
consistent quality and to enhance its suitability for particular end-users. In 2010, our preparation plants processed
approximately 98% of the raw coal we produced. In addition, depending on coal quality and customer requirements, we may
blend coal mined from different locations in order to achieve a more suitable product. At the current time, our preparation
plants do not process coal from other companies, and we do not have any present intention to do so.
The following chart provides information regarding our preparation plants:
Midwa Armstrong
y Parkway Dock
Location: Centertown, Kentucky Central City, Kentucky Centertown, Kentucky
Inception: July 2008 April 2009 March 2010
Mines Serviced: Midway, Big Run, Lewis Creek Parkway East Fork, Equality Boot, Kronos
Tons Per Hour: 600 — Expandable to 1,200 400 1,200
Loadout Tons Per Hour: 2,500 (Rail) — 2,500 (Barge)
Transportation: Rail, Truck Truck Barge
Our Midway Plant is 600 tons-per-hour (“TPH”) raw coal feed, heavy media preparation plant that was constructed in
2008. The plant is connected to the P&L Railroad via a newly-constructed unit train railroad “loop” extension of
approximately 16,000 feet, and also includes a coal handling system similar to that present at the Armstrong Dock Plant that
permits the loading of coal into railcars or trucks. With additional capital expenditures, the Midway Plant is expandable to
1,200 TPH.
The Parkway Preparation Plant is located adjacent to the Parkway mine and has a run-of-mine coal capacity of 400
TPH. Clean coal from the preparation plant is placed in a 60,000 ton capacity stockpile and subsequently loaded into trucks
for delivery to our customers.
The Armstrong Dock Plant is a 1200 TPH raw coal feed, heavy media preparation plant that was constructed in 2008.
The plant is connected to a newly-refurbished 10,000 ton “donut” storage stockpile and an extensive conveyor handling
system. The Armstrong Dock Plant has a coal handling system that permits the loading of coal into barges adjacent to the
dock conveyor or into trucks adjacent to the plant itself.
The treatments we employ at our preparation plants depend on the size of the raw coal. For coarse material, the
separation process relies on the difference in the density between coal and waste rock where, for the very fine fractions, the
separation process relies on the difference in surface chemical properties between coal and the waste minerals. To remove
impurities, we crush raw coal and classify it into various sizes. For the largest size fractions, we use dense media vessel
separation techniques in which we float coal in a tank containing a liquid of a pre-determined specific gravity. Since coal is
lighter than its impurities, it floats, and we can separate it from rock and shale. We treat intermediate sized particles with
dense medium cyclones, in which a liquid is spun at high speeds to separate coal from rock. Fine coal is treated in spirals, in
which the differences in density between coal and rock allow them, when suspended in water, to be separated. Ultra fine coal
is recovered in column flotation cells utilizing the differences in surface chemistry between coal and rock. By injecting
stable air bubbles through a suspension of ultra fine coal and rock, the coal particles adhere to the bubbles and rise to the
surface of the column where they are removed. To minimize the moisture content in coal, we process most coal sizes
through centrifuges. A centrifuge spins coal very quickly, causing
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water accompanying the coal to separate. Coarse refuse from our preparation plants is back-hauled and disposed of in our
mining pits or other locations in accordance with applicable regulations and permits.
Sales and Marketing
Our sales and marketing functions are handled from our St. Louis, Missouri headquarters with assistance from our
Madisonville, Kentucky operations center. Prior to 2011, the majority of our coal sales were made through the use of
third-party independent contractors who were paid a per-ton commission with respect to the coal they brokered for sale.
Commencing in 2011, the majority of our new coal sales have been made through our in-house Director of Coal Sales, and
no new commissions are paid with respect to coal sold by our employees.
Multi-year Coal Supply Agreements
As is customary in the coal industry, we enter into multi-year coal supply agreements with many of our customers.
Multi-year coal supply agreements usually have specific and possibly different volume and pricing arrangements for each
year of the agreement. These agreements allow customers to secure a supply for their future needs and provide us with
greater predictability of sales volume and sales prices. In 2010, we sold approximately 90% of our coal under multi-year coal
supply agreements. The majority of our multi-year coal supply agreements include a fixed price for the term of the
agreement or a pre-determined escalation in price for each year. Some of our multi-year coal supply agreements may include
a variable pricing system. While most of our multi-year coal supply agreements are for terms of one to five years, some spot
agreements and purchase orders provide for deliveries for as little as one month, and other agreements have terms up to
10.5 years. At September 30, 2011, we had 11 multi-year coal supply agreements with remaining terms ranging from one to
seven years.
We typically enter into multi-year coal supply agreements through a “request-for-proposal” process and after
competitive bidding and negotiations. Therefore, the terms of these agreements vary by customer. Our multi-year coal
supply agreements typically contain provisions to adjust the base price due to new laws and regulations that affect our costs.
Additionally, some of our agreements contain provisions that allow for the recovery of costs affected by modifications or
changes in the interpretations or application of any applicable statute by local, state or federal government authorities.
The price of coal sold under certain of our agreements is subject to fluctuation. For example, some of our agreements
include index provisions that change the price based on changes in market-based indices and or changes in economic indices.
Other agreements contain price reopener provisions that may allow a party to renegotiate pricing at a set time. Price reopener
provisions may automatically set a new price based on then-current market prices or require us to negotiate a new price. In a
limited number of agreements, if the parties do not agree on a new price, either party has an option to terminate the
agreement. In addition, certain of our agreements contain clauses that may allow customers to terminate the agreement in the
event of certain changes in environmental laws and regulations that impact their operations.
The coal supply agreements establish the quality and volume of coal to be sold. Most of our agreements fix annual
pricing and volume obligations, though in certain instances, the volume obligations may change depending on the
customer’s needs. Most of our coal supply agreements contain provisions requiring us to deliver coal within certain ranges
for specific coal characteristics such as heat content, sulfur, ash and moisture content as well as others. Failure to meet these
specifications can result in economic penalties, suspension or cancellation of shipments or termination of the agreements.
Our coal supply agreements also typically contain force majeure provisions allowing temporary suspension of
performance by us or our customers in the event that circumstances beyond the control of the affected party occur, including
events such as strikes, adverse mining conditions, mine closures or serious transportation problems that affect us or
unanticipated plant outages that may affect the buyer. Our agreements also generally provide that in the event a force
majeure event exceeds a certain time period, the unaffected party may have the option to terminate the purchase or sale in
whole or in part.
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Customers
The following map identifies current or planned scrubbed power plants to which we presently sell coal or to which
Illinois Basin coal could be sold in the future.
Our primary customers are electric utilities. We may also sell coal to industrial companies, brokers and other coal
producers. For the year ended December 31, 2010 and the nine months ended September 30, 2011,
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approximately 96% and 94%, respectively, of our coal revenues related to sales to electric utilities. The majority of our
electric utility customers purchase coal for terms of one to five years, but we also supply coal on a spot basis for some of our
customers.
In 2010, we sold coal to eight domestic customers with operations located in numerous states. The majority of those
customers operate power plants in the Midwestern and Southern regions of the United States. For the year ended
December 31, 2010, we derived approximately 76% of our total coal revenues from sales to our two largest customers —
Tennessee Valley Authority (“TVA”) and Louisville Gas and Electric (“LGE”). For the fiscal year ended December 31,
2010, coal sales to TVA and LGE constituted approximately 40% and 36% of our total coal revenues, respectively.
We currently have two multi-year coal supply agreements with LGE for the sale of coal. The first agreement was
entered into in 2008, as amended, and expires in 2016. It calls for 2.1 million tons annually through 2015 and 0.9 million
tons in 2016. Pricing ranges from $28.19 to $30.25 per ton over the term of the agreement subject to certain additional
quality related adjustments that are typical of the industry. There is no price reopener provision in this agreement. The
agreement with LGE that was entered into in 2009 calls for annual delivery of 1.25 million tons from 2011 through 2013 and
0.75 million tons from 2014 through 2016. In addition to typical quality adjustments, the price ranges from $42.00 to $45.00
per ton from 2011 through 2013. The agreement then provides that either party may elect at its sole option to reopen the
agreement for negotiations with respect to price and/or other terms as it concerns all coal to be delivered in 2014 and
beyond. Should either party seek to reopen the agreement (which must be done no later than April 1, 2013) and the parties be
unable to reach a mutually acceptable agreement as to those terms being renegotiated, the agreement will terminate as of
December 31, 2013.
We also have two multi-year coal supply agreements with TVA for the sale of coal. The agreement with TVA that was
entered into in 2007, as amended, calls for the delivery of 1.0 million tons annually in 2011 and 2.0 million tons from 2012
through 2018. The price ranges from $40.57 to $41.68 per ton in 2011 and 2012. The agreement then provides that either
party may elect at its sole option to reopen the agreement for negotiations with respect to price and/or other terms as it
concerns all coal to be delivered in 2013 and beyond. Should either party seek to reopen the agreement (which must be done
by no later than April 1, 2012) and the parties are unable to reach a mutually acceptable agreement as to those terms being
renegotiated, the agreement will terminate as of December 31, 2012. The agreement also provides for typical quality
adjustments. In addition, commencing on July 1, 2011, TVA has the unilateral right to terminate the agreement upon 60 days
written notice, in which case TVA is required to pay us a termination fee equal to 10% of the base price multiplied by the
remaining number of tons to be delivered under the agreement.
The agreement with TVA that was entered into in 2008 calls for delivery of between 0.9 million and 1.1 million tons
annually from 2009-2013. The price ranges from $56.00 to $58.00 between 2011 and 2013. The agreement then provides
that either party may elect at its sole option to reopen the agreement for negotiations with respect to price and/or other terms
as it concerns all coal to be delivered in 2012 and 2013. TVA exercised its option under the agreement. As a result the
parties reached an agreement to reprice the coal to be delivered in 2012 and 2013 with pricing from $54.25 to $55.88 per ton.
Transportation
We ship our coal to domestic customers by means of railcars, barges or trucks, or a combination of these means of
transportation. We generally sell coal free on board at the mine or nearest loading facility. Our customers normally bear the
costs of transporting coal by rail or barge. Historically, most domestic electricity generators have arranged long-term
shipping agreements with rail or barge companies to assure stable delivery costs. Approximately 37% of our coal shipped in
2010 was delivered by barge, which is generally less expensive than transporting coal by truck or rail. The Armstrong Dock,
which is located on the Green River, can load up to six million tons of coal annually for shipment on inland waterways. For
the first nine months of 2011, 50%, 27% and 23% of our coal sales tonnage was shipped by barge, truck and rail,
respectively.
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Competition
The coal industry is highly competitive. There are numerous large and small producers in all coal producing regions of
the United States, and we compete with many of these producers. Our main competitors include Alliance Resource Partners,
L.P., Patriot Coal Corp., Peabody Energy, Inc., the Cline Group’s Foresight Energy LLC, Oxford Resource Partners, LP and
Murray Energy, all of which are companies mining in the Illinois Basin. Many of these coal producers have greater financial
resources and more proven and probable reserves than we do. Based on MSHA data, we were the sixth largest producer of
Illinois Basin coal in fiscal 2010, producing approximately 5% of the total Illinois Basin coal. As the price of domestic coal
increases, we also compete with companies that produce coal from one or more foreign countries, such as Colombia,
Indonesia and Venezuela.
The most important factors on which we compete are price, quality and characteristics, transportation costs and
reliability of supply. The demand for our coal and the prices that we will be able to obtain for our coal are closely related to
coal consumption patterns of the U.S. electric generation industry and international consumers. The patterns of coal
consumption are affected by various factors beyond our control, including economic conditions, temperatures in the United
States, government regulation, technological developments and the location, quality, price and availability of competing
sources of fuel such as natural gas, oil and nuclear sources, and alternative energy sources such as hydroelectric power and
wind.
Our Safety Programs
For the period October 1, 2010 through September 30, 2011, our underground and surface mines had non-fatal days lost
incidence rates that were 39% and 72%, respectively, below the national averages for the same period. Non-fatal days lost
incidence rate is an industry standard used to describe occupational injuries that result in the loss of one or more days from
an employee’s scheduled work. We attribute our lower incident rate to our safety program, which includes: (i) employing
eight full-time safety professionals; (ii) implementing policies and procedures to protect employees and visitors at our mines;
(iii) utilizing experienced third-party blasting professionals to conduct our blasting activities; (iv) requiring a certified
surface mine foreman to be in charge of the activities at each mine; and (v) ensuring that each employee undergoes the
required safety, hazard and task training.
We have won numerous awards for our safety record since 2008 recognizing our low injury and incident rates, as
follows:
Awar
Mine/Facility Year d
Equality Boot 2010 Sentinels of Safety award for 86,661 employee hours
worked without a Lost Workday Injury
Midway Preparation Plant 2010 Sentinels of Safety award for 66,688 employee hours
worked without a Lost Workday Injury
Parkway Mine Surface Facilities 2010 Sentinels of Safety award for 43,130 employee hours
worked without a Lost Workday Injury
Parkway 2010 Sentinels of Safety award for 332,851 employee
hours worked without a Lost Workday Injury
Armstrong Dock & Preparation Plant 2010 Sentinels of Safety award for 52,568 employee hours
worked without a Lost Workday Injury
East Fork 2010 Sentinels of Safety award for 202,898 employee
hours worked without a Lost Workday Injury
Kronos 2010 Green River Safety Council in recognition of 607
man hours worked with an incident rate of 0.0
Parkway 2010 Green River Safety Council in recognition of 334,923
man hours worked with an incident rate of 0.0
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Awar
Mine/Facility Year d
Equality Boot 2010 Green River Safety Council in recognition of 86,661
man hours worked with an incident rate of 0.0
East Fork 2010 Green River Safety Council in recognition of 202,898
man hours worked with an incident rate of 0.0
Parkway Preparation Plant 2010 Green River Safety Council in recognition of 43,130
man hours worked with an incident rate of 0.0
Midway Preparation Plant 2010 Green River Safety Council in recognition of 66,688
man hours worked with an incident rate of 0.0
Armstrong Dock & Preparation Plant 2010 Green River Safety Council in recognition of 52,568
man hours worked with an incident rate of 0.0
Parkway 2010 Kentucky Office of Mine Safety & Licensing for
being the safest underground coal mine in Western
Kentucky
Parkway 2009 Green River Safety Council in recognition of 175,051
man hours worked with an incident rate of 2.29
Midway 2009 Sentinels of Safety award for 255,731 employee
hours worked without a Lost Workday Injury
Midway 2009 Green River Safety Council in recognition of 255,731
man hours worked with an incident rate of 0.0
Parkway Preparation Plant 2009 Sentinels of Safety award for 24,855 man hours
worked without a Lost Workday Injury
Parkway Preparation Plant 2009 Green River Safety Council in recognition of 24,855
man hours worked with an incident rate of 0.0
Armstrong Dock & Preparation Plant 2009 Sentinels of Safety award for 24,255 employees
hours worked without a Lost Workday Injury
Armstrong Dock & Preparation Plant 2009 Green River Safety Council in recognition of 24,255
man hours worked with an incident rate of 0.0
Midway 2008 Sentinels of Safety award for 112,174 employee
hours worked without a Lost Workday Injury
Midway 2008 Green River Safety Council in recognition of 112,174
man hours worked with an incident rate of 0.0
Armstrong Dock & Preparation Plant 2008 Green River Safety Council in recognition of 461
man hours worked with an incident rate of 0.0
On October 28, 2011, an accident occurred at the Company’s Equality Boot mine and, tragically, two employees of a
local blasting company were killed when rock fell from the highwall to the pit floor where they were travelling. Following
the accident, pursuant to Section 103(k) of the Mine Act, MSHA issued an order prohibiting all activity at the Equality Boot
Mine until MSHA determined that it was safe to resume normal mining operations. On November 2, 2011, MSHA modified
the 103(k) order to permit the Company to resume mining the #14 seam in the Equality Boot mine.
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On November 8, 2011, the Company submitted a ground control plan addendum to MSHA which was approved the
same day, and subsequently incorporated into the Company’s mining operations at the Equality Boot mine. As a result, on
November 8, 2011, MSHA modified the 103(k) order to permit the Company to resume normal mining activities in all areas
of the Equality Boot mine until such time as the Commonwealth of Kentucky completes its accident report concerning the
incident.
On February 7, 2012, the Kentucky Office of Mine Safety and Licensing issued its Fatal Accident Report. The
Commonwealth of Kentucky concluded that the failure of the highwall occurred where the rock strata transitioned from wide
bands of shale to smaller bands on laminated rock, thus creating a slicken slide fault in the area where the rock fell. The
Kentucky Office of Mine Safety and Licensing did not find any causes or circumstances which contributed to the accident
other than the aforementioned naturally occurring geological condition.
Suppliers
We use various supplies and raw materials in our coal mining operations, such as petroleum-based fuels, explosives,
tires and steel, as well as spare parts and other consumables. We use third-party suppliers for a significant portion of our
equipment rebuilds and repairs, drilling services and construction. We use sole source suppliers for certain parts of our
business such as explosives and fuel, and preferred suppliers for other parts at our business such as dragline and shovel parts
and related services. We believe adequate substitute suppliers are available.
Employees
At September 30, 2011, we employed a total of approximately 774 employees, none of whom is represented for
collective bargaining by a union. We believe that our relations with all employees are good.
Seasonality
Our business has historically experienced some variability in its results due to the effect of seasons. Demand for
coal-fired power can increase due to unusually hot or cold weather as power consumers use more air conditioning or heating.
Conversely, mild weather can result in softer demand for our coal. Adverse weather conditions, such as floods or blizzards,
can impact our ability to mine and ship our coal and our customers’ ability to take delivery of coal.
Legal Proceedings
From time to time, we are involved in litigation and claims arising out of our operations in the normal course of
business. At this time, we do not believe that we are a party to any litigation that will have a material adverse impact on our
financial condition or results of operations. We are not aware of any significant and material legal or governmental
proceedings against us, or contemplated to be brought against us. We maintain insurance policies in amounts and with
coverage and deductibles that we believe are reasonable and appropriate. However, we cannot assure you that this insurance
will be adequate to protect us from all material expenses related to potential future claims for personal and property damage
or that these levels of insurance will be available in the future at economical prices.
Regulation and Laws
Federal, state and local authorities regulate the U.S. coal mining industry with respect to matters such as:
• employee health and safety;
• permitting and licensing requirements;
• air quality standards;
• water pollution;
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• storage, treatment and disposal of wastes;
• protection of plant life and wildlife, including endangered or threatened species;
• reclamation and restoration of mining properties after mining is completed;
• remediation of contaminated soil and groundwater;
• surface subsidence from underground mining;
• the effects of mining on surface and groundwater quality and availability; and
• competing uses of adjacent, overlying or underlying lands, pipelines, roads and public facilities.
In addition, many of our customers are subject to extensive regulation regarding the environmental impacts associated
with the combustion or other use of coal, which could affect demand for our coal.
The costs of compliance with these laws and regulations have been and are expected to continue to be significant.
Future laws, regulations or orders, as well as future interpretations and more rigorous enforcement of existing laws,
regulations or orders, may substantially increase equipment and operating costs, result in delays and disrupt operations or
termination of operations, the extent of which cannot be predicted with any degree of certainty. Changes in applicable laws
or the adoption of new laws relating to energy production may cause coal to become a less attractive source of energy. For
example, if emissions rates or caps on greenhouse gases are enacted or a tax on carbon is imposed, the market share of coal
as fuel used to generate electricity would be expected to decrease. Thus, future laws, regulations or enforcement priorities
may adversely affect our mining operations, cost structure or the demand for coal.
We are committed to operating our mines in compliance with applicable federal, state and local laws and regulations.
However, because of extensive and comprehensive regulatory requirements, violations during mining operations occur from
time to time. Violations, including violations of any permit or approval, can result in substantial civil and criminal fines and
penalties, including revocation or suspension of mining permits. None of the violations we have experienced to date have
had a material impact on our operations or financial condition.
Mining Permits and Approvals
Numerous governmental permits and approvals are required for our coal mining operations. When we apply for some of
these, we are required to assess the effect or impact that any proposed production or processing of coal may have upon the
environment. The authorization and permitting requirements imposed by governmental authorities are costly and may delay
or prevent commencement or continuation of mining operations in certain locations. These requirements may also be
supplemented, modified or re-interpreted from time to time. Past or ongoing violations of federal and state mining laws
could provide a basis to revoke existing permits and to deny the issuance of additional permits.
In order to obtain mining permits and approvals from federal and state regulatory authorities, mine operators or
applicants must submit a reclamation plan for restoring the mined land to its prior productive use, better condition or other
approved use. Typically, we submit the necessary permit applications several months, or even years, before we plan to mine
a new area. Some required mining permits are becoming increasingly difficult to obtain in a timely manner, or at all,
particularly those permits involving the Clean Water Act. Specifically, issuance of Corps permits allowing placement of
material in valleys or streams has been slowed in recent years due to ongoing disputes over the requirements for obtaining
such permits. While we do not engage in mountaintop mining, we are required to obtain permits from the Corps and our
mining operations do impact bodies of water regulated by the Corps. The application review process takes longer to
complete and permit applications are increasingly being challenged by environmental and other advocacy groups, although
we are not aware of any such challenges to any of our pending permit applications. We may experience difficulty or delays
in obtaining mining permits or other necessary approvals in the future, or even face denials of permits altogether.
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Violations of federal, state and local laws, regulations or any permit or approval issued under such authorization can
result in substantial fines and penalties, including revocation or suspension of mining permits and, in certain circumstances,
criminal sanctions.
Surface Mining Control and Reclamation Act
The Surface Mining Control and Reclamation Act of 1977 (“SMCRA”), which is administered by the Office of Surface
Mining Reclamation and Enforcement within the Department of the Interior (“OSM”), establishes operational, reclamation
and closure standards for all aspects of surface mining, including the surface effects of underground coal mining. Mining
operators must obtain SMCRA permits and permit renewals from the OSM or from the applicable state agency if the state
has obtained primacy. A state may achieve primacy if it develops a regulatory program that is no less stringent than the
federal program and is approved by OSM. SMCRA stipulates compliance with many other major environmental statutes,
including the federal Clean Air Act, Clean Water Act, Resource Conservation and Recovery Act (“RCRA”) and
Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”). Our mines are
located in Kentucky, which has primacy to administer the SMCRA program.
SMCRA permit provisions include a complex set of requirements, which include, among other things, coal exploration,
mine plan development, topsoil or a topsoil removal alternative, storage and replacement, selective handling of overburden
materials, mine pit backfilling and grading, disposal of excess spoil, protection of the hydrologic balance, subsidence control
for underground mines, surface runoff and drainage control, mine drainage and mine discharge control and treatment,
establishment of suitable post mining land uses and re-vegetation. Our preparation of a mining permit application begins by
collecting baseline data to adequately characterize the pre-mining environmental conditions of the permit area. This work is
typically conducted by third-party consultants with specialized expertise and typically includes surveys or assessments of the
following: cultural and historical resources, geology, soils, vegetation, aquatic organisms, wildlife, potential for threatened,
endangered or other special status species, surface and groundwater hydrology, climatology, riverine and riparian habitat and
wetlands. The geologic data and information derived from the surveys or assessments are used to develop the mining and
reclamation plans presented in the permit application. The mining and reclamation plans address the provisions and
performance standards of the state’s equivalent SMCRA regulatory program, and are also used to support applications for
other authorizations or permits required to conduct coal mining activities. Also included in the permit application is
information used for documenting surface and mineral ownership, variance requests, public road use, bonding information,
mining methods, mining phases, other agreements that may relate to coal, other minerals, oil and gas rights, water rights,
permitted areas, and ownership and control information required to determine compliance with OSM’s Applicant Violator
System, including the mining and compliance history of officers, directors and principal owners of the permitting entity and
its affiliates.
Some SMCRA mine permits take us over a year to prepare, depending on the size and complexity of the mine. Once a
permit application is prepared and submitted to the regulatory agency, it goes through a completeness and technical review.
Also, before a SMCRA permit is issued, a mine operator must submit a bond or otherwise secure the performance of all
reclamation obligations. After the application is submitted, public notice or advertisement of the proposed permit action is
required, which is followed by a public comment period. It is not uncommon for this process to take from a year to several
years for a SMCRA mine permit to be issued. This variability in time frame for permitting is a function of the discretion
vested in the various regulatory authorities’ handling of comments and objections relating to the project that may be received
from the governmental agencies involved and the general public. The public also has the right to comment on and otherwise
engage in the permitting process including at the public hearing and through judicial challenges to an issued permit.
Federal laws and regulations also provide that a mining permit or modification can be delayed, refused or revoked if
owners of specific percentages of ownership interests or controllers (i.e., officers and directors or other entities) of the
applicant have, or are affiliated with another entity that has outstanding violations of SMCRA or state or tribal programs
authorized by SMCRA. This condition is often referred to as being “permit blocked” under the federal Applicant Violator
Systems. Thus, non-compliance with SMCRA can
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provide the bases to deny the issuance of new mining permits or modifications of existing mining permits. We know of no
basis to be, and are not, permit-blocked.
In 1983, the OSM adopted the “stream buffer zone rule” (“SBZ Rule”), which prohibited mining disturbances within
100 feet of streams if there would be a negative effect on water quality. In December 2008, the OSM finalized a revised SBZ
Rule, which purported to clarify certain aspects of the 1983 SBZ Rule. Several organizations challenged the 2008 revision to
the SBZ Rule in two related actions filed in the U.S. District Court for the District of Columbia. In June 2009, the Interior
Department and the U.S. Army entered into a memorandum of understanding on how to protect waterways from degradation
if the revised SBZ Rule were vacated due to the litigation. In August 2009, the District Court concluded that the revised SBZ
Rule could not be vacated without following the Administrative Procedure Act and other related requirements. In November
2009, the OSM published an advanced notice of proposed rulemaking to further revise the SBZ Rule. In a March 2010
settlement with litigation parties, OSM agreed to use its best efforts to adopt a final rule by June 2012. The revised SBZ
Rule, when adopted, may be stricter than the SBZ Rule promulgated in December 2008 in order to further protect streams
from the impacts of surface mining, and it may adversely affect our business and operations. In addition, legislation has been
introduced in Congress in the past, and may be introduced in the future, in an attempt to preclude placing any fill material in
streams. Implementation of new requirements or enactment of such legislation could negatively impact our future ability to
conduct certain types of mining activities.
In addition to the bond requirement for an active or proposed permit, the Abandoned Mine Land Fund (“AML”), which
was created by SMCRA, imposes a fee on all coal produced. The proceeds of the fee are used to restore mines closed or
abandoned prior to SMCRA’s adoption in 1977. The current fee is $0.315 per ton of coal produced from surface mines and
$0.135 per ton on deep-mined coal from 2008 to 2012, with reductions to $0.28 per ton on surface-mined coal and $0.12 per
ton on deep-mined coal from 2013 to 2021. In 2010, we recorded approximately $1.3 million of expense related to these
reclamation fees.
Surety Bonds
Federal and state laws require a mine operator to secure the performance of its reclamation obligations required under
SMCRA through the use of surety bonds or other approved forms of performance security to cover the costs the state would
incur if the mine operator were unable to fulfill its obligations. The cost of surety bonds have fluctuated in recent years, and
the market terms of these bonds have generally become more unfavorable to mine operators. For example, in connection
with our current bonds, we are required to post substantial security in the form of cash collateral. These changes in the terms
of the bonds have been accompanied at times by a decrease in the number of companies willing to issue surety bonds. Some
mine operators have therefore used letters of credit to secure the performance of a portion of our reclamation obligations.
Many of these bonds are renewable on a yearly basis. We cannot predict our ability to obtain bonds or other approved forms
of performance security, or the cost of such security, in the future. As of September 30, 2011, we had approximately
$16.5 million in surety bonds outstanding to secure the performance of our reclamation obligations which are collateralized
by cash deposits of 25% of the value of the bonds.
Mine Safety and Health
Stringent health and safety standards have been in effect since the enactment of the Federal Coal Mine Health and
Safety Act of 1969. The Mine Act provided for MSHA and significantly expanded the enforcement of safety and health
standards and imposed safety and health standards on all aspects of mining operations. For example, it requires periodic
inspections of surface and underground coal mines and the issuance of citations or orders for the violation of a mandatory
health and safety standard. A civil penalty must be assessed for each citation or order issued. Serious violations of mandatory
health and safety standards may result in the issuance of an order requiring the immediate withdrawal of miners from the
mine or shutting down a mine or any section of a mine or any piece of mine equipment. The Mine Act also imposes criminal
liability for corporate operators who knowingly or willfully violate a mandatory health and safety standard, or order and
provides that civil and criminal penalties may be assessed against individual agents, officers and directors who knowingly or
willfully violate a mandatory health and safety standard or order. In addition,
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criminal liability may be imposed against any person for knowingly falsifying records required to be kept under the Mine
Act and standards. In addition to federal regulatory programs, the State of Kentucky in which we operate, also has programs
for mine safety and health regulation and enforcement. Collectively, federal and state safety and health regulation in the coal
mining industry is among the most comprehensive systems for protection of employee health and safety affecting any
segment of U.S. industry. Such regulation has a significant effect on our operating costs.
In 2006, in response to underground mine accidents, Congress enacted the MINER Act. Among other things, it
(i) imposed additional obligations on coal operators related to (a) developing new emergency response plans that address
post-accident communications, tracking of miners, breathable air, lifelines, training and communication with local
emergency response personnel, (b) establishing additional requirements for mine rescue teams, and (c) promptly notifying
federal authorities of incidents that pose a reasonable risk of death; and (ii) increased penalties for violations of applicable
federal laws and regulations. In addition, in October, 2010, MSHA published a proposed rule to reduce the permissible
concentration of respirable dust in underground coal mines from the current standard of 2.0 milligrams per cubic meter of air
to 1.0 milligram per cubic meter. We believe MSHA is also likely to adopt new safety standards for proximity protection for
miners that will require certain underground mining equipment to be equipped with devices that will shut the equipment
down if a person is too close to the equipment to avoid injuries where individuals are caught between equipment and blocks
of unmined coal. Various states also have enacted their own new laws and regulations addressing many of these same
subjects. In the wake of several recent underground mine accidents, enforcement scrutiny has also increased, including more
inspection hours at mine sites, increased numbers of inspections and increased issuance of the number and the severity of
enforcement actions.
After the MINER Act, Illinois, Kentucky, Pennsylvania and West Virginia enacted legislation addressing issues such as
mine safety and accident reporting, increased civil and criminal penalties, and increased inspections and oversight. Other
states may pass similar legislation in the future. Additionally, in 2010, the 111th Congress introduced federal legislation
seeking to impose extensive additional safety and health requirements on coal mining. While the legislation was passed by
the House of Representatives, the legislation was not voted on in the Senate and did not become law. In January 2011, a
similar bill was reintroduced in the 112th Congress. Our compliance with current or future mine health and safety
regulations could increase our mining costs. At this time, it is not possible to predict the full effect that the new or proposed
statutes, regulations and policies will have on our operating costs, but they will increase our costs and those of our
competitors. Some, but not all, of these additional costs may be passed on to customers.
We are required to compensate employees for work-related injuries under various state workers’ compensation laws.
Our costs will vary based on the number of accidents that occur at our mines and other facilities, and our costs of addressing
these claims. We provide benefits to our employees by being insured through state-sponsored programs or an insurance
carrier where there is no state-sponsored program.
Black Lung
Under the Black Lung Benefits Revenue Act of 1977 and the Black Lung Benefits Reform Act of 1977, as amended in
1981, each coal mine operator must pay federal black lung benefits to claimants who are current and former employees and
also make payments to a trust fund for the payment of benefits and medical expenses to eligible claimants who last worked
in the coal industry prior to January 1, 1970. The trust fund is funded by an excise tax on production of up to $1.10 per ton
for deep-mined coal and up to $0.55 per ton for surface-mined coal, neither amount to exceed 4.4% of the gross sales price.
The excise tax does not apply to coal shipped outside the United States. During 2010, we recorded $4.2 million of expense
related to this excise tax.
In December 2000, the Department of Labor amended regulations implementing the federal black lung laws to, among
other things, establish a presumption in favor of a claimant’s treating physician and limit a coal operator’s ability to
introduce medical evidence regarding the claimant’s medical condition. Due to these changes, the number of claimants who
are awarded benefits has since increased, and will continue to increase, as will the amounts of those awards. The Patient
Protection and Affordable Care Act (“PPACA”), which was
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implemented in 2010, provided changes to the legal criteria used to assess and award claims by creating a legal presumption
that miners are entitled to benefits if they have worked at least 15 years in coal mines and suffer from totally disabling lung
disease. A coal company would have to prove that a miner did not have black lung or that the disease was not caused by the
miner’s work. Second, it changed the law so black lung benefits being received by miners automatically go to their
dependent survivors, regardless of the cause of the miner’s death. Our payment obligations for federal black lung benefits to
claimants entitled to such benefits are either substantially secured by insurance coverage or paid from a tax exempt trust
established for that purpose. Based on actuarial reports and required funding levels, from time to time we may have to
supplement the trust corpus to cover the anticipated liabilities going forward. These regulations may have a material impact
on our costs expended in association with the federal Black Lung program. In addition, we could be held liable under various
Kentucky statutes for black lung claims.
Coal Industry Retiree Health Benefit Act of 1992
The Coal Industry Retiree Health Benefit Act of 1992 (“Coal Act”) provides for the funding of health benefits for
certain United Mine Workers of America (“UMWA”), retirees and their spouses or dependants. The Coal Act established the
Combined Benefit Fund into which employers who are “signatory operators” are obligated to pay annual premiums for
beneficiaries. The Combined Benefit Fund covers a fixed group of individuals who retired before July 1, 1976, and the
average age of the retirees in this fund is over 80 years of age. Because of our union-free status, we are not required to make
payments to retired miners under the Coal Act. The Coal Act also created a second benefit fund, the 1992 UMWA Benefit
Plan (“1992 Plan”), for miners who retired between July 1, 1976 and September 30, 1994, and whose former employers are
no longer in business to provide them retiree medical benefits. Companies with 1992 Plan liabilities also pay premiums into
this plan. We are not required to pay any premiums into the 1992 Plan.
Clean Air Act
The federal Clean Air Act and the amendments thereto and state laws that regulate air emissions both directly and
indirectly affect coal mining operations. Direct impacts on our coal mining and processing operations include Clean Air Act
permitting requirements and control requirements for particulate matter, which includes fugitive dust from roadways,
parking lots, and equipment such as conveyors and storage piles. Our customers also are subject to extensive air emissions
requirements, including those applicable to the air emissions of SO 2 , NOx, particulates, mercury and other compounds
from coal-fired electricity generating plants and industrial facilities that burn coal. These requirements are complex, and are
generally becoming increasingly stringent as new regulations or revisions to existing regulations are adopted. In addition,
legal challenges by environmental advocacy groups, affected members of the regulated community, and others to regulations
may impact their content and the timing of their implementation.
More stringent air emissions requirements in future years may increase the cost of producing and consuming coal and
impact the demand for coal. These requirements may result in an upward pressure on the price of lower sulfur eastern coal,
and more demand for western coal, as coal-fired power plants continue to comply with the more stringent restrictions
initially focused on SO 2 emissions. As utilities continue to invest the capital to add scrubbers and other devices to address
emissions of NOx, mercury and other hazardous air pollutants, demand for lower sulfur coal may drop. However, we cannot
predict these impacts with certainty.
In June 2010, several environmental groups petitioned the EPA to list coal mines as a source of air pollution and
establish emissions standards under the Clean Air Act for several pollutants, including particulate matter, NOx, volatile
organic compounds and methane. Petitioners further requested that the EPA regulate other emissions from mining
operations, including dust and clouds of NOx associated with blasting operations. If the petitioners are successful, emissions
of these or other materials associated with our mining operations could become subject to further regulation pursuant to
existing laws such as the Clean Air Act. In that event, we may be required to install additional emissions control equipment
or take other steps to lower emissions associated with our operations, thereby reducing our revenues and adversely affecting
our operations.
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The Clean Air Act indirectly affects coal mining operations by extensively regulating the emissions of particulate
matter, SO 2 , NOx, carbon monoxide, ozone, mercury and other compounds emitted by coal-fired power plants, which are
the largest end users of our coal. In addition to developments directed at limiting greenhouse gas emissions, which are
discussed separately further below, air emission control programs that affect our operations, directly or indirectly, include,
but are not limited to, the following:
• Acid Rain. Title IV of the Clean Air Act requires reductions of SO 2 and NOx emissions by electric utilities
regulated under the Acid Rain Program (“ARP”). The ARP was designed to reduce the electric power sector
emissions of SO 2 and NOx and was implemented in two phases, Phase II of which commenced in 2000 for both SO
2 and NOx. SO 2 emissions were controlled through the development of a national market-based cap-and-trade
system applicable to all coal-fired power plants with a capacity of more than 25 megawatts, among other sources.
Under the ARP, a cap on annual SO 2 emissions is established and then EPA issues allowances to regulated entities
up to the cap using defined formulas. A small percentage of the allowances are retained for auctions. Each power
plant must have enough allowances to cover all its annual SO 2 emissions or pay penalties. The electric power plant
can choose to reduce emissions and sell or bank the surplus allowances or purchase allowances. Power plants are
allowed to choose to emit or control emissions, emission reductions are encouraged by requiring an allowance to be
retired every year for each ton of SO 2 emitted. Affected power plants have sought to reduce SO 2 emissions by
switching to lower sulfur fuels, installing pollution control devices, reducing electricity generating levels or
purchasing or trading SO 2 emissions allowances. The ARP makes it more costly to operate coal-fired power plants
and could make coal a less attractive fuel alternative in the planning and building of power plants in the future.
• New National Ambient Air Quality Standards. The federal Clean Air Act requires the EPA to determine and,
where appropriate, from time to time update ambient air quality standards applicable nationwide, known as national
ambient air quality standards (“NAAQSs”) for six common air pollutants. Such standards can have significant
impacts on sources of such air pollutants, particularly after such standards are tightened. Although the NAAQSs do
not apply directly to sources of such pollutants, NAAQSs can result in sources having to meet substantially stricter
emissions limitations for such pollutants upon renewal of their air permits, which commonly are issued for five-year
terms. Where an air quality management district has not attained the NAAQS for such a pollutant (a
“non-attainment area”), sources may face more onerous requirements regarding such a pollutant. Coal combustion
generates or affects several pollutants subject to NAAQSs, including SO 2 , NO 2 , ozone, and particulate matter, so
when any such standard is made stricter, it may indirectly affect our customers’ current or anticipated future costs of
using coal. In addition, NAAQSs for particulate matter may affect aspects of our own operations, which can
generate such emissions. The EPA has revised and/or proposed to revise a number of such NAAQSs in recent years.
For example, in June 2010, the EPA issued a stricter NAAQS for SO 2 emissions which, among other things,
establishes a new 1-hour standard at a level of 75 parts per billion to protect against short-term exposure and
minimize health-based risks, revokes the previous 24-hour and annual standard for SO 2, and imposes requirements
for monitoring and reporting SO 2 concentrations. In February 2010, the EPA issued a stricter NAAQS for NOx and
in January 2010 also proposed a revised, stricter ground-level ozone NAAQS. In addition, in 2006 the EPA issued
stricter NAAQSs for particulate matter and subsequently has been implementing, and reviewing state
implementation of, those standards. While aspects of the EPA’s rules promulgating some of these standards or
predecessor standards have been, and in some instances remain, the subject of litigation by industry representatives,
environmental advocacy groups, and others, and while EPA is reviewing aspects of some of these NAAQSs, in
important respects these NAAQSs and/or their implementation have become stricter, and may become more so due
to ongoing developments.
• Cross-State Air Pollution Rule. In July 2011, the EPA promulgated the CSAPR, which replaces the EPA’s Clean
Air Interstate Rule (“CAIR”), issued in 2005. A decision in July 2008 by the U.S. Court of Appeals for the District
of Columbia Circuit concluded that CAIR should be vacated and directed the EPA to develop a replacement. The
CSAPR, including a related proposed rulemaking that would revise the CSAPR by subjecting six additional states to
NOx emission limits, requires additional
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reductions in SO 2 and NOx emissions from power plants in 27 states and severely limits interstate emissions trading
as a compliance option. The CSAPR may result in many coal-fired sources installing additional pollution control
equipment for NOx and SO 2 , which we believe could lead plants with these controls to become less sensitive to the
sulfur-content of coal and more sensitive to delivered price, thereby making high sulfur coal more competitive. In
December 2011, the U.S. Court of Appeals for the District of Columbia Circuit issued a ruling to stay the CSAPR
pending judicial review.
• Mercury. In May 2011, the EPA formally proposed its rule to establish a national standard to reduce mercury and
other toxic air pollutants from coal and oil-fired power plants, sometimes referred to as the EPA’s Mercury and Air
Toxics Standards (“MATS”) proposed rule. The EPA is obligated to finalize the rule by November 2011, under a
consent decree of the U.S. Court of Appeals for the District of Columbia Circuit in the proceeding that resulted in
that court’s vacating the EPA’s Clean Air Mercury Rule (“CAMR”), which was issued in 2005 and had established
a cap and trade program to reduce mercury emissions from power plants. At present, there are no federal regulations
that require monitoring and reducing of mercury emissions at existing power plants. In the meantime, case-by-case
MACT determinations for mercury may be required for new and reconstructed coal-fired power plants. Apart from
CAMR, several states have enacted or proposed regulations requiring reductions in mercury emissions from
coal-fired power plants, and federal legislation to reduce mercury emissions from power plants has also been
proposed from time to time. In addition, in March 2011, EPA issued new MACT determinations for several classes
of boilers and process heaters, including large coal-fired boilers and process heaters, which would require
significant reductions in the emission of particulate matter, carbon monoxide, hydrogen chloride, dioxins and
mercury, although in May the effective date of these rules for major sources was delayed for reconsideration of
certain aspects of the rule.
• Regional Haze. In 1999, the EPA issued a rule in an effort to meet Clean Air Act requirements regarding a
nationwide regional haze program designed to protect and improve visibility at and around 156 federal areas such as
national parks, national wilderness areas and international parks; this rule was revised by another EPA rule issued in
2005. This program may result in additional restrictions on emissions from new coal-fired power plants whose
operation may impair visibility at and near such federally protected areas. This program may also require certain
existing coal-fired power plants to install additional control measures designed to limit haze-causing emissions, such
as SO 2 , NOx, ozone and particulate matter. Insofar as this program results in limitations on coal combustion in
addition to those that are otherwise applicable, it could also affect the future market for coal, although we are unable
to predict the extent of any such impacts with any reasonable degree of certainty.
• New Source Review. A number of enforcement actions in recent years are affecting the impact of the EPA’s New
Source Review (“NSR”) program as applied to some existing sources, including certain coal-fired power plants. The
NSR program requires existing coal-fired power plants, when undertaking certain modifications, to install the same
air emissions control equipment as new plants. Enforcement proceedings alleging that such modifications were
made without implementing the required control equipment have resulted in a number of settlements involving
commitments, including those by coal-fired power plants, to incur extensive air emissions controls involving
substantial expenses. Such enforcement, and other changes affecting the scope or interpretation of aspects of the
NSR program, may impact demand for coal, but we are unable to predict the magnitude of any such impact on us
with any reasonable degree of certainty.
Climate Change
CO 2 is a “greenhouse gas,” the man-made emissions of which are of major concern under any regulatory framework
intended to control what is sometimes referred to as “global warming” or, due to other possible impacts on climate that many
policy-makers and scientists believe such warming may have, “climate change.” CO 2 is a major by-product of the
combustion process within coal-fired power plants. Methane, which must be expelled from our underground coal mines for
mining safety reasons, also is classified as a greenhouse gas; although estimates may vary, it is generally considered to have
a greenhouse gas impact many times that of an equivalent amount of CO 2 .
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Considerable and increasing government attention in the United States and other countries is being paid to reducing
greenhouse gas emissions, including CO 2 from coal-fired power plants and methane emissions from mining operations. In
2005, the Kyoto Protocol to the 1992 United Nations Framework Convention on Climate Change, which establishes a
binding set of emission targets for greenhouse gases, became binding on all those countries that had ratified it. To date, the
U.S. has not ratified the Kyoto Protocol, which expires in 2012. The United States is participating in international
discussions currently underway to develop a treaty to replace the Kyoto Protocol after its expiration in 2012. A replacement
treaty or other international arrangement requiring additional reductions in greenhouse gas emissions could have a
potentially significant impact on the demand for coal, particularly if the United States were to adopt it but, depending on the
requirements it imposes and the extent to which other nations adopt it, even if the United States does not adopt it.
Future regulation of greenhouse gases in the United States could occur pursuant to, for example, future U.S. treaty
commitments; new domestic legislation that imposes a tax on greenhouse gas emissions, a greenhouse gas cap-and-trade
program or other programs aimed at greenhouse gas reduction; or regulatory programs that may be established by the EPA
under its existing authority. Congress has actively considered various proposals to reduce greenhouse gas emissions,
mandate electricity suppliers to use renewable energy sources to generate a certain percentage of power, promote the use of
clean energy and require energy efficiency measures. In June 2009, the House of Representatives passed a comprehensive
climate change and energy bill, the American Clean Energy and Security Act, and the Senate has considered similar
legislation that would, among other things, impose a nationwide cap on greenhouse gas emissions and require major sources,
including coal-fired power plants, to obtain “allowances” to meet that cap. Passage of such comprehensive climate change or
energy legislation could impact the demand for coal. Any reduction in the demand for coal by North American electric
power generators could reduce the price of coal that we mine and sell and thereby reduce our revenues, which could have a
material adverse affect on our business and the results of our operations.
Even in the absence of new federal legislation, greenhouse gas emissions may be regulated in the future by the EPA
pursuant to the Clean Air Act. In response to the 2007 U.S. Supreme Court ruling in Massachusetts v. Environmental
Protection Agency that the EPA has authority to regulate greenhouse gas emissions under the Clean Air Act, the EPA has
taken several steps towards implementing regulations regarding greenhouse gas emissions. In December 2009, the EPA
issued a finding that CO 2 and certain other greenhouse gases emitted by motor vehicles endanger public health and the
environment. This finding allows the EPA to begin regulating greenhouse gas emissions under existing provisions of the
Clean Air Act. In October 2009, the EPA published a final rule requiring certain emitters of greenhouse gases, including
coal-fired power plants, to monitor and report their greenhouse gas emissions to the EPA beginning in 2011 for emissions
occurring in 2010. In May 2010, the EPA issued a final “tailoring rule” that determines which stationary sources of
greenhouse emissions need to obtain a construction or operating permit, and install best available control technology for
greenhouse gas emissions, under the Clean Air Act’s Prevention of Significant Deterioration or Title V programs when such
facilities are built or significantly modified. Without the tailoring rule, permits would have been required for stationary
sources with emissions that exceed either 100 or 250 tons per year (depending on the type of source), which the EPA
considered not feasible. The tailoring rule substantially increases this threshold for greenhouse gas emissions to 75,000 tons
per year beginning in January 2011, and further modifies the threshold after July 2011; the EPA has stated that the rule will
be limited to the largest greenhouse gas emitters in the United States, primarily power plants, refineries, and cement
production facilities that the EPA estimates are responsible for nearly 70% of greenhouse gas emissions from the country’s
stationary sources. The tailoring rule also commits the EPA to undertake and complete another rulemaking by no later than
July 2012 to, among other things, consider expanding permitting requirements to sources with greenhouse gas emissions
greater than 50,000 tons per year. A number of lawsuits have been filed challenging the tailoring rule. The final outcome of
federal legislative action on greenhouse gas emissions may change one or more of the foregoing final or proposed EPA
findings and regulations. If the EPA were to set emission limits or impose additional permitting requirements for CO 2 from
coal-fired power plants, the amount of coal our customers purchase from us could decrease.
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Many states and regions have adopted greenhouse gas initiatives and certain governmental bodies have or are
considering the imposition of fees or taxes based on the emission of greenhouse gases by certain facilities. For example,
beginning in January 2009, the Regional Greenhouse Gas Initiative (“RGGI”), a regional greenhouse gas cap-and-trade
program, began its first control period, operating with ten Northeastern and mid-Atlantic states (Connecticut, Delaware,
Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont). The RGGI program
has had several emission allowances auctions and will enter its second three-year control period in 2012. The RGGI program
calls for signatory states to stabilize CO 2 emissions to current levels from 2009 to 2015, followed by a 2.5% reduction each
year from 2015 through 2018. Since RGGI was first proposed, the states formally participating and observing have varied
somewhat; recently politicians in several states have taken formal steps (including an announcement by New Jersey’s
governor, and a bill passed by New Hampshire’s legislature but vetoed by its governor) to withdraw from RGGI. RGGI has
been holding quarterly CO 2 allowance auctions for its initial three-year compliance period from January 1, 2009 to
December 31, 2011 to allow utilities to buy allowances to cover their CO 2 emissions. Midwestern states and Canadian
provinces have also adopted initiatives to reduce and monitor greenhouse gas emissions. In November 2007, Illinois, Iowa,
Kansas, Michigan, Minnesota, South Dakota and Wisconsin signed the Midwestern Greenhouse Gas Reduction Accord to
develop and implement steps to reduce greenhouse gas emissions; also, Indiana, Ohio and Manitoba signed as observers.
Draft recommendations were released in June 2009, although they have not been finalized. Climate change initiatives are
also being considered or enacted in some western states.
Also, litigation to address climate change impacts is being pursued against major emitters of greenhouse gases. A
federal appeals court allowed a lawsuit pursuing federal common law claims to proceed against certain utilities on the basis
that they may have created a public nuisance due to their emissions of CO 2 ; while the United States Supreme Court
recently reversed the appeals court, it did not reach the question whether state common law is available for such claims
because that question had not been addressed by the lower court. A second federal appeals court had earlier dismissed a case
seeking damages allegedly caused by climate change that had been filed against scores of large corporate defendants,
including a number of electrical power generating companies and coal companies, but the dismissal was on procedural
grounds; the case has since been re-filed. Claims seeking remedies to address conditions or losses allegedly caused by
climate change that in turn allegedly has resulted from greenhouse gas-generating conduct by the defendants remain pending
in the courts. Such claims could continue to be asserted against our customers in the future, and might also be asserted
against us; accordingly, such claims could adversely affect us either directly or indirectly.
In addition to direct regulation of greenhouse gases, over 30 states have adopted mandatory “renewable portfolio
standards,” which require electric utilities to obtain a certain percentage of their electric generation portfolio from renewable
resources by a certain date. These standards range generally from 10% to 30%, over time periods that generally extend from
the present until between 2020 and 2030. Several other states have renewable portfolio standard goals that are not yet legal
requirements. Additional states may adopt similar goals or requirements, and federal legislation has been repeatedly
proposed in this area although no bills imposing such requirements have been enacted into law to date. To the extent these
requirements affect our current and prospective customers, their demand for coal-fueled power may decline, which may
reduce long-term demand for our coal.
These and other current or future climate change rules, court orders or other legally enforceable mechanisms may in the
future require, additional controls on coal-fired power plants and industrial boilers and may cause some users of coal to
switch from coal to lower greenhouse gas emitting fuels or shut-down coal-fired power plants. There can be no assurance at
this time that a greenhouse gas cap and trade program, a greenhouse gas tax or other regulatory regime, if implemented by
the states in which our customers operate or at the federal level, or future court orders or other legally enforceable
mechanisms, will not affect the future market for coal in those regions. The permitting of new coal-fired power plants has
also recently been contested by some state regulators and environmental organizations based on concerns relating to
greenhouse gas emissions. Increased efforts to control greenhouse gas emissions could result in reduced demand for coal. If
mandatory restrictions on greenhouse gas emissions are imposed, the ability to capture and store large
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volumes of CO 2 emissions from coal-fired power plants may be a key mitigation technology to achieve emissions
reductions while meeting projected energy demands. A number of recent legislative and regulatory initiatives to encourage
the development and use of carbon capture and storage (“CCS”) technology have been proposed or enacted. For example,
the U.S. Department of Energy announced in May 2009 that it would provide $2.4 billion of federal stimulus funds under the
American Recovery and Reinvestment Act of 2009 to expand and accelerate the commercial deployment of large-scaled
CCS technology. However, there can be no assurances that cost-effective CCS technology will become commercially
feasible in the near future, or at all.
Clean Water Act
The Clean Water Act of 1972 (“CWA”) and corresponding state and local laws and regulations affect coal mining
operations by restricting the discharge of pollutants, including the discharge of dredged or fill materials, into waters of the
United States. The CWA provisions and associated state and federal regulations are complex and subject to amendments,
legal challenges and changes in implementation. Recent court decisions, regulatory actions and proposed legislation have
created uncertainty over CWA jurisdiction and permitting requirements that could either increase or decrease our costs and
time spent on CWA compliance.
CWA requirements that may directly or indirectly affect our operations include the following:
• Wastewater Discharge. Section 402 of the CWA regulates the discharge of “pollutants” into navigable waters of
the United States. The National Pollutant Discharge Elimination System (“NPDES”) requires a permit for any such
discharges and entails regular monitoring, reporting and compliance with performance standards, all of which are
preconditions for the issuance and renewal of NPDES permits that govern the discharge of pollutants into water.
Failures to comply with the CWA or the NPDES permits can lead to the imposition of penalties, compliance costs
and delays in coal production. The CWA and corresponding state laws also protect waters that states have
designated for special protections including those designated as: impaired (i.e., as not meeting present water quality
standards) through Total Maximum Daily Load (“TMDL”) regulations and “high quality/exceptional use” streams
through anti-degradation regulations which restrict or prohibit discharges which result in degradation. Likewise,
when water quality in a receiving stream is better than required, states are required to adopt an “anti-degradation
policy” by which further “degradation” of the existing water quality is reviewed and possibly limited. In the case of
both the TMDL and anti-degradation review, the limits in our NPDES discharge permits could become more
stringent, thereby potentially increasing our treatment costs and making it more difficult to obtain new surface
mining permits. Other requirements may result in obligations to treat discharges from coal mining properties for
non-traditional pollutants, such as chlorides, selenium and dissolved solids; and to take measures intended to protect
streams, wetlands, other regulated water sources and associated riparian lands from surface mining and/or the
surface impacts of underground mining. Individually and collectively, these requirements may cause us to incur
significant additional costs that could adversely affect our operating results, financial condition and cash flows.
• Dredge and Fill Permits. Many mining activities, including the development of settling ponds and other
impoundments, may require a Section 404 permit from the Corps, prior to conducting such mining activities where
they involve discharges of “fill” into navigable waters of the United States. The Corps is empowered to issue
“nationwide” permits for specific categories of filling activities that are determined to have minimal environmental
adverse effects in order to save the cost and time of issuing individual permits under Section 404 of the CWA.
Using this authority, the Corps issued NWP 21, which authorizes the disposal of dredge-and-fill material from
mining activities into the waters of the United States. Individual Section 404 permits are required for activities
determined to have more significant impacts to waters of the United States.
Since 2003, environmental groups have pursued litigation primarily in West Virginia and Kentucky challenging the
validity of NWP 21 and various individual Section 404 permits authorizing valley fills associated with surface coal
mining operations (primarily mountain-top removal operations). This litigation has resulted in delays in obtaining
these permits and has increased permitting costs. The most
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recent major decision in this line of litigation is the opinion of the U.S. Court of Appeals for the Fourth Circuit in
Ohio Valley Environmental Council v. Aracoma Coal Company, 556 F.3d 177 (2009) (Aracoma), issued in February
2009. In Aracoma, the Court rejected all of the substantive challenges to the Section 404 permits involved in the case
primarily by deferring to the expertise of the Corps in review of the permit applications. After this decision was
published, however, the EPA undertook several initiatives to address the issuance of Section 404 permits for coal
mining activities in the Eastern U.S. First, the EPA began to comment on Section 404 permit applications pending
before the Corps raising many of the same issues decided in favor of the coal industry in Aracoma. Many of the
EPA’s comment letters were submitted long after the end of the EPA’s comment period based on what the EPA
contended was “new” information on the impacts of valley fills on stream water quality immediately downstream of
valley fills. These letters have created regulatory uncertainty regarding the issuance of Section 404 permits for coal
mining operations and have substantially expanded the time required for issuance of these permits, particularly in the
Appalachian region.
In June 2009, the Corps, the EPA and the Department of the Interior announced an interagency action plan for
“enhanced coordination procedures” in reviewing any project that requires both a SMCRA and a CWA permit,
designed to reduce the harmful environmental consequences of mountain-top mining in the Appalachian region. As
part of this interagency memorandum of understanding, the Corps proposed to suspend and modify NWP 21 in the
Appalachian region of Kentucky, Ohio, Pennsylvania, Tennessee, Virginia and West Virginia to prohibit its use to
authorize discharges of fill material into waters of the United States for mountain-top mining.
In June 2010, the Corps announced the suspension of the NWP 21 permitting process in the Appalachian region of
the six states referred to above until the Corps takes further action on NWP 21, or until NWP 21 expires on
March 18, 2012. While the suspension is in effect, proposed surface coal mining projects in the Appalachian region
of these states that involve discharges of dredged or fill material into waters of the United States will have to obtain
individual permits from the Corps. Projects currently permitted under NWP 21 are not affected by the suspension,
and NWP 21 remains available for proposed surface coal mining projects outside the Appalachian region.
The EPA is also taking a more active role in its review of NPDES permit applications for coal mining operations in
Appalachia, and announced in September 2009 that it was delaying the issuance of 74 Section 404 permits in central
Appalachia. This is especially true in West Virginia, where the EPA plans to review all applications for NPDES
permits even though the State of West Virginia is authorized to issue NPDES permits in West Virginia. In addition,
in April 2010, the EPA issued an interim guidance document on water quality requirements for coal mines in
Appalachia. This guidance follows up on the June 2009 enhanced coordination procedures memorandum for the
issuance of Section 404 permits whereby the EPA undertook a new level of review of Section 404 permits than it had
previously undertaken. Ultimately, the EPA identified 79 coal-related applications for Section 404 permits that would
need to go through that process. The EPA’s actions in issuing the enhanced coordination procedures memorandum
and the guidance are being challenged in a lawsuit pending before the U.S. District Court of the District of Columbia
in a case captioned National Mining Assoc. v. U.S. Environmental Protection Agency. In a ruling issued in January
2011, the District Court held that these measures “are legislative rules that were adopted in violation of notice and
comment requirements.” The court would not grant the motion for a preliminary injunction to enjoin further use of
these measures but also refused to dismiss the Complaint as the EPA had sought. In July 2011, after a notice and
comment process, the EPA issued final guidance on review of Appalachian surface coal mining operations that
replaced the interim guidance it had issued in April 2010.
In January 2011 the EPA exercised its “veto” power under Section 404(c) of the CWA to withdraw or restrict the use
of previously issued permits in connection with the Spruce No. 1 Surface Mine in West Virginia, which is one of the
largest surface mining operations ever authorized in Appalachia. This action is the first time that such power was
exercised with regard to a previously permitted coal mining project. These initiatives have extended the time required
for operations affected by them to obtain permits for coal mining, and the costs associated with obtaining and
complying with those permits may
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increase substantially. Additionally, while it is unknown precisely what other future changes will be implemented as
a result of the interagency action plan, any future changes could further restrict our ability to obtain other new
permits or to maintain existing permits.
Section 404(q) of the CWA establishes a requirement that the Secretary of the Army and the Administrator of the
EPA enter into an agreement assuring that delays in the issuance of permits under Section 404 are minimized. In
August 1992, the Department of the Army and the EPA entered into such an agreement. The 1992 Section 404(q)
Memorandum of Agreement (“MOA”) outlines the current process and time frames for resolving disputes in an effort
to issue timely permit decisions. Under this MOA, the EPA may request that certain permit applications receive a
higher level of review within the Department of Army. In these cases, the EPA determines that issuance of the permit
will result in unacceptable adverse effects to Aquatic Resources of National Importance (“ARNI”). Alternately, the
EPA may raise concerns over Section 404 program policies and procedures. An ARNI is a resource-based threshold
used to determine whether a dispute between the EPA and the Corps regarding individual permit cases are eligible
for elevation under the MOA. Factors used in identifying ARNIs, include the economic importance of the aquatic
resource, rarity or uniqueness, and/or importance of the aquatic resource to the protection, maintenance, or
enhancement of the quality of the waters.
We received notice from the EPA dated July 25, 2011 that it believes that the proposed discharge plan submitted by
us in connection with our Section 404 permit application for the expanded mining at our Midway Mine would result
in unacceptable impacts on ARNIs, and in particular, downstream waters outside the scope of the permit area. As a
result, it is possible that the Corps will deny our pending permit application, or that the EPA will elevate the permit
application to a higher level of review should the Corps proceed with the issuance of the permit notwithstanding
EPA’s concerns. Ultimately, the EPA may consider initiating a Section 404(c) “veto” of the permit. A material delay
in the issuance of this permit, or other Section 404 permits that we may require as part of our mining operations, or
the denial or veto of such permits, could have a materially negative effect on our operations and profitability.
Other Regulations on Stream Impacts
Federal and state laws and regulations can also impose measures to be taken to minimize and/or avoid altogether stream
impacts caused by both surface and underground mining. Temporary stream impacts from mining are not uncommon, but
when such impacts occur there are procedures we follow to mitigate or remedy any such impacts. These procedures have
generally been effective and we work closely with applicable agencies to implement them. Our inability to mitigate or
remedy any temporary stream impacts in the future, and the application of existing or new laws and regulations to disallow
any stream impacts, could adversely affect our operating and financial results.
Resource Conservation and Recovery Act
The Resource Conservation and Recovery Act (“RCRA”) was enacted in 1976 to establish requirements for the
management of hazardous wastes from the point of generation through treatment and disposal. RCRA does not apply to
certain wastes generated at coal mines, such as overburden and coal cleaning wastes, because they are not considered
hazardous wastes as the EPA applies that term. Only a small portion of the wastes generated at a mine are regulated as
hazardous wastes.
Although RCRA has the potential to apply to wastes from the combustion of coal, the EPA determined in 1993 with
respect to certain coal combustion wastes, and in May 2000 with respect to others, that coal combustion wastes do not
warrant regulation as hazardous wastes under RCRA. Most state solid waste laws also regulate coal combustion wastes as
non-hazardous wastes. In May 2010, the EPA issued proposed regulations governing management and disposal of coal ash
from coal-fired power plants. The EPA sought public comment on two regulatory options. Under the more stringent option,
the EPA would regulate coal ash as a “special waste” subject to hazardous waste standards when disposed in landfills or
surface impoundments, which would be subject to stringent design, permitting, closure and corrective action requirements.
Alternatively, coal ash would be regulated as non-hazardous waste under RCRA subtitle D, with national minimum criteria
for disposal
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but no federal permitting or enforcement. Under both options, the EPA would establish dam safety requirements to address
the structural integrity of surface impoundments to prevent catastrophic releases. The EPA is expected to issue a final
decision by the end of 2011. The EPA did not address in the proposed regulations the use of coal combustion wastes as
minefill, but indicated that it would separately work with the Office of Surface Mining in order to develop effective federal
regulations ensuring that such placement is adequately controlled. If coal ash from coal-fired power plants is re-classified as
hazardous waste, regulations may impose restrictions on ash disposal, provide specifications for storage facilities, require
groundwater testing and impose restrictions on storage locations, which could increase our customers’ operating costs and
potentially reduce their ability to purchase coal. If coal ash is regulated under RCRA subtitle D, it could also adversely affect
our customers and potentially reduce the desirability of coal for them. In addition, contamination caused by the past disposal
of coal combustion byproducts, including coal ash, can lead to material liability to our customers under RCRA or other
federal or state laws and potentially reduce the demand for coal.
Comprehensive Environmental Response, Compensation and Liability Act
The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”), and
similar state laws affect coal mining operations by, among other things, imposing cleanup requirements for threatened or
actual releases of hazardous substances. Under CERCLA and similar state laws, joint and several liability may be imposed
on waste generators, site owners, lessees and others regardless of fault or the legality of the original disposal activity.
Although the EPA excludes most wastes generated by coal mining and processing operations from the hazardous waste laws,
such wastes can, in certain circumstances, constitute hazardous substances for the purposes of CERCLA. In addition, the
disposal, release or spilling of some products used by coal companies in operations, such as chemicals, could trigger the
liability provisions of CERCLA or similar state laws. Thus, we may be subject to liability under CERCLA and similar state
laws for coal mines that we currently own, lease or operate, and sites to which we have sent waste materials. We are
currently unaware of any material liability associated with the release or disposal of hazardous substances from our mine
sites. We may be liable under CERCLA or similar state laws for the cleanup of hazardous substance contamination and
natural resource damages at sites where we own surface rights.
Endangered Species Act
The federal Endangered Species Act (“ESA”) and counterpart state legislation protect species threatened with possible
extinction. The U.S. Fish and Wildlife Service (“USFWS”), works closely with the OSM and state regulatory agencies to
ensure that species subject to the ESA are protected from mining-related impacts. A number of species indigenous to the
areas in which we operate are protected under the ESA, and compliance with ESA requirements could have the effect of
prohibiting or delaying us from obtaining mining permits. These requirements may also include restrictions on timber
harvesting, road building and other mining or agricultural activities in areas containing the affected species or their habitats.
Should more stringent protective measures be applied, this could result in increased operating costs, heightened difficulty in
obtaining future mining permits, or the need to implement additional mitigation measures.
Use of Explosives
We use third party contractors for blasting services and our surface mining operations are subject to numerous
regulations relating to blasting activities. Pursuant to these regulations, we incur costs to design and implement blast
schedules and to conduct pre-blast surveys and blast monitoring. In addition, the storage of explosives is subject to
regulatory requirements. We presently do not directly engage in blasting activities; instead, all of our blasting activities are
conducted by independent contractors that use certified blasters.
Other Environmental Laws and Matters
We and our customers are subject to and are required to comply with numerous other federal, state and local
environmental laws and regulations in addition to those previously discussed which place stringent requirements on our coal
mining and other operations as well as the ability of our customers to use coal. Federal, state and local regulations also
require regular monitoring of our mines and other facilities to ensure
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compliance with these many laws and regulations. Some of these additional laws and regulations include, for example, the
Safe Drinking Water Act, the Toxic Substance Control Act and the Emergency Planning and Community Right-to-Know
Act.
Other Facilities
We currently lease office space for our headquarters in St. Louis, Missouri, as well as our regional office in
Madisonville, Kentucky. We believe our properties are sufficient for our current needs.
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MANAGEMENT
Executive Officers and Directors
Set forth below are the names, ages and positions of our executive officers and directors as of January 31, 2012. All
directors are elected for a term of three years and serve until their successors are elected and qualified. All executive officers
hold office until their successors are elected and qualified.
Position
Nam with the
e Age Company
J. Hord Armstrong, III 70 Chairman (Class II) and Chief Executive Officer
Martin D. Wilson 50 President and Director (Class I)
Kenneth E. Allen 65 Executive Vice President of Operations
David R. Cobb, P.E. 63 Executive Vice President of Business Development
J. Richard Gist 55 Senior Vice President, Finance and Administration and Chief
Financial Officer
Brian G. Landry 55 Vice President, Information Technology
Anson M. Beard, Jr. 75 Director (Class I)
James C. Crain 63 Director (Class III)
Richard F. Ford. 75 Director (Class III)
Bryan H. Lawrence 69 Director (Class III)
Greg A. Walker. 56 Director (Class II)
Biographical information concerning the directors and executive officers listed above is set forth below. The term of
our Class I directors expires in 2012, the term of our Class II directors expires in 2013, and the term of our Class III directors
expires in 2014.
J. Hord Armstrong, III — Mr. Armstrong served as our Predecessor’s Chairman and Chief Executive Officer, and as a
member of our Predecessor’s board of managers, from its formation in 2006 until the Reorganization in October 2011. Since
the Reorganization, Mr. Armstrong has been our Chairman and Chief Executive Officer. Previously, Mr. Armstrong worked
for the Morgan Guaranty Trust Company and was elected Assistant Treasurer in 1967. He subsequently spent 10 years with
White Weld & Company as First Vice President until the firm was acquired by Merrill Lynch in 1978. Mr. Armstrong then
joined Arch Mineral Corporation, St. Louis, as Treasurer (1978-1981), and ultimately became its Vice President and Chief
Financial Officer (1981-1987). Mr. Armstrong left Arch Mineral in 1987, when he founded D&K Healthcare Resources.
Mr. Armstrong served as D&K’s Chief Executive Officer from 1987 to 2005. D&K Healthcare Resources became a public
company in 1992 and was acquired by McKesson Corporation in 2005. Mr. Armstrong served for 10 years as a member of
the Board of Trustees of the St. Louis College of Pharmacy, as well as a Director of Jones Pharma Incorporated. He was
formerly Chairman of the Board of Trustees of the Pilot Fund, a registered investment company. He was also formerly a
Director of BHA, Inc. of Kansas City, Missouri, and a Director of GeoMet, Inc. of Houston, Texas. He currently serves as
Advisory Director of US Bancorp. The board selected Mr. Armstrong to serve as a director because of his extensive
experience in the coal industry and public company management, as well as his previous tenure with our company. The
board believes his prior experiences afford him unique insights into our company’s strategies, challenges and opportunities.
Martin D. Wilson — Mr. Wilson served as our Predecessor’s President, and as a member of our Predecessor’s board of
managers, from its formation in 2006 until the Reorganization in October 2011. Since the Reorganization, Mr. Wilson has
been our President. From 1985 to 1988, Mr. Wilson was employed by KPMG Peat Marwick. From 1988 until 2005,
Mr. Wilson served as President and Chief Operating Officer of D&K Healthcare Resources. Mr. Wilson currently serves on
the Board of Trustees of the St. Louis College of Pharmacy and is a former member of the Board of Directors of Healthcare
Distribution Management Association (HDMA). The board selected Mr. Wilson to serve as a director because of his
experience in public company management, finance and administration, as well as for his in-depth knowledge of our
company.
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Kenneth E. Allen — Mr. Allen served as our Predecessor’s Vice President of Operations from 2007 until the
Reorganization in October 2011. Since the Reorganization, Mr. Allen has been our Executive Vice President of Operations.
He started his career with Peabody Coal Company in 1967 and has over 40 years of experience in the coal industry. In 1971,
he moved into a supervisory position and continued to hold various supervisory and management positions, including Chief
Electrical Engineer, Mine Superintendent, General Manager, Operations Manager, Vice President Resource Development
and Conservancy. Prior to joining our company in 2007, Mr. Allen held the position of President and Operations Manager of
Bluegrass Coal Company, a subsidiary of Peabody Energy. Mr. Allen is Chairman of the Upper Pond River Conservancy
District, Chairman of Cedar West Inc., and member of the Madisonville Community College Energy Advisory Committee.
He is a past member of the Kentucky Coal Counsel, the Kentucky Governors Finance Committee, and Kentucky Consortium
for Energy and the Environment. He is past Chairman and current member of the Executive Boards of the Kentucky Coal
Association and the Western Kentucky Coal Association.
David R. Cobb, P.E . — Mr. Cobb served as our Predecessor’s Vice President of Business Development since its
inception in 2006 until the Reorganization in October 2011. Since the Reorganization, Mr. Cobb has been our Executive
Vice President of Business Development. He has over 40 years of experience in the coal business, beginning with AMAX
Coal Company, where he served as a Resident Mine Engineer, Administrative Engineer, and Southern Division Engineer. In
1975, he joined Danco Engineering, a mine consulting firm located in Western Kentucky, serving as a Principal Engineer
and later becoming its owner and President. Danco was acquired by Associated Engineers, Inc. in 2005. Mr. Cobb stayed on
as the Director of Mining Services until joining our company in 2006. Mr. Cobb is registered in the fields of Civil and
Mining Engineering and is licensed as a Professional Engineer in Kentucky, Indiana, and Illinois along with being a
Certified Fire and Explosion Investigator. Mr. Cobb is a member of the Society of Mining Engineers, the National and
Kentucky Societies of Professional Engineers, the American Society of Civil Engineers, the American Society of Surface
Mining and Reclamation, and the National Association of Fire Investigators.
J. Richard Gist — Mr. Gist served as our Predecessor’s Vice President and Controller from 2009 until the
Reorganization in October 2011. Since the Reorganization, Mr. Gist has been our Senior Vice President, Finance and
Administration and Chief Financial Officer. Mr. Gist began his career with Arthur Andersen in 1978 and subsequently held a
number of positions at St. Joe Minerals, an entity which owned part of Massey Energy, NERCO, Ziegler Coal and Peabody
Energy. From 2000 until its purchase by McKesson Corporation in 2005, Mr. Gist was the Vice President and Controller of
D&K Healthcare Resources. From 2005 until 2006, Mr. Gist worked as part of the transition team with McKesson. From
2006 until 2009, he served as Vice President — Marketing Administration of Arch Coal. Mr. Gist is a Certified Public
Accountant.
Brian G. Landry — Mr. Landry served as our Predecessor’s Vice President, Information Technology from 2010 until
the Reorganization in October 2011. Since the Reorganization, Mr. Landry has been our Vice President, Information
Technology. From 2007 until 2010, Mr. Landry served as Senior Vice President of Information Technology of H.D. Smith
Drug Company. Prior to that, Mr. Landry spent 10 years with D&K Healthcare Resources, Inc., ultimately serving as its
Senior Vice President of Operations and Chief Information Officer.
Anson M. Beard, Jr. — Mr. Beard was appointed to our board in October 2011. He joined Morgan Stanley & Co. as a
Vice President to found Private Client Services in 1977. He was promoted to Principal in 1979 and Managing Director in
1980. In January 1981, he was put in charge of the Firm’s Equity Division, responsible for sales and trading relationships
with institutional and individual investors of all equity and related products worldwide. In 1987, he was elected to the Firm’s
Management Committee and the Board of Directors of Morgan Stanley Group. Mr. Beard was also the former Chairman of
Morgan Stanley Security Services, Inc., a subsidiary of Morgan Stanley Group, which engaged in stock borrowing/lending,
customer and dealer clearance, international settlements and custody. He previously served as a Trustee of the Morgan
Stanley Foundation, Vice Chairman of the National Association of Securities Dealers, and Chairman of its NASDAQ, Inc.
subsidiary. In February 1994, Mr. Beard retired and became an Advisory Director of Morgan Stanley. He continues to serve
in this capacity. Mr. Beard was selected for board membership because of his past board and committee experience and his
knowledge of securities markets and publicly traded companies.
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James C. Crain — Mr. Crain was appointed to our board of directors in October 2011. Mr. Crain has been in the
energy industry for over 30 years, both as an attorney and as an executive officer. Since 1984, Mr. Crain has been an officer
of Marsh Operating Company, an investment management company focusing on energy investing, including his current
position as president, which he has held since 1989. Mr. Crain has served as general partner of Valmora Partners, L.P., a
private investment partnership that invests in the oil and gas sector, among others, since 1997. Before joining Marsh in 1984,
Mr. Crain was a partner in the law firm of Jenkens & Gilchrist, where he headed the firm’s energy section. Mr. Crain is a
director of Crosstex Energy, Inc., a midstream natural gas company, GeoMet, Inc., a natural gas exploration and production
company, and Approach Resources, Inc., an independent oil and natural gas company. During the past five years, Mr. Crain
has also been a director of Crosstex Energy, GP, LLC, the general partner of a midstream natural gas company, and Crusader
Energy Group Inc., an oil and gas exploration and production company. The board selected Mr. Crain to serve as a director
because of his extensive legal, investment and transactional experience, as well as his public company board experience.
Richard F. Ford — Mr. Ford was appointed to our board in October 2011. Mr. Ford is the retired general partner of
Gateway Associates, L.P., a venture capital management firm that he formed in 1984. Mr. Ford serves as a member of the
board of directors and a member of the audit committees of each of Barry-Wehmiller Company and Stifel Financial Corp.
Mr. Ford also serves as a member of the board of directors and chair of the audit committee of Spartan Light Metal Products,
Inc., a privately-held company. He currently serves on the board of directors of Washington University in St. Louis,
Missouri. The board selected Mr. Ford to serve as a director because of his substantial experience in the financial services
industry. He also has considerable board and committee leadership experience at other publicly held and large private
companies.
Bryan H. Lawrence — Mr. Lawrence served as a member of our Predecessor’s board of managers from its formation
in 2006 until the Reorganization. He was appointed to our board of directors in October 2011. He is a founder and principal
of Yorktown Partners, LLC, the manager of the Yorktown group of investment partnerships, which make investments in
companies engaged in the energy industry. The Yorktown partnerships were formerly affiliated with the investment firm of
Dillon, Read & Co., Inc. where Mr. Lawrence had been employed since 1966, serving as a Managing Director until the
merger of Dillon Read with SBC Warburg in September 1997. Mr. Lawrence serves as a director of Crosstex Energy, Inc.,
Crosstex Energy GP, LLC, Hallador Energy Company, Star Gas Partners, L.P., and Approach Resources, Inc. (each a United
States publicly traded company) and Winstar Resources, Ltd., (a Canadian public company) and certain non-public
companies in the energy industry in which Yorktown partnerships hold equity interests. Mr. Lawrence serves on our board
of directors because of his significant knowledge of all aspects of the energy industry.
Greg A. Walker — Mr. Walker was appointed to our board of directors in October 2011. From 2009 to January 2011,
he served as a Senior Vice President of Alpha Natural Resources, Inc., assisting with integration issues after the merger of
Alpha Natural Resources, Inc. and Foundation Coal Holdings, Inc. From 2004 to 2009, Mr. Walker served as the Senior
Vice President, General Counsel and Secretary of Foundation Coal Holdings, Inc. From 1999 to 2004, he served as the
Senior Vice President, General Counsel and Secretary of RAG American Coal Holdings, Inc., which was the predecessor
entity to Foundation Coal Holdings, Inc. From 1989 through 1999, he served in various capacities in the law department of
Cyprus Amax Minerals Company. He spent three years in private law practice in Denver, Colorado from 1986 to 1989, and
from 1981 through 1986 he held various positions within the law department of Mobil Oil Corporation. He has been a
member of the board of directors since 2005, and Chairman in 2008, of the FutureGen Industrial Alliance, Inc., a
not-for-profit entity whose global members are working with the United States Department of Energy to build and operate a
commercial scale carbon dioxide sequestration project. He currently also serves as the Treasurer and Secretary of FutureGen.
From 2007 through 2010, he served as an appointee from the United States to the Coal Industry Advisory Board, an
international advisory panel to the International Energy Administration with respect to matters regarding the production, use
and demand for coal on a global basis. The board selected Mr. Walker to serve as a director because of his specialized
knowledge of the coal and energy industry and applicable regulations, as well as his experience in public company
management.
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Board of Directors and Board Committees
Our board currently consists of seven directors. Our board has established the following committees: an audit
committee, a compensation committee, a nominating and governance committee and a conflicts committee. The composition
and responsibilities of each committee are described below. Members serve on these committees until their resignation or
until otherwise determined by our board.
The majority of our board members are independent. The board has determined that each of Messrs. Beard, Crain, Ford
and Walker is an independent director pursuant to the requirements of Nasdaq, and each of the members of the audit
committee satisfies the additional conditions for independence for audit committee members required by Nasdaq.
Audit Committee
Messrs. Crain, Ford and Walker, each an independent director, serve on our audit committee. Mr. Ford is the chair of
the audit committee. The committee assists our board in fulfilling its oversight responsibilities relating to (i) the integrity of
our financial statements, internal accounting, financial controls, disclosure controls and financial reporting processes, (ii) the
independent auditors’ qualifications and independence, (iii) the performance of our internal audit function and independent
auditors, and (iv) our compliance with legal and regulatory requirements. The board has determined that Mr. Ford qualifies
as an “audit committee financial expert,” as that term is defined in Item 407(d)(5) of Regulation S-K, as promulgated by the
SEC.
Compensation Committee
Messrs. Beard, Ford and Walker, each an independent director, serve on our compensation committee. Mr. Beard is the
chair of the compensation committee. The committee is responsible for discharging the board’s responsibility relating to
compensation of our executive officers and directors, evaluating the performance of our executive officers in light of our
goals and objectives and recommending to the board for approval our compensation plans, policies and programs. Each
member of the committee is independent, a “non-employee director” for purposes of Rule 16b-3 under the Exchange Act,
and an “outside director” for purposes of Section 162(m) of the Code.
Nominating and Governance Committee
Messrs. Beard, Crain and Ford, each an independent director, serve on our nominating and governance committee.
Mr. Crain is the chair of this committee. The committee is responsible for (i) assisting the board by indentifying individuals
qualified to become board members, and recommending to our board nominees for election as director, (ii) leading the board
in its annual performance review, (iii) recommending to the board members and chairpersons for each committee,
(iv) monitoring the attendance, preparation and participation of individual directors and conducting a performance evaluation
of each director prior to the time he or she is considered for re-nomination to the board of directors, (v) monitoring and
evaluating corporate governance issues and trends, and (vi) discharging the board’s responsibilities relating to compensation
of our directors by reviewing such compensation annually and then recommending any changes in such compensation to the
full board of directors.
Conflicts Committee
Messrs. Beard, Crain and Walker, each an independent director, serve on our conflicts committee. Mr. Walker is the
chair of this committee. The committee is responsible for (i) reviewing specific matters that the board believes may involve
conflicts of interest, (ii) reviewing specific matters requiring action of the conflicts committee pursuant to any agreement to
which we are a party, (iii) advising the board on actions to be taken by us upon the board’s request, and (iv) carrying out any
other duties delegated to the conflicts committee by the board of directors.
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Compensation Committee Interlocks and Insider Participation
Although our board did not have a compensation committee during the entire current or previous fiscal year, none of
the individuals who currently serve on our compensation committee has served our company or any of our subsidiaries as an
officer or employee. In addition, none of our executive officers serves as a member of the board of directors or compensation
committee of any entity which has one or more executive officers serving as a member of our board or compensation
committee.
Code of Ethics
We have adopted a code of business conduct and ethics applicable to all employees, including executive officers, and
directors. A copy of the code of business conduct and ethics is available on our web site at www.armstrongcoal.com. Any
amendments to, or waivers from, provisions of the code related to certain matters will be disclosed on our website.
Compensation of Directors
Historically, our directors have not received compensation for their service. In connection with this offering, we
adopted a new director compensation program pursuant to which each of our non-employee directors will receive (i) an
annual cash retainer of $50,000, and (ii) a restricted stock award with a value of $25,000 on the date of grant. Our
Nominating and Governance Committee reviews and makes recommendations to the board regarding compensation of
directors, including equity-based plans. We reimburse our non-employee directors for reasonable travel expenses incurred in
attending board and committee meetings. We also intend to allow our non-employee directors to participate in the 2011
Long-Term Incentive Plan (the “LTIP”) and any other equity compensation plans that we adopt in the future.
Executive Officer Compensation
Compensation Discussion and Analysis
This Compensation Discussion and Analysis describes and explains our compensation program for the fiscal year ended
December 31, 2010 for our named executive officers, who are listed as follows:
• J. Hord Armstrong, III, Chairman and Chief Executive Officer;
• Martin D. Wilson, President;
• Kenneth E. Allen, Executive Vice President of Operations;
• David R. Cobb, P.E., Executive Vice President of Business Development; and
• J. Richard Gist, Senior Vice President, Finance and Administration and Chief Financial Officer.
This section also explains how we expect the compensation of the named executive officers to change following this
offering.
Historical Compensation Decisions
Our compensation approach has been tied to our stage of development as a company. Before this offering, we were
privately-held and therefore, not subject to any stock exchange or SEC rules relating to compensation, board committees and
independent board representation. We informally considered the responsibilities connected with each management position
and the available funds for management compensation when making past compensation decisions. Each year, after the
financial statements for the prior fiscal year were prepared, Messrs. Armstrong and Wilson, together with Yorktown
convened to discuss compensation of management and certain other employees, including themselves, and made adjustments
to executive pay as they deemed appropriate and feasible given our company’s financial position.
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Although we did not have a formal compensation program in place, we believe that our informal program and
compensation methods furthered the following objectives:
• To retain talented individuals to contribute to our company’s sustained progress, growth and profitability; and
• To reflect the unique qualifications, skills, experiences and responsibilities of each individual.
New Compensation Philosophy and Objectives
We recently formed a compensation committee comprised of board members who meet the definition of independence
as set forth in applicable Nasdaq rules. As of its inception, the compensation committee has been tasked with the
responsibility to establish and implement our new compensation philosophy and objectives, administrate our executive and
director compensation programs and plans, and review and approve the compensation of our named executive officers. The
committee is currently in the process of evaluating our historical compensation practices and customizing a new
management compensation program for our specific circumstances.
As we gain experience as a public company, we expect that the specific director, emphasis and components of our
executive compensation program will continue to evolve. Accordingly, the compensation paid to our named executive
officers in the past is not necessarily indicative of how we will compensate them after this offering.
Compensation Committee Procedures
The compensation committee’s responsibilities are specified in its charter. The compensation committee’s functions
and authority include, among other things:
• Establishment and annual review of corporate goals and objectives relevant to the compensation of the executive
officers, including the chief executive officer;
• Evaluation of the executive officers’ performance;
• Determination and approval of executive officer compensation;
• Administration of equity compensation plans, annual bonus and long-term incentive cash-based compensation
plans;
• Review and approval of employment agreements and severance arrangements of all executive officers; and
• Management of risk relating to incentive compensation.
Elements of Compensation
Historically, our executive officers have received annual salaries as their compensation for services. In addition, our
board may grant discretionary cash bonuses and equity to our executive officers. In connection with Mr. Gist’s appointment
as an executive officer, effective January 1, 2010, we granted Mr. Gist 18,500 shares of common stock of Armstrong
Energy, which vested on September 30, 2011. The aggregate grant date value of Mr. Gist’s award was $120,000. In addition,
on June 1, 2011, we granted to each of Messrs. Armstrong, Wilson, Allen and Cobb 18,500 shares of common stock of
Armstrong Energy, which vest on April 1, 2013. The aggregate grant date fair value of each award was approximately
$258,000.
We believe that our key executives’ compensation is reflective of their leadership roles in a growing company in
relation to our financial performance. We believe that our executive compensation is competitive within our industry and
adequate to retain and incentivize our key executives.
We recently adopted the LTIP. Going forward, we expect that our executive officers’ compensation will consist of base
salary, annual cash incentive compensation, and long-term incentive compensation. Executive officers are eligible to receive
annual performance-based and discretionary cash bonuses. Long-term incentive
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compensation further aligns the interests of our executive officers with those of our stockholders over the long-term,
encourages the retention of our executives, and rewards executive actions that enhance long-term stockholder returns. The
LTIP provides for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units,
performance grants and other equity-based incentive awards to those who contribute significantly to our strategic and
long-term performance objectives and growth. The LTIP is more fully described below under “— 2011 Long-Term
Incentive Plan.”
Other Executive Benefits
Our named executive officers are eligible for the following benefits on the same basis as other eligible employees:
• Health insurance;
• Vacation, personal holidays and sick time;
• Life insurance and supplemental life insurance;
• Short-term and long-term disability; and
• A 401(k) plan with matching contributions.
In addition, we provide our named executive officers with an annual car allowance and a payment equal to the group
term life insurance premium paid on each named executive officer’s behalf. Also, we provide Mr. Wilson with an allowance
for club membership dues.
Employment Agreements
2007 Allen and Cobb Employment Agreements
Effective June 1, 2007, we entered into an employment agreement (the “2007 Allen Employment Agreement”) with
Mr. Allen. Effective January 1, 2007, we entered into an employment agreement (the “2007 Cobb Employment Agreement”
and together with the Allen Employment Agreement, the “2007 Agreements”) with Mr. Cobb. Pursuant to the 2007
Agreements, we agreed to pay Messrs. Allen and Cobb initial base salaries of $240,000 and $180,000, respectively. The base
salaries are subject to adjustment annually as determined by the board of directors. In 2010, the base salaries of
Messrs. Allen and Cobb were $260,000 and $226,000. Effective January 1, 2011, base salaries of Messrs. Allen and Cobb
were increased to $275,000 and $238,000, respectively.
The 2007 Agreements provide that Messrs. Allen and Cobb shall be eligible to participate in such benefits as may be
authorized and adopted from time to time by the board of directors for our employees, including, without limitation, any
pension plan, profit-sharing plan or other qualified retirement plan and any group insurance plan. The term of each of the
2007 Agreements is three years, and each shall be automatically renewed for additional one year terms until such time, if
any, as we or the respective executive give written notice to the other party that such automatic extension shall cease. In the
case of the 2007 Allen Employment Agreement, such notice must be given at least 60 days prior to the expiration of the then
current term.
The 2007 Agreements provide that we may terminate the agreement with or without cause, and the executive may
terminate his respective agreement with or without good reason. See “— Payments upon Termination or a Change in
Control” for additional information regarding termination rights and payments due to the executives upon termination or a
change in control.
The 2007 Agreements contain non-competition and non-solicitation provisions that endure for a period of twelve
months following the executives’ termination of employment with us.
In addition, pursuant to each of the 2007 Agreement and the related overriding royalty agreement, as amended, between
Mr. Allen and us, and the 2007 Cobb Employment Agreement and the related overriding royalty agreement, as amended,
between Mr. Cobb and us, Messrs. Allen and Cobb each receive an overriding
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royalty equal to $0.05 per ton sold by us from certain reserves described in those agreements. See “— Overriding Royalty
Agreements.”
2009 Gist Employment Agreement
Effective September 17, 2009, we entered into an employment agreement (the “2009 Gist Agreement”) with Mr. Gist.
Pursuant to the 2009 Gist Agreement, we agreed to pay Mr. Gist a base salary of $192,500. In 2010, Mr. Gist’s base salary
was $195,000. Effective January 1, 2011, his base salary was increased to $210,000. Pursuant to the 2009 Gist Agreement,
Mr. Gist is also eligible to receive a bonus, with a target of 45% of his base compensation. The bonus will be earned based
on our company’s achievement of profitability targets and Mr. Gist’s satisfactory achievement of goals and objectives as
determined by our President. For 2009, Mr. Gist was to earn a bonus equal to a minimum of 22.5% of base salary, less
$15,000. In addition, Mr. Gist received a signing bonus of $15,000 in 2009.
In addition, pursuant to the terms of the 2009 Gist Agreement, Mr. Gist was granted 18,500 restricted shares of
Armstrong Energy common stock. Such shares vested on September 30, 2011.
The 2009 Gist Agreement provides that Mr. Gist shall be eligible to participate in any future stock option plans,
restricted stock grants, phantom stock, or any other stock compensation programs as approved by the board of directors or
our shareholders. Awards will be made at the discretion of the board of directors and our President.
The 2009 Gist Agreement provides that we may terminate without cause, and Mr. Gist may terminate for good reason.
See “— Payments upon Termination or a Change in Control” for additional information regarding termination rights and
payments due to Mr. Gist upon termination or a change in control.
2011 Gist Employment Agreement
Effective October 1, 2011, we terminated the 2009 Gist Agreement upon mutual agreement of the parties thereto and
entered into a new employment agreement with Mr. Gist (the “2011 Gist Agreement”).
Pursuant to the 2011 Gist Agreement, we agreed to pay Mr. Gist $210,000 for his services as our Senior Vice President,
Finance and Administration and Chief Financial Officer. In addition, Mr. Gist is entitled to an annual target bonus of 50% of
the then annual salary. The bonus will be based upon the achievement of performance criteria established by us and to be
awarded at the discretion of our President or board of directors. As of December 16, 2011, the Company has not established
any performance criteria pursuant to the 2011 Gist Agreement. The board may grant Mr. Gist a discretionary cash bonus for
2011, however.
The 2011 Gist Agreement provides that Mr. Gist shall be eligible to participate in such benefits as may be authorized
and adopted from time to time by the board of directors for our employees, including, without limitation, any pension plan,
profit-sharing plan or other qualified retirement plan and any group insurance plan. The term of the 2011 Gist Agreement is
one year, and shall be automatically renewed for additional one year terms until such time, if any, as we or Mr. Gist gives
written notice to the other party that such automatic extension shall cease. Such notice must be given at least 60 days prior to
the expiration of the then current term.
The 2011 Gist Agreement provides that we may terminate the agreement with or without cause. See “— Payments upon
Termination or a Change in Control” for additional information regarding termination rights and payments due to the
executives upon termination or a change in control.
The 2011 Gist Agreement contains non-competition and non-solicitation provisions that endure for a period of
12 months following Mr. Gist’s termination of employment with us.
Armstrong and Wilson Employment Agreements
Effective October 1, 2011, we entered into an employment agreement (the “2011 Armstrong Agreement”) with each of
Messrs. Armstrong and Wilson (together, the “Armstrong and Wilson Agreements”).
Pursuant to each of the Armstrong and Wilson Agreements, we agreed to pay each of Messrs. Armstrong and Wilson a
base salary of $300,000. In addition, each of Messrs. Armstrong and Wilson is entitled to an
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annual bonus based upon achievement of performance criteria established by us and to be awarded by our board. The target
amount will not be less than 75% of the executive’s then annual base salary. The executive’s base salary and bonus will be
reviewed from time to time and may be increased. As of December 16, 2011, the Company has not established any
performance criteria pursuant to Armstrong and Wilson Agreements. The board may grant Mr. Armstrong and/or Mr.
Wilson a discretionary cash bonus for 2011, however.
The Armstrong and Wilson Agreements provide that Messrs. Armstrong and Wilson shall be entitled to participate in
any of our benefit plans made available to other senior executive officers. The term of each of the Armstrong and Wilson
Agreements is three years, and each shall automatically renew for successive one year terms unless either party gives the
other a notice of non-renewal at least 90 days before the end of then current term.
The Armstrong and Wilson Agreements provide that we may terminate the agreement with or without cause, and the
executive may terminate the agreement with or without good reason. See “— Payments upon Termination or a Change in
Control” for additional information regarding termination rights and payments due to Messrs. Armstrong and Wilson upon
termination or a change in control.
The Armstrong and Wilson Agreements contain non-competition provisions that continue for 18 months following a
termination of employment with us. In addition, the Armstrong and Wilson Agreements contain non-solicitation provisions
that endure for a period of 24 months following the executive’s termination.
Overriding Royalty Agreements
On December 3, 2008, we entered into an amended and restated overriding royalty agreement with Mr. Cobb pursuant
to which we agreed to pay Mr. Cobb a royalty of five cents ($0.05) per ton of all coal thereafter mined or extracted and
subsequently sold from certain of our reserves. The term of the royalty began on November 22, 2006, and is set to continue
until the later of: (i) November 22, 2026, or (ii) such time as all of the mineable and saleable coal from the subject properties
has been mined. The agreement also states that the overriding royalty shall constitute an independent and enforceable
obligation that shall run with the land and shall be binding on us, our respective assigns and successors, and any subsequent
owner of the subject properties.
On December 3, 2008, we entered into an amended and restated overriding royalty agreement with Mr. Allen pursuant
to which we agreed to pay Mr. Allen a royalty of five cents ($0.05) per ton of all coal thereafter mined or extracted and
subsequently sold from certain of our reserves. The term of the royalty began on February 9, 2007, and is set to continue
until the later of: (i) February 9, 2027, or (ii) such time as all of the mineable and saleable coal from the subject properties
has been mined. The agreement also states that the overriding royalty shall constitute an independent and enforceable
obligation that shall run with the land and shall be binding on us, our respective assigns and successors, and any subsequent
owner of the subject properties.
Tax Considerations
In the past, we have not taken into consideration the tax consequences to employees and us when considering the types
and levels of awards and other compensation granted to executives and directors. However, we anticipate that the
compensation committee will consider these tax implications when determining executive compensation in the future.
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2010 Summary Compensation Table
The following table sets forth all compensation paid to our named executive officers for the years ending December 31,
2010, 2009, and 2008.
Name and Principal All Other
Position Year Salary Bonus Stock Awards Compensation Total
J. Hord Armstrong, III, 2010 $ 250,000 $ 187,500 $ — $ 21,456 (1) $ 458,956
Chairman and Chief 2009 124,000 42,000 — 5,780 171,780
Executive Officer 2008 60,000 — — 3,076 63,076
Martin D. Wilson, 2010 $ 250,000 $ 187,500 $ — $ 9,868 $ 447,368
President 2009 206,000 — — — 206,000
2008 200,000 — — 1,710 201,710
Kenneth E. Allen(2), 2010 $ 260,000 $ 130,000 $ — $ 606,219 (3) $ 996,219
Executive Vice President
of 2009 247,000 42,000 — 12,560 301,560
Operations 2008 243,000 — — 15,641 258,641
David R. Cobb, P.E.(4), 2010 $ 226,000 $ 113,000 $ — $ 300,567 (5) $ 639,567
Executive Vice President
of 2009 210,000 42,000 — 244,428 496,428
Business Development 2008 182,000 — — 81,402 263,402
J. Richard Gist(6), 2010 $ 195,000 $ 88,000 $ 120,000 $ 4,129 $ 407,129
Senior Vice President, 2009 48,250 43,000 — — 91,250
Finance and
Administration and 2008 — — — — —
Chief Financial Officer
(1) Includes our matching contributions paid to our 401(k) plan on behalf of Mr. Armstrong ($14,600).
(2) Mr. Allen was appointed Executive Vice President of Operations effective October 1, 2011. Prior to this time,
Mr. Allen was our Vice President of Operations.
(3) Includes overriding royalties paid to Mr. Allen ($569,000) (see “— Overriding Royalty Agreements” for a description
of Mr. Allen’s agreement with us regarding the payment of overriding royalties) and our matching contributions paid
to our 401(k) plan on behalf of Mr. Allen ($15,100).
(4) Mr. Cobb was appointed Executive Vice President of Business Development effective October 1, 2011. Prior to this
time, Mr. Cobb was our Vice President of Business Development.
(5) Includes overriding royalties paid to Mr. Cobb ($265,000) (see “— Overriding Royalty Agreements” for a description
of Mr. Cobb’s agreement with us regarding the payment of overriding royalties) and our matching contributions paid
to our 401(k) plan on behalf of Mr. Cobb ($13,400).
(6) Mr. Gist became Vice President and Controller on October 7, 2009, and Senior Vice President, Finance and
Administration and Chief Financial Officer effective October 1, 2011.
Payments upon Termination or a Change in Control
Each of our named executive officers has entered into an agreement with us regarding his respective employment. The
following is a description of the termination provisions contained in each agreement and the payments due to the named
executive officers upon termination or a change in control.
2007 Allen and Cobb Employment Agreements
Pursuant to the 2007 Agreements, we may terminate each agreement at any time for cause, which is defined as: (i) the
executive’s failure substantially to perform his duties under the agreement in a manner satisfactory to the board, as
determined in good faith by the board, provided that the board has given the executive written notice of the action(s) or
omission(s) which are claimed to constitute such failure and the executive does not fully remedy such failure within 10
calendar days after receipt of the written notice, (ii) the executive has engaged in gross misconduct, dishonest, disloyal,
illegal or unethical conduct, or any other conduct which has or could reasonably have a detrimental impact on our company
or its reputation, all facts to be determined in good faith by the board, (iii) the executive has acted in a dishonest or disloyal
manner, or
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breached any fiduciary duty to our company that, in either case, results or was intended to result in personal profit to the
executive at the expense of our company or any of its customers, (iv) the executive has been convicted of or pleads guilty or
no contest to any felony, (v) the executive has one or more physical or mental impairments which have substantially
impaired his ability to perform the essential functions of his job under the agreement, (vi) the executive’s death, (vii) any
breach by the executive of certain obligations under the agreement, (viii) resignation by the executive under circumstances
where a termination for “cause” was impending or could have reasonably been foreseen.
We also may terminate each of the 2007 Agreements without cause, as defined above. In the event of such termination
without cause, the executive shall be entitled to receive (i) the executive’s base salary for 12 months following termination,
at the same rate as was in effect on the day prior to termination, and (ii) health insurance premiums for 12 months. In
addition, the respective overriding royalty will run with the land per the provisions of the overriding royalty agreements. See
“— Overriding Royalty Agreements.”
Under each of the 2007 Agreements, the executive may resign for good reason, which is defined as a material demotion
or reduction, without the executive’s consent, in the executive’s duties. In the event of a resignation for good reason, the
executive shall be entitled to receive (i) the executive’s base salary for 12 months following termination, at the same rate as
was in effect on the day prior to termination, and (ii) health insurance premiums for 12 months. In addition, the respective
overriding royalty will run with the land per the provisions of the overriding royalty agreements. See “— Overriding Royalty
Agreements.”
In the event of a termination of the executive’s employment, other than for cause, within 12 months of a change in
control, the executive shall be entitled to receive health insurance premiums for 12 months. In addition, we will pay,
promptly following such termination, a lump sum payment equal to one times the executive’s annual base salary at the time
of his termination, plus any accrued and unpaid overriding royalty. For this purpose, a change in control means: (i) any
purchase or other acquisition by an individual or group of person(s) (including entity(ies)) acting in concert, which results in
persons who are our shareholders as of the date of entry into the respective agreement no longer being the legal and
beneficial owners of 51% or more of the outstanding equity in our company, (ii) consummation of a reorganization, merger,
recapitalization, consolidation, or any other transaction, in each case with respect to which persons who were our
shareholders as of the date of entry into the respective agreement do not, immediately thereafter, legally and beneficially
own 51% or more of the equity in the newly-organized, merged, recapitalized, consolidated, or other resulting entity, or
(iii) the sale of all or substantially all of our assets in a transaction approved by the board.
2009 Gist Employment Agreement
Pursuant to the 2009 Gist Agreement, if we terminate the agreement without cause, Mr. Gist is entitled to receive
12 months of salary, bonus and health benefits. If Mr. Gist resigns for good reason, which is defined as significant
diminishing of Mr. Gist’s job responsibilities, change in position or title, etc., Mr. Gist is entitled to receive 12 months of
salary, bonus and health benefits. Pursuant to the 2009 Gist Agreement, if there is a change in control and Mr. Gist’s job is
eliminated or Mr. Gist resigns for good reason within one year of the change in control, Mr. Gist is entitled to receive
12 months of salary, bonus and health benefits.
2011 Gist Employment Agreement
Pursuant to the 2011 Gist Agreement, we may terminate the agreement at any time for cause, which is defined as:
(i) Mr. Gist’s failure substantially to perform his duties under the agreement in a manner satisfactory to the board, as
determined in good faith by the board, provided that the board has given Mr. Gist written notice of the action(s) or
omission(s) which are claimed to constitute such failure and Mr. Gist does not fully remedy such failure within 10 calendar
days after receipt of the written notice, (ii) Mr. Gist has engaged in gross misconduct, dishonest, disloyal, illegal or unethical
conduct, or any other conduct which has or could reasonably have a detrimental impact on our company or its reputation, all
facts to be determined in good faith by the board, (iii) Mr. Gist has acted in a dishonest or disloyal manner, or breached any
fiduciary duty to our company that, in either case, results or was intended to result in personal profit to Mr. Gist at the
expense of our company or any of its customers, (iv) Mr. Gist has been convicted of or pleads guilty or no
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contest to any felony, (v) Mr. Gist has one or more physical or mental impairments which have substantially impaired his
ability to perform the essential functions of his job under the agreement, (vi) Mr. Gist’s death, (vii) any breach by Mr. Gist
of certain obligations under the agreement, (viii) resignation by Mr. Gist under circumstances where a termination for
“cause” was impending or could have reasonably been foreseen.
We also may terminate the 2011 Gist Agreement without cause, as defined above. In the event of such termination
without cause, the executive shall be entitled to receive (i) the executive’s base salary for 12 months following termination,
at the same rate as was in effect on the day prior to termination, plus any accrued but unpaid bonus as of the termination
date, and (ii) health insurance premiums for 12 months.
Pursuant to the 2011 Gist Agreement, Mr. Gist may resign for good reason, which is defined as a material demotion or
reduction, without Mr. Gist’s consent, in Mr. Gist’s duties. In the event of a resignation for good reason, Mr. Gist shall be
entitled to receive (i) his base salary for 12 months following termination, at the same rate as was in effect on the day prior to
termination, and (ii) health insurance premiums for 12 months.
In the event of a termination of Mr. Gist’s employment, other than for cause, within 12 months of a change in control,
Mr. Gist shall be entitled to receive health insurance premiums for 12 months. In addition, we will pay, promptly following
such termination, a lump sum payment equal to one times Mr. Gist’s annual base salary at the time of his termination, plus
one year’s bonus in an amount equal to 50% of Mr. Gist’s then existing annual base salary. For this purpose, a change in
control means: (i) any purchase or other acquisition by an individual or group of person(s) (including entity(ies)) acting in
concert, which results in persons who are our shareholders as of the date of entry into the respective agreement no longer
being the legal and beneficial owners of 51% or more of the outstanding equity in our company, (ii) consummation of a
reorganization, merger, recapitalization, consolidation, or any other transaction, in each case with respect to which persons
who were our shareholders as of the date of entry into the respective agreement do not, immediately thereafter, legally and
beneficially own 51% or more of the equity in the newly-organized, merged, recapitalized, consolidated, or other resulting
entity, or (iii) the sale of all or substantially all of our assets in a transaction approved by the board.
Armstrong and Wilson Employment Agreements
Pursuant to the Armstrong and Wilson Agreements, we may terminate Mr. Armstrong’s and Mr. Wilson’s employment
at any time without cause (as defined below), and each of Mr. Armstrong and Mr. Wilson may terminate his own
employment at any time for good reason (as defined below). In the event of a termination without cause, failure by us to
renew the agreement or termination by the executive for good reason, (i) we will continue to pay the executive’s base salary
and provide his other benefits under the respective agreement (including automobile allowance, vacation and health
insurance) for 24 months, and (ii) the executive shall also be entitled to a bonus for that year equal to 75% of his base salary
then in effect (irrespective of whether performance objectives have been achieved). In addition, (a) we will provide the
executive with outplacement services, and (b) the executive shall be entitled to a contribution under our retirement benefit
plan for that fiscal year equal to the greater of (x) the amount that would have been contributed for that fiscal year
determined in accordance with past practice, or (y) the highest amount contributed by us on behalf of the executive for any
of the three prior fiscal years.
For this purpose, cause means (i) the executive’s willful and continued failure substantially to perform his duties under
the respective agreement (other than as a result of sickness, injury or other physical or mental incapacity or as a result of
termination by the executive for good reason); provided, however, that such failure shall constitute “cause” only if (x) we
deliver a written demand for substantial performance to the executive that specifies the manner in which we believe he has
failed substantially to perform his duties under the agreement and (y) the executive shall not have corrected such failure
within 10 business days after his receipt of such demand; (ii) willful misconduct by the executive in the performance of his
duties under the agreement that is demonstrably and materially injurious to our company or any affiliated company for
which he is required to perform duties hereunder; (iii) the executive’s conviction of (or plea of nolo contendere to) a
financial-related felony or other similarly material crime under the laws of the United States or any state
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thereof; or (iv) any material violation of the respective agreement by the executive. No action, or failure to act, shall be
considered “willful” if it is done by the executive in good faith and with the reasonable belief that the action or omission was
in the best interest of our company. If our Board determines in its sole discretion that a cure of the acts or omissions
described above is possible and appropriate, we will give the executive written notice of the acts or omissions constituting
cause and no termination of the agreement shall be for cause unless and until the executive fails to cure such acts or
omissions within 20 business days following receipt of such notice. If the Board determines in its sole discretion that a cure
is not possible and appropriate, the executive shall have no notice or cure rights before the agreement is terminated for cause.
For this purpose, good reason means the occurrence of any of the following (other than by reason of a termination of
the executive for cause or disability or with the executive’s consent): (i) the authority, duties or responsibilities of the
executive are significantly and materially reduced (including, without limitation, by reason of the elimination of the
executive’s position or the failure to elect the executive to such position or by reason of a change in the reporting
responsibilities to and of such position, or, following a change in control, by reason of a substantial reduction in the size of
our company or other substantial change in the character or scope of our company’s operations); (ii) the annual base salary is
materially reduced (except if such reduction occurs prior to a change in control and is part of an across-the-board reduction
applicable to all senior level executives); (iii) the executive is required to change his regular work location to a location that
is more than 75 miles from his regular work location prior to such change; or (iv) any other action or inaction that constitutes
a material breach by us of the agreement. To exercise his right to terminate for good reason the executive must provide
written notice of his belief that good reason exists within 90 days of the initial existence of the condition(s) giving rise to
good reason. We shall have 20 days to remedy the good reason condition(s). If not remedied within that 20-day period, the
executive may terminate his employment; provided, however, that such termination must occur no later than 180 days after
the date of the initial existence of the condition(s) giving rise to the good reason.
Pursuant to the Armstrong and Wilson Agreements, in the event that: (i) we terminate the executive’s employment
without cause in anticipation of, or pursuant to a notice of termination delivered to the executive within 24 months after, a
change in control (as defined below); (ii) the executive terminates his employment for good reason pursuant to a notice of
termination delivered to us in anticipation of, or within 24 months after, a change in control; or (iii) we fail to renew the
agreement in anticipation of, or within 24 months after, a change in control:
(a) we shall pay to the executive, within 30 days following the executive’s separation from service (within the
meaning of Code Section 409A and the regulations and other guidance promulgated thereunder), a lump-sum cash
amount equal to: (x) two times the sum of (A) his salary then in effect and (B) 75% of his then current salary; plus (y) a
bonus for the then current fiscal year equal to 75% of his salary (irrespective of whether performance objectives have
been achieved); plus (z) if such notice is given within the first 12 months after October 1, 2011, then, the salary the
executive should have been paid from the date of termination through the end of such 12-month period; and
(b) during the portion, if any, of the 24-month period commencing on the date of the executive’s separation from
service that the executive is eligible to elect and elects to continue coverage for himself and his eligible dependents
under our health plan pursuant to COBRA or a similar state law, we shall reimburse the executive for the difference
between the amount the executive pays to effect and continue such coverage and the employee contribution amount that
our active senior executive employees pay for the same or similar coverage.
For purposes of the Armstrong and Wilson Agreements, a change in control means the occurrence of any of the
following: (i) a merger, consolidation, exchange, combination or other transaction involving our company and another entity
(or our securities and such other entity) as a result of which the holders of all of the shares of our common stock outstanding
prior to such transaction do not hold, directly or indirectly, shares of the outstanding voting securities of, or other voting
ownership interest in, the surviving, resulting or successor entity in such transaction in substantially the same proportions as
those in which they held the outstanding shares of our common stock immediately prior to such transaction; (ii) the sale,
transfer,
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assignment or other disposition by us in one transaction or a series of transactions within any period of 18 consecutive
calendar months (including, without limitation, by means of the sale of capital stock of any subsidiary or subsidiaries of our
company) of assets which account for an aggregate of 50% or more of the consolidated revenues of our company and its
subsidiaries, as determined in accordance with GAAP, for the fiscal year most recently ended prior to the date of such
transaction (or, in the case of a series of transactions as described above, the first such transaction); provided, however, that
no such transaction shall be taken into account if substantially all the proceeds thereof (whether in cash or in kind) are used
after such transaction in the ongoing conduct by our company and/or its subsidiaries of the business conducted by our
company and/or its subsidiaries prior to such transaction; (iii) our company is dissolved; or (iv) a majority of our directors
are persons who were not members of the board as of the date which is the more recent of the date hereof and the date which
is two years prior to the date on which such determination is made, unless the first election or appointment (or the first
nomination for election by our shareholders) of each director who was not a member of the board on such date was approved
by a vote of at least two-thirds of the board of directors in office prior to the time of such first election, appointment or
nomination.
Pursuant to the terms of the Armstrong and Wilson Agreement if the executive is a “disqualified individual” (as defined
in Section 280G of the Code), and the severance or change of control payments and benefits, together with any other
payments which the executive has the right to receive from the Company, would constitute a “parachute payment” (as
defined in Section 280G of the Code), the payments provided hereunder shall be reduced (but not below zero) so that the
aggregate present value of such payments received by the executive from the Company shall be $1.00 less than three times
the executive’s “base amount” (as defined in Section 280G of the Code) and so that no portion of such payments received by
the executive shall be subject to the excise tax imposed by Section 4999 of the Code.
The following table illustrates the payments and benefits due to each of Messrs. Allen, Cobb and Gist assuming that the
termination or change in control took place on the last business day of our last completed fiscal year. There would have been
no payments or benefits due to Messrs. Armstrong or Wilson in such an event, as Messrs. Armstrong and Wilson were not
parties to an employment agreement as of December 31, 2010.
Termination
in Connection
Termination with a
Termination for Termination Termination for Without Good Change in
Nam
e Cause Without Cause Good Reason Reason Control
Kenneth E. Allen $ 19,691 $ 292,315 $ 292,315 $ 19,691 $ 292,315
David R. Cobb, P.E. $ 19,691 $ 270,315 $ 270,315 $ 19,691 $ 270,315
J. Richard Gist — $ 302,154 $ 302,154 — $ 302,154
2011 Long-Term Incentive Plan
Our board of directors recently adopted the 2011 LTIP for our employees and directors, as well as for consultants and
independent contractors who perform services for us. The LTIP is administered by the compensation committee, which has
the authority to select recipients of awards and determine the type, size, terms and conditions of awards. The maximum
aggregate number of shares of common stock available for issuance under the LTIP is 10% of our authorized shares of
common stock.
The LTIP provides for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units,
performance grants and other equity-based incentive awards to those who contribute significantly to our strategic and
long-term performance objectives and growth, as the compensation committee may determine.
Except with respect to restricted stock awards and unless otherwise determined by the committee in its discretion, the
recipient of an award has no rights as a stockholder until he or she receives a stock certificate or has his or her ownership
entered into the books of the Company.
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The compensation committee has the authority to administer the LTIP and may determine the type, number and size of
the awards, the recipients of awards and the terms and conditions applicable to awards made under the LTIP. The committee
may also generally amend the terms and conditions of awards, subject to certain restrictions.
The LTIP will terminate upon the earlier of the adoption of a board resolution terminating the LTIP or ten years from its
effective date.
The following is a brief summary of the types of awards available for issuance under the LTIP:
Stock Options
The committee may grant non-qualified and incentive stock options under the LTIP, provided that incentive stock
options shall be granted to employees only. The exercise price of stock options must be no less than the fair market value of
the common stock on the date of grant and expire ten years after the date of grant. The exercise price of incentive stock
options granted to holders of at least 10% of the Company’s stock must be no less than 110% of such fair market value, and
incentive stock options expire five years from the date of grant.
Stock Appreciation Rights
An award of a stock appreciation right entitles the recipient to receive, without payment, the number of shares of
common stock having an aggregate value equal to the excess of the fair market value of one share of common stock at the
time of exercise over the exercise price, times the number of shares of common stock subject to the award. Stock
appreciation rights shall have an exercise price no less than the fair market value of the common stock on the date of grant.
Restricted Stock and Restricted Stock Units
In addition to other terms and conditions applicable to restricted stock and restricted stock unit awards, the
compensation committee shall establish the restricted period applicable to such awards. The awards shall vest in one or more
increments during the restricted period, which shall not be less than three years; provided, however, that this limitation shall
not apply to awards granted to non-employee directors. As may be subject to additional conditions in the committee’s
discretion, recipients of such awards shall have voting, dividend and other stockholder rights with respect to the awards from
the date of grant.
Performance Grants
Performance grants shall consist of a right that is (i) denominated in cash, common stock or any other form of award
issuable under the LTIP, (ii) valued in accordance with the achievement of certain performance goals applicable to
performance periods as the committee may establish, and (iii) payable at such time and in such form as the committee shall
determine. The committee may reduce the amount of any performance grant in its discretion if it believes a reduction is
necessary based on the recipient’s performance, comparisons with compensation received by similarly-situated recipients
within the industry, the Company’s financial results, or any other factors deemed relevant.
Other Share-Based Awards
Other share-based awards may consist of any other right payable in, valued by, or otherwise related to common stock.
The awards shall vest in one or more increments during a service period, which shall not be less than three years; provided,
however, that this limitation shall not apply to awards granted to non-employee directors.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the amount of our common stock beneficially owned as of January 31, 2012 prior to the
offering and after giving effect to the Reorganization and this offering by (i) each person who is known by us to own
beneficially more than 5% of our common stock, (ii) each member of the board of directors, (iii) each of the named
executive officers, and (iv) all members of the board of directors and the executive officers, as a group. A person is a
“beneficial owner” of a security if that person has or shares voting or investment power over the security or if he or she has
the right to acquire beneficial ownership within 60 days. Unless otherwise noted, these persons, to our knowledge, have sole
voting and investment power over the shares listed. Percentage computations are based on 19,095,763 shares of our common
stock outstanding as of January 31, 2012, after giving effect to the Reorganization. The following table includes equity
awards granted to our executive officers on a discretionary basis. Except as otherwise noted, the principal address for the
stockholders listed below is c/o Armstrong Energy, Inc., 7733 Forsyth Boulevard, Suite 1625, St. Louis, Missouri 63105.
Shares Beneficially Shares Beneficially Owned
Nam
e Owned Prior to this Offering After this Offering(1)
Number Percent Number Percent
J. Hord Armstrong, III 129,701 * 129,701 *
Martin D. Wilson 114,772 * 114,772 *
Kenneth E. Allen — * — *
David R. Cobb, P.E. — * — *
J. Richard Gist 18,500 * 18,500 *
Anson M. Beard, Jr. — — — —
James C. Crain — — — —
Richard F. Ford — — — —
Bryan H. Lawrence(2) — — — —
Greg A. Walker — — — —
All Directors and Executive Officers as a
group (11 persons) 262,973 1.38 % 262,973 %
Yorktown VII Associates LLC(2)(3) 11,562,500 60.55 % 11,562,500 %
Yorktown VIII Associates LLC(2)(4) 6,012,500 31.49 % 6,012,500 %
* Less than 1%.
(1) Assumes that the underwriters do not exercise their option to purchase additional shares of our common stock.
(2) The address of this beneficial owner is 410 Park Avenue, 19th Floor, New York, New York 10022.
(3) These shares are held of record by Yorktown Energy Partners VII, L.P. Yorktown VII Company LP is the sole general
partner of Yorktown Energy Partners VII, L.P. Yorktown VII Associates LLC is the sole general partner of Yorktown
VII Company LP. As a result, Yorktown VII Associates LLC may be deemed to have the power to vote or direct the
vote or to dispose or direct the disposition of the shares owned by Yorktown Energy Partners VII, L.P. Yorktown VII
Company LP and Yorktown VII Associates LLC disclaim beneficial ownership of the securities owned by Yorktown
Energy Partners VII, L.P. in excess of their pecuniary interests therein.
(4) These shares are held of record by Yorktown Energy Partners VIII, L.P. Yorktown VIII Company LP is the sole
general partner of Yorktown Energy Partners VIII, L.P. Yorktown VIII Associates LLC is the sole general partner of
Yorktown VIII Company LP. As a result, Yorktown VIII Associates LLC may be deemed to have the power to vote or
direct the vote or to dispose or direct the disposition of the shares owned by Yorktown Energy Partners VIII, L.P.
Yorktown VIII Company LP and Yorktown VIII Associates LLC disclaim beneficial ownership of the securities
owned by Yorktown Energy Partners VIII, L.P. in excess of their pecuniary interests therein.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Administrative Services Agreement
Effective as of January 1, 2011, Armstrong Energy entered into an Administrative Services Agreement with Armstrong
Resource Partners (f/k/a Elk Creek L.P.) and its general partner, Elk Creek GP, LLC, pursuant to which Armstrong Energy
will provide Armstrong Resource Partners with general administrative and management services, including, but not limited
to, human resources, information technology, financial and accounting services and legal services. As consideration for the
use of Armstrong Energy’s employees and services, and for certain shared fixed costs, including, but not limited to, office
lease, telephone and office equipment leases, Armstrong Resource Partners will pay Armstrong Energy (i) a monthly fee
equal to $60,000 per month, and (ii) an aggregate annual fee equal to $279,996 per year, until December 31, 2011. The
monthly fee is subject to adjustment annually in accordance with the terms of the Administrative Services Agreement.
Armstrong Resource Partners shall also be liable for all taxes that are applicable to the services Armstrong Energy provides
on its behalf.
Sale of Coal Reserves
Armstrong Energy is majority-owned by Yorktown. Effective February 9, 2011, Armstrong Energy and several of its
affiliates participated in a transaction with Armstrong Resource Partners, an entity also majority-owned by Yorktown, and
several of its affiliates. In 2009 and 2010, Armstrong Energy borrowed an aggregate principal amount of $44.1 million from
Armstrong Resource Partners. The borrowings were evidenced by promissory notes in favor of Armstrong Resource Partners
in the principal amounts of $11.0 million on November 30, 2009, $9.5 million on March 31, 2010, $12.6 million on May 31,
2010 and $11.0 million on November 30, 2010, respectively. The promissory notes had a fixed interest rate of 3%. In
addition, contingent interest equal to 7% of revenue would be accrued to the extent it exceeds the fixed interest amount. No
payments of principal or interest were due until the earliest of May 31, 2014, or the 91st day after the secured promissory
notes had been paid in full. In consideration for Armstrong Resource Partners making these loans, Armstrong Energy
granted it a series of options to acquire interests in the majority of coal reserves then held by us in Muhlenberg and Ohio
Counties. On February 9, 2011, Armstrong Resources Partners exercised its options, paid Armstrong Energy an additional
$5.0 million in cash and offset $12.0 million in accrued advance royalty payments owed by Armstrong Energy to Ceralvo
Resources, LLC, and thereby acquired a 39.45% undivided interest as a joint tenant in common with Armstrong Energy’s
subsidiaries in the aforementioned coal reserves. The aggregate amount paid by Armstrong Resource Partners to acquire its
interest was the equivalent of approximately $69.5 million. See “Description of Indebtedness.”
Credit and Collateral Support Fee, Indemnification and Right of First Refusal Agreement
In addition, effective February 9, 2011, Armstrong Energy and several of its affiliates entered into a credit and collateral
support fee, indemnification and right of first refusal agreement with Armstrong Resource Partners, an entity also
majority-owned by Yorktown, and several of its affiliates, pursuant to which Armstrong Resource Partners joined Armstrong
Energy as a co-borrower under Armstrong Energy’s Senior Secured Term Loan, and its affiliates pledged their real estate as
collateral for and became guarantors on the Senior Secured Revolving Credit Facility and the Senior Secured Term Loan. In
exchange, Armstrong Energy agreed to pay Armstrong Resource Partners a credit support fee in an amount equal to 1% per
annum of the principal amount outstanding under the Senior Secured Credit Facility, which principal amount may be as high
as $150 million. The principal amount outstanding under the Senior Secured Credit Facility as of September 30, 2011 was
$134.6 million. Under the agreement, Armstrong Energy also granted Armstrong Resources Partners a right of first refusal to
purchase its remaining interests in the coal reserves in which they acquired a 39.45% undivided interest through the exercise
of options described above.
Lease Agreements
On February 9, 2011, Armstrong Energy’s subsidiary, Armstrong Coal, entered into a number of coal mining lease
agreements with Western Mineral (a subsidiary of Armstrong Resource Partners) and two of
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Armstrong Energy’s wholly-owned subsidiaries. Pursuant to these agreements, Western Mineral granted Armstrong Coal a
lease to its 39.45% undivided interest in certain mining properties and a license to mine coal on those properties that it had
acquired in the above-described option transaction. The initial term of the agreement is ten years, and it renews for
subsequent one-year terms until all mineable and merchantable coal has been mined from the properties, unless either party
elects not to renew or it is terminated upon proper notice. Armstrong Coal must pay the lessors a production royalty equal to
7% of the sales price of the coal it mines from the properties.
On February 9, 2011, Armstrong Coal also entered into a lease and sublease agreement with Ceralvo Holdings, LLC, a
subsidiary of Armstrong Resource Partners (“Ceralvo Holdings”). Pursuant to this agreement, Ceralvo Holdings granted
Armstrong Coal leases and subleases, as applicable, to the Elk Creek Reserves and a license to mine coal on those properties.
The initial term of the agreement is ten years, and it renews for one-year terms until all mineable and merchantable coal has
been mined from the properties, unless either party elects not to renew or it is terminated upon proper notice. Armstrong
Coal must pay the lessor a production royalty equal to 7% of the sales price of the coal it mines from the properties.
Armstrong Energy has paid $12 million of advance royalties under the lease, which are recoupable against production
royalties. See “Description of Indebtedness.”
Royalty Deferment and Option Agreement
Effective February 9, 2011, Armstrong Coal, Western Diamond and Western Land, each of which is a wholly owned
subsidiary of Armstrong Energy, entered into a Royalty Deferment and Option Agreement with Western Mineral and
Ceralvo Holdings, both wholly owned subsidiaries of Armstrong Resource Partners. Pursuant to this agreement, Western
Mineral and Ceralvo Holdings agreed to grant to Armstrong Coal and its affiliates the option to defer payment of their pro
rata share of the 7% production royalty described under “Business — Our Mining Operations” above. In consideration for
the granting of the option to defer these payments, Armstrong Coal and its affiliates granted to Western Mineral the option to
acquire an additional undivided interest in certain of the coal reserves held by Armstrong Energy, Inc. in Muhlenberg and
Ohio Counties by engaging in a financing arrangement, under which Armstrong Coal and its affiliates would satisfy payment
of any deferred fees by selling part of their interest in the aforementioned coal reserves at fair market value for such reserves
determined at the time of the exercise of such options.
Investment in Ram Terminals, LLC
On May 26, 2011, Armstrong Energy made a capital contribution in Ram in the amount of $2.47 million. Upon
amendment of the Limited Liability Company Agreement of Ram (the “Operating Agreement”) on June 23, 2011,
Armstrong Energy’s membership interest in Ram constituted 8.4%. The remaining membership interest is owned by
Yorktown Energy Partners IX, L.P., a fund managed by Yorktown. Armstrong Energy is majority-owned by Yorktown.
Yorktown Energy Partner IX, L.P. will provide the funds for future capital expenditures related to the development of the
site. Armstrong Energy will be actively involved in the design and construction of the terminal and will provide accounting
and bookkeeping assistance to Ram. Certain of Armstrong Energy’s executive officers will serve as officers of Ram.
Pursuant to the Operating Agreement, Armstrong Energy will not be liable for the debts, liabilities and other obligations of
Ram.
Western Diamond and Western Land Coal Reserves Sale Agreement
On October 11, 2011, two of our subsidiaries, Western Diamond and Western Land (together, the “Sellers”), entered
into an agreement with Western Mineral, a subsidiary of Armstrong Resource Partners, pursuant to which the Sellers agreed
to sell an additional partial undivided interest in substantially all of the coal reserves and real property owned by the Sellers
previously subject to the options exercised by Armstrong Resource Partners on February 9, 2011 (see “— Sale of Coal
Reserves” and “— Concurrent Transactions with Armstrong Resource Partners”), other than any of Sellers’ real property and
related mining rights associated with the Parkway mine.
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Agreement to Enter into Voting and Stockholders’ Agreement
On October 1, 2011, Armstrong Energy, Inc. entered into an agreement to enter into a voting and stockholders’
agreement with all of its stockholders. Pursuant to the terms of this agreement, Armstrong Energy, Inc. and its stockholders
agreed to enter into a voting and stockholders’ agreement in the event this offering is not completed on or before February 1,
2012; provided, however, that the deadline may be extended to a date mutually agreed upon by Yorktown and Armstrong
Energy, Inc., which in no event shall be later than May 1, 2012.
Concurrent Transactions with Armstrong Resource Partners
Concurrent with this offering of common stock, Armstrong Resource Partners is offering common units pursuant to a
separate initial public offering (the “Concurrent ARP Offering”). Armstrong Energy indirectly holds a 0.4% equity interest
in Armstrong Resource Partners. See “Business — Our Organizational History.”
If the Concurrent ARP Offering is completed, we expect that the net proceeds received by Armstrong Resource
Partners, estimated to be $ million, assuming an offering price of $ per unit, the midpoint of the range set forth on the
cover of the prospectus related to the Concurrent ARP Offering, will be used to purchase an additional partial undivided
interest in substantially all of the coal reserves and real property owned by us previously subject to the options exercised by
Armstrong Resource Partners on February 9, 2011. If the Concurrent ARP Offering is completed, and the net proceeds are
applied in this manner, Armstrong Resource Partners, through its subsidiary Western Mineral, will have a % undivided
interest as a joint tenant in common with us in the majority of our coal reserves, excluding the Union/Webster Counties
reserves. Such interest shall be equal to a fraction, the numerator of which shall be equal to the amount of net proceeds
received from the Concurrent ARP Offering described above, and the denominator of which is a dollar amount which we
and Armstrong Reserve Partners agree represents the aggregate fair market value of the affected reserves. The closing of the
sale, which is conditioned on the closing of the Concurrent ARP Offering, is expected to occur on or before 90 days after
Armstrong Resource Partners receives the net proceeds of the Concurrent ARP Offering. See “— Western Diamond and
Western Land Coal Reserves Sale Agreement.”
The amount received by us in such purchase is expected to be utilized first to repay the remaining outstanding balance
of the Senior Secured Revolving Credit Facility (approximately $ million) and related accrued interest (approximately
$ million). Any cash we receive in excess of those amounts will be used by us for working capital purposes. In
connection with such purchases, we expect to enter into a financing arrangement with Armstrong Resource Partners to mine
the mineral reserves transferred, resulting in the recognition of an obligation of $ million. See “Certain Relationships and
Related Party Transactions — Lease Agreements.”
While we expect that Armstrong Resource Partners will consummate the Concurrent ARP Offering concurrently with
this offering of common stock, the completion of this offering is not subject to the completion of the Concurrent ARP
Offering and the completion of the Concurrent ARP Offering is not subject to the completion of this offering.
This description and other information in this prospectus regarding the Concurrent ARP Offering is included in this
prospectus solely for informational purposes. Nothing in this prospectus should be construed as an offer to sell, nor the
solicitation of an offer to buy, any common units of Armstrong Resource Partners.
Madisonville Office Lease
Beginning in 2008, pursuant to an oral agreement, Armstrong Coal leased from David R. Cobb, one of our executive
officers, and Rebecca K. Cobb, Mr. Cobb’s spouse, certain property to be used by Armstrong Coal as its office space in
Madisonville, Kentucky, equipment, furniture, supplies and the use of Mr. Cobb’s employees. Armstrong Coal agreed to pay
$4,700 per month in exchange for the leased property, equipment, furniture, supplies and use of employees. On August 1,
2009, Armstrong Coal entered into a written lease agreement with Mr. and Mrs. Cobb regarding the subject matter of the
oral agreement. The terms of the
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written lease were the same as the terms of the prior oral agreement. The lease term ends on July 31, 2012, but automatically
renews for additional 12-month periods unless either party gives written notice of termination no later than 30 days prior to
the end of the term or a renewal term.
Loans to Executive Officers and Loan Repayment
During the fiscal years ended December 31, 2006 through 2008, our Predecessor entered into certain transactions with
J. Hord Armstrong, III, its Chairman and Chief Executive Officer, and Martin D. Wilson, its President and member of its
board of managers, pursuant to which our Predecessor loaned Messrs. Armstrong and Wilson money in connection with their
purchase of shares of common stock of our Predecessor. In a series of separate transactions, each of Messrs. Armstrong and
Wilson executed promissory notes in favor of our Predecessor in connection with his purchase of shares of common stock,
as follows:
Number of Shares Amount of Loan from
Date Purchased(1) Predecessor
J. Hord Armstrong, III September 28, 2006 23,125 $ 250,000
December 6, 2006 23,125 $ 250,000
March 7, 2007 46,250 $ 500,000
June 6, 2008 11,563 $ 125,000
Martin D. Wilson September 28, 2006 23,125 $ 250,000
December 6, 2006 23,125 $ 250,000
March 7, 2007 46,250 $ 500,000
(1) In connection with the Reorganization, each of the issued and outstanding limited liability company units was
converted to 9.25 shares of common stock. In accordance with SEC Staff Accounting Bulletin Topic 4.6, all share
information has been retroactively adjusted to reflect the common stock conversion.
Each of the promissory notes was secured by the shares purchased in each of the transactions, including the shares
purchased with cash and those financed by the promissory notes. In addition, each of the promissory notes provided that
interest on the unpaid principal balance accrued at 6.00% per annum. Interest was not required to be paid until repayment of
the loan.
The largest aggregate amount of principal outstanding and the amount of principal and interest paid on these loans for
the periods presented below are as follows:
Fiscal Year Ended December 31,
(in thousands) 2008 2009 2010
J. Hord Armstrong, III
Largest Aggregate Amount of Principal Outstanding $ 1,125 $ 1,125 $ 1,125
Amount of Principal Paid — — —
Amount of Interest Paid — — —
Martin D. Wilson
Largest Aggregate Amount of Principal Outstanding $ 1,000 $ 1,000 $ 1,000
Amount of Principal Paid — — —
Amount of Interest Paid — — —
Effective September 30, 2011, each of Messrs. Armstrong and Wilson entered into a Unit Repurchase Agreement with
our Predecessor, pursuant to which our Predecessor repurchased a number of membership units from Messrs. Armstrong and
Wilson in full satisfaction of the loans described above. Pursuant to Mr. Armstrong’s Unit Repurchase Agreement, our
Predecessor repurchased 78,424 shares of Mr. Armstrong’s common stock in satisfaction of his total outstanding debt as of
September 30, 2011 of approximately $1.43 million. Pursuant to Mr. Wilson’s Unit Repurchase Agreement, our Predecessor
repurchased 70,228 shares of Mr. Wilson’s common stock in satisfaction of his total outstanding debt as of September 30,
2011 of approximately $1.28 million. Effective September 30, 2011, these loans were repaid in full.
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Policies and Procedures for Related Party Transactions
The conflicts committee must review and approve all transactions between Armstrong Energy and any related person
that are required to be disclosed pursuant to Item 404 of Regulation S-K. “Related person” and “transaction” shall have the
meanings given to such terms in Item 404 of Regulation S-K, as amended from time to time. In determining whether to
approve or ratify a particular transaction, the conflicts committee will take into account any factors it deems relevant.
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DESCRIPTION OF INDEBTEDNESS
In February 2011, we repaid certain promissory notes that were delivered in connection with the acquisition of our coal
reserves (see “Business — Our Operational History”) and entered into the Senior Secured Credit Facility, which is
comprised of the $100.0 million Senior Secured Term Loan and the $50.0 million Senior Secured Revolving Credit Facility.
Of the proceeds from borrowings under the Senior Secured Credit Facility totaling $118.5 million, $115.7 million was used
to repay the outstanding promissory notes, which were included in long-term debt obligations as of December 31, 2010. As a
result of the repayment of the existing debt obligations, we recognized a gain of approximately $7.0 million in the nine
months ended September 30, 2011. The Senior Secured Term Loan is a five-year term loan that requires principal payments
in the amount of $5.0 million each on the first day of each quarter commencing on January 1, 2012 through January 1, 2016,
with a final balloon payment due upon maturity on February 9, 2016. Interest payments are also payable quarterly in arrears
on the first day of each quarter. The interest rate fluctuates based on our leverage ratio and the applicable interest option
elected. The interest rate as of September 30, 2011 was 5.75%. The Senior Secured Revolving Credit Facility provides for
quarterly interest payments in arrears that fluctuate on the same terms as our term loan. The Senior Secured Revolving
Credit Facility also provides for a commitment fee based on the unused portion of the facility at certain times. As of
September 30, 2011, we had $34.6 million outstanding, with $15.4 million available for borrowing under our Senior Secured
Revolving Credit Facility. The obligations under the credit agreement are secured by a first lien on substantially all of our
assets, including but not limited to certain of our mines, coal reserves and related fixtures. The credit agreement contains
certain customary covenants as well as certain limitations on, among other things, additional debt, liens, investments,
acquisitions and capital expenditures, future dividends, and asset sales. We incurred approximately $3.3 million in fees
related to the new credit agreement which will be amortized over the term of the Senior Secured Term Loan. Armstrong
Energy entered into an interest rate swap agreement, effective January 1, 2012, to hedge our exposure to rising interest rates.
Pursuant to this agreement, Armstrong Energy is required to make payments at a fixed interest rate of 2.89% to the
counterparty on an initial notional amount of $47.5 million (amortizing thereafter) in exchange for receiving variable
payments based on the greater of 1.0% or the three-month LIBOR rate, which was 0.37433% as of September 30, 2011. This
agreement has quarterly settlement dates and matures on February 9, 2016. Armstrong Resource Partners is a co-borrower
under the Senior Secured Term Loan and guarantor under the Senior Secured Credit Revolving Facility and the Senior
Secured Term Loan, and substantially all of its assets are pledged to secure borrowings under the Senior Secured Credit
Facility.
On July 1, 2011, we entered into the First Amendment to our Senior Secured Credit Facility which, among other things,
amended the provisions of the loan documents so as to permit an offering of our securities and the completion of the
Reorganization. The amendment also made certain changes to our financial covenants, including our maximum leverage
ratio. In addition, our interest rate increased to 5.75%, which can be reduced in future periods to the extent our results
improve. We incurred approximately $1.1 million of fees related to this amendment, which will be amortized over the
remaining term of the Senior Secured Term Loan. We entered into the Second Amendment to our Senior Secured Credit
Facility on September 29, 2011, pursuant to which restrictions to the consummation of this offering were eliminated.
Additionally, on December 29, 2011, we entered into the Third Amendment to our Senior Secured Credit Facility which,
among other things, amended the provisions of the loan documents so as to permit the acquisition of additional coal reserves.
On February 8, 2012, we entered into the Fourth Amendment to our Senior Secured Credit Facility which, among other
things, amended the provisions of the loan documents so as to modify the consolidated EBITDA threshold, eliminate the
minimum fixed charge coverage ratio, add a minimum interest coverage ratio beginning in 2013 and make certain changes to
our financial covenants, including our maximum leverage ratio and our minimum consolidated EBITDA. In connection with
entry into the Third and Fourth Amendments to the Senior Secured Credit Facility, we paid fees in the aggregate amount of
$1.125 million.
In 2009 and 2010, Armstrong Energy borrowed an aggregate principal amount of $44.1 million from Armstrong
Resource Partners. The borrowings were evidenced by promissory notes in favor of Armstrong Resource Partners in the
principal amounts of $11.0 million on November 30, 2009, $9.5 million on
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March 31, 2010, $12.6 million on May 31, 2010 and $11.0 million on November 30, 2010, respectively. The promissory
notes had a fixed interest rate of 3%. In addition, contingent interest equal to 7% of revenue would be accrued to the extent it
exceeds the fixed interest amount. No payments of principal or interest were due until the earliest of May 31, 2014, or the
91st day after the secured promissory notes had been paid in full. The proceeds of those loans were used to satisfy various
installment payments required by the promissory notes referred to above. In consideration for Armstrong Resource Partners
making the loans Armstrong Energy granted to Armstrong Resource Partners a series of options to acquire an undivided
interest in the coal reserves acquired by us in the above transactions, excluding the Webster/Union Counties reserves. On
February 9, 2011, Armstrong Resource Partners exercised its option to acquire an interest in those reserves in satisfaction of
the loans it had made to Armstrong Energy. In connection with that exercise, Armstrong Resource Partners paid an
additional $5.0 million in cash and agreed to offset $12.0 million in accrued advance royalty payments owed by Armstrong
Energy to Armstrong Resource Partners, relating to the lease of the Elk Creek Reserves, to acquire an additional partial
undivided interest in certain of the coal reserves held by Armstrong Energy in Muhlenberg and Ohio Counties at fair market
value. As a result, Armstrong Resource Partners obtained a 39.45% undivided interest as a joint tenant in common with
Armstrong Energy’s subsidiaries in certain of our coal reserves. Simultaneous with this transaction, Armstrong Energy
entered into a lease agreement with a subsidiary of Armstrong Resource Partners to mine the acquired mineral reserves. The
lease has a term of 10 years that can be extended for additional periods until all the respective merchantable and mineable
coal is removed. The lease transaction has been accounted for as a financing arrangement due to Armstrong Energy’s
continuing involvement in the land and mineral reserves transferred. This has resulted in the recognition of an initial
obligation of $69.5 million by Armstrong Energy. As the financial results of Armstrong Resource Partners have historically
been consolidated, this transaction has not impacted our results of operations or financial condition through September 30,
2011. As noted above, the Deconsolidation was effective October 1, 2011. Subsequently, the long-term obligation will be
reflected on our balance sheet and will continue to be amortized through 2031 at an annual rate of 7% of the estimated gross
revenue generated from the sale of the coal originating from the leased mineral reserves. As of September 30, 2011, the
outstanding principal balance of the long-term obligations to Armstrong Resource Partners was $70.3 million.
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DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock is based upon our amended and restated certificate of incorporation, our
bylaws, the certificate of designations for the shares of Series A convertible preferred stock and applicable provisions of law,
in each case as currently in effect. This discussion does not purport to be complete and is qualified in its entirety by reference
to our amended and restated articles of incorporation, our bylaws and the certificate of designation for the shares of Series A
preferred stock, copies of which are filed with the SEC as exhibits to the registration statement of which this prospectus is a
part.
Authorized Capital Stock
Upon the closing of this offering, our authorized capital stock will consist of (i) 70,000,000 shares of common stock,
par value $0.01 per share, of which shares will be issued and outstanding, and (ii) 1,000,000 shares of preferred stock,
$0.01 par value per share, of which no shares will be issued and outstanding. As of January 31, 2012, we had 19,095,763
outstanding shares of common stock, held of record by 13 stockholders, and 300,000 outstanding shares of Series A
preferred stock, held of record by one stockholder.
Common Stock
Except as provided by law or in a preferred stock designation, holders of common stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the stockholders, will have the exclusive right to vote for the
election of directors and do not have cumulative voting rights. Subject to preferences that may be applicable to any
outstanding shares or series of preferred stock, holders of common stock are entitled to receive ratably such dividends
(payable in cash, stock or otherwise), if any, as may be declared from time to time by our board of directors out of funds
legally available for dividend payments. All outstanding shares of common stock are fully paid and non-assessable, and the
shares of common stock to be issued upon the closing of this offering will be fully paid and non-assessable. The holders of
common stock have no preferences or rights of conversion, exchange, pre-emption or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. In the event of any liquidation, dissolution or
winding-up of our affairs, holders of common stock will be entitled to share ratably in our assets that are remaining after
payment or provision for payment of all of our debts and obligations and after liquidation payments to holders of outstanding
shares of preferred stock, if any.
Preferred Stock
Our amended and restated certification of incorporation authorizes our board of directors, subject to any limitations
prescribed by law, without further stockholder approval, to establish and to issue from time to time one or more classes or
series of preferred stock. Each class or series of preferred stock will cover the number of shares and will have the powers,
preferences, rights, qualifications, limitations and restrictions determined by the board of directors, which may include,
among others, dividend rights, liquidation preferences, voting rights, conversion rights, preemptive rights and redemption
rights. Except as provided by law or in a preferred stock designation, the holders of preferred stock will not be entitled to
vote at or receive notice of any meeting of stockholders.
Description of Series A Convertible Preferred Stock
The certificate of designations for the Series A convertible preferred stock authorizes 300,000 shares of Series A
convertible preferred stock, all of which are outstanding as of February 6, 2012. There are no sinking fund provisions
applicable to our Series A convertible preferred stock. All outstanding shares of Series A convertible preferred stock are
fully paid and non-assessable.
• Ranking. As described more fully below, the Series A convertible preferred stock ranks senior with respect to
liquidation preference to any “Junior Securities,” which means the common stock, any preferred stock other than the
Series A convertible preferred stock, and any other class or series of stock that we may issue.
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• Liquidation Preference. In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the
Company, a holder of Series A convertible preferred stock will be entitled to receive, before any distribution or
payment is made to any holders of Junior Securities, an amount in cash equal to $100 per share of Series A
convertible preferred stock held by such holder.
• Dividends. Holders of the Series A convertible preferred stock are not entitled to the payment of any dividends by
the Company.
• Conversion.
• Automatic Conversion. Upon the closing of this offering, all of the outstanding shares of Series A convertible
preferred stock will automatically and without further action required by any person convert into that number
of shares of common stock equal of the quotient obtained by dividing (i) $100 times the number of shares of
Series A convertible preferred stock outstanding, by (ii) (a) the initial public offering price per share, less any
underwriting discount per share, of common stock sold in this offering, as reflected in this prospectus on or
immediately prior to the closing of this offering (the “IPO Price”), minus (b) a Discount Amount. The Discount
Amount shall be determined by multiplying the IPO Price by a percentage equal to the difference between
(x) 100% and (y) the fraction, expressed as a percentage, the numerator of which is $300 million and the
denominator of which is the IPO Valuation Amount; provided, however, that if the IPO Valuation amount is
$300 million or less, the discount amount shall be zero. For this purpose, the IPO Valuation Amount means an
amount determined by multiplying the IPO Price by the total number of shares of common stock issued and
outstanding as of the date of the execution and delivery of the underwriting agreement relating to this offering
and assuming the conversion in full of the Series A convertible preferred stock at the IPO Price minus the
Discount Amount.
• Conversion at Option of Holder. At any time commencing January 12, 2013 or earlier in connection with
certain change in control events and provided that this offering has not closed, any holder of Series A
convertible preferred stock may convert all or any portion of the shares held into a number of shares of
common stock equal to the quotient obtained by dividing (a) $100 times the number of shares of Series A
convertible preferred stock to be converted, by (b) the conversion price (which shall initially be $100 per
share), as may be adjusted for certain specified events.
• Voting. The holders of Series A convertible preferred stock shall vote together as a single class with the holders of
common stock, with each share of Series A convertible preferred stock having one vote per share, on all matters
submitted to a vote of the holders of common stock, except that when the Series A convertible preferred stock and
the common stock shall vote together as a single class, then each holder of shares of Series A convertible preferred
stock shall be entitled to the number of votes with respect to such holder’s Series A convertible preferred stock
equal to the number of whole shares into which such shares of Series A convertible preferred stock would have been
converted under the provisions of the certificate of designations at the conversion price then in effect on the record
date for determining stockholders entitled to vote on such matters or, if no record date is specified, as of the date of
such vote. In addition, so long as any Series A convertible preferred stock remains outstanding, the holders of a
majority of the Series A convertible preferred stock must approve, voting separately as a class:
• Any amendment to our certificate of incorporation, including any certificate of designations or bylaws that
would affect adversely the rights, preferences, privileges or voting rights of holders of the Series A convertible
preferred stock or the terms of the Series A convertible preferred stock;
• Any proposed issuance of capital stock that ranks pari passu or senior to the Series A convertible preferred
stock, or any proposed issuance of any securities other than Series A convertible preferred stock which are
required to be redeemed by the Company at any time that any shares of Series A convertible preferred stock are
outstanding; or
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• Any increase in the number of authorized shares of capital stock of the Company, except as specifically
required in the certificate of designations.
Anti-Takeover Effects of Certain Provisions of Our Amended and Restated Certificate of Incorporation, Bylaws and
Delaware Law
These provisions, summarized below, are expected to discourage coercive takeover practices and inadequate takeover
bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with us. We
believe that the benefits of increased protection and our potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging these proposals because, among
other things, negotiation of these proposals could result in an improvement of their terms.
Amended and Restated Certificate of Incorporation and Bylaws
• Classified Board of Directors. Our amended and restated certificate of incorporation provides that our board of
directors be divided into three classes. Each class of directors serves a three-year term.
• Removal of Directors; Vacancies. Our bylaws provide that a director may be removed from office by the
stockholders only for cause and only in the manner provided in the amended and restated certificate of
incorporation. A vacancy on the board of directors may be filled only by a majority of the directors then in office.
• Calling of Special Meetings of Stockholders. The bylaws provide that special meetings of the stockholders may be
called only by the chairman of the board, our chief executive officer, president or secretary after receipt of the
request of a majority of the total number of directors that we would have if there were no vacancies.
• Advance Notice Requirements for Stockholder Proposals and Director Nominations . Our amended and restated
certificate of incorporation and bylaws establish an advance notice procedure for stockholder proposals to be
brought before an annual meeting of our stockholders, including proposed nominations of persons for election to the
board of directors. Stockholders at an annual meeting will only be able to consider proposals or nominations
properly brought before the annual meeting. To be properly brought before an annual meeting, business must be
(i) specified in the notice of meeting, (ii) otherwise properly brought before the annual meeting by the presiding
officer or by or at the director of a majority of the board of directors, or (iii) otherwise properly requested to be
brought by a stockholder who was a stockholder of record at the time of the giving of notice for the annual meeting,
who is entitled to vote at the meeting, and who has given our secretary timely written notice in proper form, of the
stockholder’s intention to bring that business before the meeting.
• Amendment of Bylaws. Our bylaws can only be amended by the board of directors or by the affirmative vote of the
holders of at least 80% of the outstanding common stock, voting together as a single class.
Opt-Out of Section 203 of the Delaware General Corporation Law (“DGCL”). We have expressly elected not to be
governed by the “business combination” provisions of Section 203 of the DGCL. Section 203 prohibits a person who
acquires more than 15% but less than 85% of all classes of our outstanding voting stock without the approval of our board of
directors from thereafter merging or combining with us for a period of three years, unless such merger or combination is
approved by both a two-thirds vote of the shares not owned by such person and our board of directors. These provisions
would apply even if the proposed merger or acquisition could be considered beneficial by some stockholders.
Limitation of Liability and Indemnification Matters
Our amended and restated certificate of incorporation limits the liability of our directors for monetary damages for
breach of their fiduciary duty as directors, except for liability that cannot be eliminated under the
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DGCL. Delaware law provides that directors of a company will not be personally liable for monetary damages for breach of
their fiduciary duty as directors, except for liabilities:
• for any breach of their duty of loyalty to us or our stockholders;
• for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
• for unlawful payment of dividend or unlawful stock repurchase or redemption, as provided under Section 174 of the
DGCL; or
• for any transaction from which the director derived an improper personal benefit.
Any amendment, repeal or modification of these provisions will be prospective only and would not affect any limitation
on liability of a director for acts or omissions that occurred prior to any such amendment, repeal or modification.
Our amended and restated certificate of incorporation and bylaws also provide that we will indemnify our directors and
officers to the fullest extent permitted by Delaware law. Our amended and restated certificate of incorporation and bylaws
also permit us to purchase insurance on behalf of any director, officer, employee or agent of the Company or another
corporation, partnership, joint venture, trust or other enterprise against any liability arising out of that person’s actions as our
officer, director, employee or agent, regardless of whether Delaware law would permit indemnification. We intend to enter
into indemnification agreements with each of our current and future directors and officers. These agreements will require us
to indemnify these individuals to the fullest extent permitted under Delaware law against liability that may arise by reason of
their service to us, and to advance expenses incurred as a result of any proceeding against them as to which they could be
indemnified. We believe that the limitation of liability provision in our amended and restated certification of incorporation
and the indemnification agreements will facilitate our ability to continue to attract and retain qualified individuals to serve as
directors and officers.
Renunciation of Interest and Expectancy in Certain Corporate Opportunities
Our certificate of incorporation provides that we will renounce any interest or expectancy in, or in being offered an
opportunity to participate in, any business opportunity that may be from time to time presented to (i) members of our board
of directors who are not our employees, (ii) their respective employers and (iii) affiliates of the foregoing (other than us and
our subsidiaries), other than opportunities expressly presented to such directors solely in their capacity as our director. This
provision will apply even if the opportunity is one that we might reasonably have pursued or had the ability or desire to
pursue if granted the opportunity to do so. Furthermore, no such person will be liable to us for breach of any fiduciary duty,
as a director or otherwise, by reason of the fact that such person pursues or acquires any such business opportunity, directs
any such business opportunity to another person or fails to present any such business opportunity, or information regarding
any such business opportunity. None of such persons or entities will have any duty to refrain from engaging directly or
indirectly in the same or similar business activities or lines of business as us or any of our subsidiaries.
For example, affiliates of our non-employee directors may become aware, from time to time, of certain business
opportunities, such as acquisition opportunities, and may direct such opportunities to other businesses in which they have
invested or advise, in which case we may not become aware of or otherwise have the ability to pursue such opportunities.
Further, such businesses may choose to compete with us for these opportunities. As a result, our renouncing our interest and
expectancy in any business opportunity that may be, from time to time, presented to such persons or entities could adversely
impact our business or prospects if attractive business opportunities are procured by such persons or entities for their own
benefit rather than for ours.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock, and we cannot predict what effect, if any,
market sales of shares of common stock or the availability of shares of common stock for sale will have on the market price
of our common stock. Future sales of substantial amounts of our common stock in the public market, or the perception that
substantial sales may occur, could materially and adversely affect the prevailing market price of our common stock and
could impair our future ability to raise capital through the sale of our equity at a time and price we deem appropriate.
Upon completion of this offering, we will have shares of common stock outstanding. Of these shares of common
stock, the shares of common stock being sold in this offering will be freely tradable without restriction under the
Securities Act, except for any such shares which may be held or acquired by an “affiliate” of ours, as that term is defined in
Rule 144 promulgated under the Securities Act, which shares will be subject to the volume limitations and other restrictions
of Rule 144 described below. The remaining shares of common stock held by our existing stockholders upon completion
of this offering will be “restricted securities,” as that phrase is defined in Rule 144, and may be resold only after registration
under the Securities Act or pursuant to an exemption from such registration, including, among others, the exemptions
provided by Rule 144 of the Securities Act, which is summarized below. Taking into account the lock-up agreements
described below and the provisions of Rule 144, additional shares of our common stock will be available for sale in the
public market as follows:
• shares of restricted securities will be available for sale at various times after the date of this prospectus
pursuant to Rule 144; and
• shares subject to the lock-up agreements will be eligible for sale at various times beginning 180 days after the
date of this prospectus pursuant to Rule 144.
Rule 144
The availability of Rule 144 will vary depending on whether shares of our common stock are restricted and whether
they are held by an affiliate or a non-affiliate. For purposes of Rule 144, a non-affiliate is any person or entity that is not our
affiliate at the time of sale and has not been our affiliate during the preceding three months.
In general, under Rule 144, once we have been a reporting company subject to the reporting requirements of Section 13
or Section 15(d) of the Exchange Act for at least 90 days, an affiliate who has beneficially owned shares of our restricted
common stock for at least six months would be entitled to sell within any three-month period any number of such shares that
does not exceed the greater of:
• 1% of the number of shares of our common stock then outstanding, which will equal approximately shares
immediately after consummation of this offering; or
• the average weekly trading volume of our common stock on the open market during the four calendar weeks
preceding the filing of a notice on Form 144 with respect to that sale.
In addition, any sales by our affiliates under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about us. Our affiliates must comply with all the provisions
of Rule 144 (other than the six-month holding period requirement) in order to sell shares of our common stock that are not
restricted securities, such as shares acquired by our affiliates either in this offering or through purchases in the open market
following this offering. An “affiliate” is a person that directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, an issuer.
Similarly, once we have been a reporting company for at least 90 days, a non-affiliate who has beneficially owned
shares of our restricted common stock for at least six months would be entitled to sell those shares without complying with
the volume limitation, manner of sale and notice provisions of Rule 144, provided that certain public information is
available. Furthermore, a non-affiliate who has beneficially owned
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our shares of restricted common stock for at least one year will not be subject to any restrictions under Rule 144 with respect
to such shares, regardless of how long we have been a reporting company.
We are unable to estimate the number of shares that will be sold under Rule 144 since this will depend on the market
price for our common stock, the personal circumstances of the stockholder and other factors.
Lock-Up Agreements
We and our officers, directors and holders of all of our common stock have agreed with the underwriters not to offer,
sell, dispose of or hedge any shares of our common stock or securities convertible into or exchangeable for shares of our
common stock, subject to specified limited exceptions and extensions described elsewhere in this prospectus, during the
period continuing through the date that is 180 days (subject to extension) after the date of this prospectus, except with the
prior written consent of , on behalf of the underwriters. See “Underwriting.” may release any of the securities
subject to these lock-up agreements at any time without notice.
Immediately following the consummation of this offering, stockholders subject to lock-up agreements will
hold shares of our common stock, representing about % of our outstanding shares of common stock after giving
effect to this offering.
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MATERIAL UNITED STATES FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO NON-U.S.
HOLDERS
The following is a summary of the material United States federal income and estate tax consequences to a
non-U.S. holder (as defined below) of the purchase, ownership and disposition of shares of our common stock as of the date
hereof. Except where noted, this summary deals only with shares of our common stock that are held as a capital asset
(generally property held for investment).
A “non-U.S. holder” means a beneficial owner of common stock (other than a partnership or entity treated as a
partnership for United States federal income tax purposes) that is not for United States federal income tax purposes any of
the following:
• an individual citizen or resident of the United States, including an alien individual who is a lawful permanent
resident of the United States or who meets the “substantial presence” test under Section 7701(b) of the Code;
• a corporation (or any other entity treated as a corporation for United States federal income tax purposes) created or
organized in or under the laws of the United States, any state thereof or the District of Columbia;
• an estate the income of which is subject to United States federal income taxation regardless of its source; or
• a trust if it (1) is subject to the primary supervision of a court within the United States and one or more United States
persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under
applicable United States Treasury regulations to be treated as a United States person.
This summary is based upon provisions of the Code, and United States Treasury regulations, administrative rulings and
judicial decisions as of the date hereof. Those authorities may be changed, perhaps retroactively, so as to result in United
States federal income and estate tax consequences different from those summarized below. This summary does not address
all aspects of United States federal income and estate taxes and does not deal with foreign, state, local or other tax
considerations that may be relevant to non-U.S. holders in light of their personal circumstances. In addition, it does not
represent a detailed description of the United States federal income tax consequences applicable to you if you are an investor
subject to special treatment under the United States federal income tax laws such as (without limitation):
• United States expatriates;
• stockholders that hold our common stock as part of a straddle, appreciated financial position, synthetic security,
hedge, conversion transaction or other integrated investment or risk reduction transaction;
• stockholders who hold our common stock as a result of a constructive sale;
• stockholders who acquired our common stock through the exercise of employee stock options or otherwise as
compensation or through a tax-qualified retirement plan;
• stockholders that are partnerships or entities treated as partnerships for United States federal income tax purposes or
other pass-through entities or owners thereof;
• “controlled foreign corporations”;
• “passive foreign investment companies”;
• financial institutions;
• insurance companies;
• tax-exempt entities;
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• dealers in securities or foreign currencies; and
• traders in securities that mark-to-market.
Furthermore, this summary does not address any aspect of state, local or foreign tax laws or the alternative minimum
tax provisions of the Code.
If a partnership (including an entity that is classified as a partnership for United States federal income tax purposes)
holds shares of our common stock, the tax treatment of a partner will generally depend upon the status of the partner and the
activities of the partnership. If you are a partner of a partnership (including an entity that is classified as a partnership for
United States federal income tax purposes holding shares of our common stock, you should consult your tax advisors.
We have not sought any ruling from the IRS with respect to the statements made and the conclusions reached in the
following summary, and there can be no assurance that the IRS will agree with such statements and conclusions. If you are
considering the purchase of shares of our common stock, you should consult your own tax advisors concerning the
particular United States federal income and estate tax consequences to you of the ownership of shares of our common
stock, as well as the consequences to you arising under the laws of any other taxing jurisdiction.
Dividends
If we make distributions on our common stock, such distributions will constitute dividends for United States federal
income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under United
States federal income tax principles. Distributions in excess of earnings and profits will constitute a return of capital that is
applied against and reduces the non-U.S. holder’s adjusted tax basis in our common stock. Any remaining excess will be
treated as gain realized on the sale or other disposition of our common stock and will be treated as described under “Gain on
Disposition of Common Stock” below. Any dividends paid to a non-U.S. holder of shares of our common stock generally
will be subject to withholding of United States federal income tax at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty. In order to receive a reduced treaty rate, a non-U.S. holder must (a) provide us with IRS
Form W-8BEN (or applicable substitute or successor form) properly certifying, under penalty of perjury, eligibility for the
reduced rate, or (b) if shares of our common stock are held through certain foreign intermediaries, satisfy the relevant
certification requirements of applicable United States Treasury regulations. A non-U.S. holder of shares of our common
stock eligible for a reduced rate of United States withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for refund with the IRS.
Dividends paid to a non-U.S. holder that are effectively connected with the conduct of a trade or business by the
non-U.S. holder within the United States (and, if required by an applicable income tax treaty, are attributable to a United
States permanent establishment) generally are not subject to the withholding tax. Instead, such dividends are subject to
United States federal income tax on a net income basis in the same manner as if the non-U.S. holder were a United States
person as defined under the Code. In order to obtain this exemption from withholding tax, a non-U.S. holder must provide us
with an IRS Form W-8ECI (or applicable substitute or successor form) properly certifying, under penalty of perjury,
eligibility for such exemption. Any such effectively connected dividends received by a foreign corporation may be subject to
an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.
Gain on Disposition of Common Stock
Any gain realized on the disposition of shares of our common stock generally will not be subject to United States
federal income tax unless:
• the gain is effectively connected with a trade or business of the non-U.S. holder in the United States (and, if required
by an applicable income tax treaty, is attributable to a United States permanent establishment of the
non-U.S. holder);
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• the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of
that disposition, and certain other conditions are met; or
• we are or have been a “United States real property holding corporation” for United States federal income tax
purposes at any time during the shorter of the period that the non-U.S. holder has held our common stock or the
five-year period ending on the date that the non-U.S. holder disposes of our common stock.
Unless an applicable income tax treaty provides otherwise, a non-U.S. holder who has gain that is described in the first
bullet point immediately above will be subject to tax on the net gain derived from the sale or other taxable disposition under
regular graduated United States federal income tax rates in the same manner as if it were a United States person as defined
under the Code. In addition, a non-U.S. holder described in the first bullet point immediately above that is a foreign
corporation may be subject to the branch profits tax equal to 30% of its effectively connected earnings and profits that are
not reinvested in its United States trade or business or at such lower rate as may be specified by an applicable income tax
treaty.
An individual non-U.S. holder who is described in the second bullet point immediately above will be subject to a flat
30% tax on the gain recognized from the sale or other taxable disposition (or such lower rate as may be specified by an
applicable income tax treaty), which may be offset by certain United States-source capital losses.
With respect to the third bullet point, we have determined that we are, and will continue to be, a “United States real
property holding corporation” for United States federal income tax purposes. However, if shares of our common stock are
regularly traded on an established securities market, only a non-U.S. holder who holds or held (at any time during the shorter
of the five-year period preceding the date of disposition or the holder’s holding period) more than 5% of the shares of our
common stock will be subject to United States federal income tax on the disposition of shares of our common stock. If
shares of our common stock are not regularly traded on an established securities market, all non-U.S. holders will be subject
to United States federal income tax on disposition of shares of our common stock.
Non-U.S. holders should consult their tax advisors with respect to the application of the foregoing rules to their
ownership and disposition of our common stock.
Federal Estate Tax
Shares of our common stock held by an individual non-U.S. holder at the time of death will be included in such holder’s
gross estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise, and
therefore, may be subject to United States federal estate tax.
Information Reporting and Backup Withholding
We must report annually to the IRS and to each non-U.S. holder the amount of dividends paid to such holder and the
tax withheld with respect to such dividends, regardless of whether withholding was required. Copies of the information
returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which
the non-U.S. holder resides under the provisions of an applicable income tax treaty.
A non-U.S. holder will be subject to backup withholding for dividends paid to such holder unless such holder certifies
under penalty of perjury that it is a non-U.S. holder (and the payor does not have actual knowledge or reason to know that
such holder is a United States person as defined under the Code), or such holder otherwise establishes an exemption.
Information reporting and, depending on the circumstances, backup withholding will apply to the proceeds of a sale of
shares of our common stock within the United States or conducted through certain United States-related financial
intermediaries, unless the beneficial owner certifies under penalty of perjury that it is a non-U.S. holder (and the payor does
not have actual knowledge or reason to know that the
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beneficial owner is a United States person as defined under the Code), or such owner otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed
as a refund or a credit against a non-U.S. holder’s United States federal income tax liability provided the required
information is timely furnished to the IRS.
Additional Withholding Requirements
Under recently enacted legislation and administrative guidance, the relevant withholding agent may be required to
withhold 30% of any dividends paid after December 31, 2013 and the proceeds of a sale of shares of our common stock paid
after December 31, 2014 to (1) a foreign financial institution unless such foreign financial institution agrees to verify, report
and disclose its U.S. accountholders and meets certain other specified requirements or (2) a non-financial foreign entity that
is the beneficial owner of the payment unless such entity certifies that it does not have any substantial United States owners
or provides the name, address and taxpayer identification number of each substantial United States owner and such entity
meets certain other specified requirements.
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CERTAIN ERISA CONSIDERATIONS
The following is a summary of certain considerations associated with the purchase of shares of our common stock by
employee benefit plans that are subject to Title I of the Employee Retirement Income Security Act of 1974, as amended
(“ERISA”), plans, individual retirement accounts (“IRAs”) and other arrangements that are subject to Section 4975 of the
Code or provisions under any federal, state, local, non-U.S. or other laws or regulations that are similar to such provisions of
the Code or ERISA (collectively, “Similar Laws”), and entities whose underlying assets are considered to include “plan
assets” of any such plan, account or arrangement (each, a “Plan”).
General Fiduciary Matters
ERISA and the Code impose certain duties on persons who are fiduciaries of a Plan subject to Title I of ERISA or
Section 4975 of the Code and prohibit certain transactions involving the assets of a Plan and its fiduciaries or other interested
parties. Under ERISA and the Code, any person who exercises any discretionary authority or control over the administration
of such a Plan or the management or disposition of the assets of such a Plan, or who renders investment advice for a fee or
other compensation to such a Plan, is generally considered to be a fiduciary of the Plan.
In considering an investment in shares of our common stock with the assets of any Plan, a fiduciary should determine
whether the investment is in accordance with the documents and instruments governing the Plan and the applicable
provisions of ERISA, the Code or any Similar Law relating to a fiduciary’s duties to the Plan including, without limitation,
the prudence, diversification, delegation of control and prohibited transaction provisions of ERISA, the Code and any other
applicable Similar Laws.
Prohibited Transaction Issues
Section 406 of ERISA and Section 4975 of the Code prohibit Plans from engaging in specified transactions involving
plan assets with persons or entities who are “parties in interest,” within the meaning of ERISA, or “disqualified persons,”
within the meaning of Section 4975 of the Code, unless an exemption is available. A party in interest or disqualified person
who engages in a non-exempt prohibited transaction may be subject to excise taxes and other penalties and liabilities under
ERISA and the Code. In addition, the fiduciary of a Plan that engages in such a non-exempt prohibited transaction may be
subject to penalties and liabilities under ERISA and the Code.
The foregoing discussion is general in nature and is not intended to be all-inclusive. Due to the complexity of these
rules and the penalties that may be imposed upon persons involved in non-exempt prohibited transactions, it is particularly
important that fiduciaries, or other persons considering purchasing shares of our common stock on behalf of, or with the
assets of, any employee benefit plan, consult with their counsel to determine whether such employee benefit plan, IRA or
other arrangement is subject to Title I of ERISA, Section 4975 of the Code or any Similar Laws.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting agreement dated the date of this prospectus,
the underwriters named below have severally agreed to purchase, and we have agreed to sell to them, the number of shares
of common stock set forth opposite their names below:
Number of Shares of
Name of
Underwriter Common Stock
FBR Capital Markets & Co.
Raymond James & Associates, Inc.
Total
The underwriting agreement provides that the obligations of the underwriters to purchase and accept delivery of the
common stock offered by this prospectus are subject to the satisfaction of the conditions contained in the underwriting
agreement, including:
• the representations and warranties made by us to the underwriters are true;
• there is no material adverse change in the financial market; and
• we deliver customary closing documents and legal opinions to the underwriters.
The underwriters are obligated to purchase and accept delivery of all of the shares of common stock offered by this
prospectus, if any are purchased, other than those covered by the option to purchase additional shares of common stock
described below. The underwriting agreement also provides that if any underwriter defaults, the purchase commitments of
non-defaulting underwriters may be increased or the offering may be terminated.
The underwriters propose to offer the common stock directly to the public at the public offering price indicated on the
cover page of this prospectus and to various dealers at that price less a concession not in excess of $ per share. Any
underwriter may allow, and such dealers may reallow, a concession not in excess of $ per share. If all of the shares of
common stock are not sold at the public offering price, the underwriters may change the public offering price and other
selling terms. The common stock is offered by the underwriters as stated in this prospectus, subject to receipt and acceptance
by them. The underwriters reserve the right to reject an order for the purchase of shares of common stock in whole or in part.
Option to Purchase Additional Common Stock
We have granted the underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase from
time to time up to an aggregate of additional shares of common stock to cover over-allotments, if any, at the public
offering price less the underwriting discount set forth on the cover page of this prospectus. The underwriters may exercise
the option to purchase additional shares of common stock only to cover over-allotments made in connection with the sale of
common stock offered in this offering.
Discounts and Expenses
The following table shows the amount per share of common stock and total underwriting discounts we will pay to the
underwriters (dollars in thousands, except per share amounts). The amounts are shown assuming both no exercise and full
exercise of the underwriters’ option to purchase additional shares of common stock.
Total Without Total With
Over-Allotment Over-Allotment
Per Share Exercise Exercise
Price to the public
Underwriting discount and commissions
Proceeds to us (before offering expenses)
The expenses of this offering that are payable by us are estimated to be $ .
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Indemnification
We have agreed to indemnify the underwriters against certain liabilities that may arise in connection with this offering,
including liabilities under the Securities Act, and to contribute to payments that the underwriters may be required to make
for those liabilities.
Lock-Up Agreements
Subject to specified exceptions, we, our directors, executive officers and stockholders have agreed with the
underwriters, for a period of days after the date of this prospectus, without the prior written consent of :
• not to offer for sale, sell, pledge or otherwise dispose of the common stock;
• not to grant or sell any option or contract to purchase any of the common stock;
• not to file or cause to be filed a registration statement, including any amendments, with respect to the registration of
any shares of common stock or participate in any such registration, including under this registration statement;
• not to enter into any swap or other agreement that transfers any of the economic consequences of ownership of or
otherwise transfer or dispose of, directly or indirectly, any of the common stock; and
• not to enter into any hedging, collar or other transaction or arrangement that is designed or reasonably expected to
lead to or result in a transfer, in whole or in part, of any of the economic consequences of ownership of the common
stock, whether or not such transfer would be for any consideration.
These agreements also prohibit us from entering into any of the foregoing transactions with respect to any securities
that are convertible into or exchangeable for the common stock or with respect to us, to publicly disclose the intention to do
the foregoing transactions.
may, in its discretion and at any time, release all or any portion of the securities subject to these
agreements. does not have any present intent or any understanding to release all or any portion of the securities
subject to these agreements.
The -day period described in the preceding paragraphs will be extended if:
• during the last 17 days of the -day period, we issue an earnings release or material news or a material event
relating to us occurs; or
• prior to the expiration of the -day period, we announce that we will release earnings results during the 16-day
period beginning on the last day of the -day period, in which case the restrictions described in the preceding
paragraphs will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings
release or the occurrence of the material event.
Stabilization
Until this offering is completed, rules of the SEC may limit the ability of the underwriters to bid for and purchase the
common stock. As an exception to these rules, the underwriters may engage in activities that stabilize, maintain or otherwise
affect the price of the common stock, including:
• short sales;
• syndicate covering transactions;
• imposition of penalty bids; and
• purchases to cover positions created by short sales.
Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the
market price of the common stock while this offering is in progress. Stabilizing transactions may include making short sales
of shares of common stock, which involve the sale by the underwriters of a
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greater number of shares of common stock than they are required to purchase in this offering and purchasing common stock
from us or in the open market to cover positions created by short sales. Short sales may be “covered” shorts, which are short
positions in an amount not greater than the underwriters’ option to purchase additional shares of common stock referred to
above, or may be “naked” shorts, which are short positions in excess of that amount.
Each underwriter may close out any covered short position either by exercising its option to purchase additional shares
of common stock, in whole or in part, or by purchasing common stock in the open market. In making this determination,
each underwriter will consider, among other things, the price of common stock available for purchase in the open market
compared to the price at which the underwriter may purchase shares of common stock pursuant to the option to purchase
additional shares of common stock.
A naked short position is more likely to be created if the underwriters are concerned that there may be downward
pressure on the price of the common stock in the open market that could adversely affect investors who purchased in this
offering. To the extent that the underwriters create a naked short position, they will purchase shares of common stock in the
open market to cover the position.
As a result of these activities, the price of the common stock may be higher than the price that otherwise might exist in
the open market. If the underwriters commence these activities, they may discontinue them without notice at any time. The
underwriters may carry out these transactions on Nasdaq or otherwise.
Discretionary Accounts
The underwriters may confirm sales of the common stock offered by this prospectus to accounts over which they
exercise discretionary authority but do not expect those sales to exceed 5% of the total shares of commons stock offered by
this prospectus.
Listing
We expect to apply to list our common stock on Nasdaq under the symbol “ARMS.” There is no assurance that this
application will be approved.
Determination of Initial Offering Price
Prior to this offering, there has been no public market for the shares. The initial public offering price has been
negotiated among us and the representatives. Among the factors to be considered in determining the initial public offering
price of the shares, in addition to prevailing market conditions, will be our historical performance, estimates of our business
potential and earnings prospects, an assessment of our management and the consideration of the above factors in relation to
market valuation of companies in related businesses.
Neither we nor the underwriters can assure investors that an active market will develop for our common stock or that
shares will trade in the public market at or above the initial public offering price.
Electronic Prospectus
A prospectus in electronic format may be available on the Internet sites or through other online services maintained by
one or more of the underwriters participating in this offering, or by their affiliates. In those cases, prospective investors may
view offering terms online and, depending upon the underwriters, prospective investors may be allowed to place orders
online. The underwriters may agree with us to allocate a specific number of shares of common stock for sale to online
brokerage account holders. Any such allocation for online distributions will be made by the underwriters on the same basis
as other allocations.
Other than the prospectus in electronic format, the information on any underwriters’ website and any information
contained in any other website maintained by the underwriters is not part of this prospectus or the registration statement of
which this prospectus forms a part, has not been approved or endorsed by us or any underwriter in its capacity as underwriter
and should not be relied upon by investors.
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Notice to Prospective Investors in the EEA
In relation to each Member State of the European Economic Area (EEA) which has implemented the Prospectus
Directive (each, a “Relevant Member State”) an offer to the public of any shares which are the subject of the offering
contemplated by this prospectus may not be made in that Relevant Member State, except that an offer to the public in that
Relevant Member State of any shares may be made at any time under the following exemptions under the Prospectus
Directive, if they have been implemented in that Relevant Member State:
(a) to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in securities;
(b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial
year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000,
as shown in its last annual or consolidated accounts;
(c) it is a “qualified investor” within the meaning of the law in that Relevant Member State implementing
Article 2(1)(e) of the Prospectus Directive; and
(d) in the case of any shares acquired by it as a financial intermediary, as that term is used in Article 3(2) of the
Prospectus Directive, (i) the shares acquired by it in the offering have not been acquired on behalf of, nor have
they been acquired with a view to their offer or resale to, persons in any Relevant Member State other than
“qualified investors” (as defined in the Prospectus Directive), or in circumstances in which the prior consent of
the representative has been given to the offer or resale; or (ii) where shares have been acquired by it on behalf of
persons in any Relevant Member State other than qualified investors, the offer of those shares to it is not treated
under the Prospectus Directive as having been made to such persons.
In addition, in the United Kingdom, this document is being distributed only to, and is directed only at, and any offer
subsequently made may only be directed at persons who are “qualified investors” (as defined in the Prospectus Directive)
(i) who have professional experience in matters relating to investments falling within Article 19 (5) of the Financial Services
and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “Order”) and/or (ii) who are high net worth
companies (or persons to whom it may otherwise be lawfully communicated) falling within Article 49(2)(a) to (d) of the
Order (all such persons together being referred to as “relevant persons”). This document must not be acted on or relied on in
the United Kingdom by persons who are not relevant persons. In the United Kingdom, any investment or investment activity
to which this document relates is only available to, and will be engaged in with, relevant persons.
Notice to Prospective Investors in Australia
This document has not been lodged with the Australian Securities & Investments Commission and is only directed to
certain categories of exempt persons. Accordingly, if you receive this document in Australia:
(a) you confirm and warrant that you are either:
(i) a “sophisticated investor” under section 708(8)(a) or (b) of the Corporations Act 2001 (Cth) of Australia
(Corporations Act);
(ii) a “sophisticated investor” under section 708(8)(c) or (d) of the Corporations Act and that you have
provided an accountant’s certificate to the Company which complies with the requirements of
section 708(8)(c)(i) or (ii) of the Corporations Act and related regulations before the offer has been
made; or
(iii) a “professional investor” within the meaning of section 708(11)(a) or (b) of the Corporations Act,
and to the extent that you are unable to confirm or warrant that you are an exempt sophisticated investor or
professional investor under the Corporations Act, any offer made to you under this document is void and incapable of
acceptance.
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(b) you warrant and agree that you will not offer any of the shares issued to you pursuant to this document for resale
in Australia within 12 months of those shares being issued unless any such resale offer is exempt from the
requirement to issue a disclosure document under section 708 of the Corporations Act.
Notice to Prospective Investors in Switzerland
This document, as well as any other material relating to the shares which are the subject of the offering contemplated by
this prospectus, do not constitute an issue prospectus pursuant to Article 652a and/or 1156 of the Swiss Code of Obligations.
The shares will not be listed on the SIX Swiss Exchange and, therefore, the documents relating to the shares, including, but
not limited to, this document, do not claim to comply with the disclosure standards of the listing rules of SIX Swiss
Exchange and corresponding prospectus schemes annexed to the listing rules of the SIX Swiss Exchange. The shares are
being offered in Switzerland by way of a private placement, i.e., to a small number of selected investors only, without any
public offer and only to investors who do not purchase the shares with the intention to distribute them to the public. The
investors will be individually approached by the issuer from time to time. This document, as well as any other material
relating to the shares, is personal and confidential and do not constitute an offer to any other person. This document may
only be used by those investors to whom it has been handed out in connection with the offering described herein and may
neither directly nor indirectly be distributed or made available to other persons without express consent of the issuer. It may
not be used in connection with any other offer and shall in particular not be copied and/or distributed to the public in (or
from) Switzerland.
Notice to Prospective Investors in the United Kingdom
Each underwriter has represented and agreed that it has only communicated or caused to be communicated and will
only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the
meaning of Section 21 of the Financial Services and Markets Act 2000) in connection with the issue or sale of the shares in
circumstances in which Section 21(1) of such Act does not apply to us and it has complied and will comply with all
applicable provisions of such Act with respect to anything done by it in relation to any shares in, from or otherwise involving
the United Kingdom.
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CONFLICTS OF INTEREST
The underwriters and their affiliates may provide, in the future, investment banking, financial advisory or other
financial services for us and our affiliates, for which they may receive advisory or transaction fees, as applicable, plus
out-of-pocket expenses, of the nature and in amounts customary in the industry for such financial services.
The underwriters are also expected to be underwriters in connection with the Concurrent ARP Offering and may receive
certain discounts, commissions and fees in connection therewith.
Raymond James Bank, FSB, an affiliate of Raymond James & Associates, Inc., one of the underwriters in this offering,
is expected to receive more than 5% of the net proceeds of this offering in connection with the repayment of our Senior
Secured Term Loan and our Senior Secured Revolving Credit Facility. See “Use of Proceeds.” Accordingly, this offering is
being made in compliance with the requirements of FINRA Rule 5121. Rule 5121 requires that a “qualified independent
underwriter” meeting certain standards to participate in the preparation of the registration statement and prospectus and
exercise the usual standards of due diligence with respect thereto. FBR Capital Markets & Co. has agreed to act as a
“qualified independent underwriter” within the meaning of FINRA Rule 5121 in connection with this offering. FBR Capital
Markets & Co. will not receive any additional compensation for acting as a qualified independent underwriter. Raymond
James & Associates, Inc. will not confirm sales of the securities to any account over which it exercises discretionary
authority without the prior written approval of the customer.
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LEGAL MATTERS
The validity of the shares of common stock offered hereby and certain legal matters in connection with this offering
will be passed upon for us by Armstrong Teasdale LLP. The validity of the shares of common stock will be passed upon for
the underwriters by Simpson Thacher & Bartlett LLP, New York, New York.
COAL RESERVES
The information appearing in, and incorporated by reference in, this prospectus concerning our estimates of proven and
probable coal reserves at December 31, 2010 were prepared by Weir International, Inc., an independent mining and
geological consultant.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
The consolidated financial statements of Armstrong Energy, Inc. and subsidiaries (formerly Armstrong Land Company,
LLC and subsidiaries) as of December 31, 2010 and 2009 and for each of the years in the two-year period ended
December 31, 2010 appearing in this prospectus have been audited by Ernst & Young LLP, an independent registered public
accounting firm, as stated in their report appearing in this prospectus, and are included in reliance upon such report given on
their authority as experts in accounting and auditing.
The consolidated financial statements of Armstrong Energy, Inc. and subsidiaries (formerly Armstrong Land Company,
LLC and subsidiaries) as of December 31, 2008 and for the year ended December 31, 2008 appearing in this prospectus have
been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report appearing in
this prospectus.
CHANGE IN AUDITOR
Prior to engaging Ernst & Young as our independent registered public accounting firm, KPMG LLP was engaged as our
Predecessor’s independent registered public accounting firm to audit our Predecessor’s financial statements for the fiscal
year ended December 31, 2008. In February 2010, the board of managers of our Predecessor dismissed KPMG LLP as our
Predecessor’s independent registered public accounting firm.
KPMG LLP’s report on our Predecessor’s financial statements for the fiscal year ended December 31, 2008 did not
contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or
accounting principles. We have not included KPMG’s report in this prospectus. KPMG LLP was not engaged as the
principal accountant to audit our Predecessor’s financial statements for the fiscal year ended December 31, 2010 or 2009,
and therefore, did not issue a report on such financial statements. Furthermore, during the fiscal year ended December 31,
2008 and the subsequent period through February 2010, (i) there were no disagreements with KPMG LLP on any matter of
accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of KPMG LLP, would have caused it to make reference to the subject matter of the disagreement
in connection with its report on our Predecessor’s financial statements for such period; and (ii) there were no reportable
events described in Item 304(a)(1)(v) of Regulation S-K, except that KPMG LLP advised our Predecessor of the material
weakness described herein. KPMG LLP identified several audit adjustments. As a result of these adjustments and KPMG
LLP’s interaction with our Predecessor’s former controller, KPMG LLP believed that our Predecessor lacked an adequately
trained finance and accounting controller with appropriate GAAP expertise. In KPMG LLP’s opinion, this resulted in an
ineffective internal review of technical accounting matters, overall financial statement presentation and disclosure, resulting
in a material weakness in internal controls as of December 31, 2008. Our Predecessor terminated the former controller and
hired a new controller in 2009.
On March 4, 2010, our Predecessor’s board of managers appointed Ernst & Young LLP as our new independent
registered public accounting firm. Ernst & Young LLP audited our Predecessor’s financial statements for the fiscal years
ended December 31, 2009 and 2010 and has been engaged as our independent registered public accounting firm for our
fiscal year ending December 31, 2011. During our two most recent fiscal years, we did not consult with Ernst & Young LLP
with respect to any of the matters or reportable events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
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Notwithstanding the 2010 appointment of Ernst & Young LLP as our Predecessor’s new independent registered public
accounting firm, on June 4, 2010, our Predecessor’s board of managers engaged Grant Thornton LLP solely to re-audit our
Predecessor’s financial statements for the fiscal year ended December 31, 2008. Our Predecessor was unable to engage
Ernst & Young LLP to re-audit the 2008 financial statements due to the fact that Ernst & Young LLP performed certain
consulting services for our Predecessor during 2008 and, therefore, would not have been deemed to be independent. During
our two most recent fiscal years, we did not consult with Grant Thornton LLP with respect to any of the matters or reportable
events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
On July 31, 2010, following Grant Thornton LLP’s completion of the 2008 audit, the board of managers of our
Predecessor dismissed Grant Thornton LLP. Grant Thornton LLP’s report on our Predecessor’s financial statements for the
fiscal year ended December 31, 2008 did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or
modified as to uncertainty, audit scope or accounting principles. Grant Thornton LLP was not engaged as the principal
accountant to audit our Predecessor’s financial statements for the fiscal year ended December 31, 2010 or 2009, and
therefore, did not issue a report on such financial statements. Furthermore, during the fiscal year ended December 31, 2008
and the subsequent period through July 31, 2010, (i) there were no disagreements with Grant Thornton LLP on any matter of
accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of Grant Thornton LLP, would have caused it to make reference to the subject matter of the
disagreement in connection with its report on our Predecessor’s financial statements for such period; and (ii) there were no
reportable events described in Item 304(a)(1)(v) of Regulation S-K.
We provided KPMG LLP and Grant Thornton LLP with a copy of the foregoing disclosure prior to its filing with the
SEC and requested that each of KPMG LLP and Grant Thornton LLP furnish us with a letter addressed to the SEC stating
whether or not each of them agrees with the above statements and, if not, stating the respects in which it does not agree.
Grant Thornton LLP’s and KPMG LLP’s letters to the SEC are filed as Exhibits 16.1 and 16.2, respectively, to the
registration statement of which this prospectus is a part.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement, of which this Prospectus is a part, on Form S-1 with the SEC relating to this
offering. This Prospectus does not contain all of the information in the registration statement and the exhibits and financial
statements included with the registration statement. References in this Prospectus to any of our contracts, agreements or
other documents are not necessarily complete, and you should refer to the exhibits attached to the registration statement for
copies of the actual contracts, agreements or documents.
The Company’s filings with the SEC are available to the public on the SEC’s website at www.sec.gov. Those filings
will also be available to the public on, or accessible through, our corporate web site at www.armstrongcoal.com. The
information contained on or accessible through our corporate web site or any other web site that we may maintain is not part
of this prospectus or the registration statement of which this prospectus is a part. You may also read and copy, at SEC
prescribed rates, any document we file with the SEC, including the registration statement (and its exhibits) of which this
prospectus is a part, at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington D.C. 20549. You can
call the SEC at 1-800-SEC-0330 to obtain information on the operation of the Public Reference Room. You may also request
a copy of these filings, at no cost, by writing to us at Armstrong Energy, Inc., 7733 Forsyth Boulevard, Suite 1625, St. Louis,
Missouri 63105, Attention: Senior Vice President, Finance and Administration and Chief Financial Officer or telephoning us
at (314) 727-8202.
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Upon the effectiveness of the registration statement, we will be subject to the informational requirements of the
Exchange Act and, in accordance with the Exchange Act, will file periodic reports, proxy and information statements and
other information with the SEC. Such annual, quarterly and current reports; proxy and information statements; and other
information can be inspected and copied at the locations set forth above. We will report our financial statements on a year
ended December 31. We intend to furnish our stockholders with annual reports containing consolidated financial statements
audited by our independent registered public accounting firm and will post on our website our quarterly reports containing
unaudited consolidated financial statements for each of the first three quarters of each fiscal year.
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INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm F-2
Report of Independent Registered Public Accounting Firm F-3
Consolidated Balance Sheets as of December 31, 2010 and 2009 F-4
Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008 F-5
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2010, 2009 and 2008 F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008 F-7
Notes to Consolidated Financial Statements F-8
Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010 F-27
Condensed Consolidated Statements of Operations for the nine months ended September 30, 2011 and 2010 F-28
Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2011 F-29
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 F-30
Notes to Condensed Consolidated Financial Statements F-31
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Armstrong Energy, Inc. and Subsidiaries (formerly
Armstrong Land Company, LLC and Subsidiaries)
We have audited the accompanying consolidated balance sheets of Armstrong Energy, Inc. and Subsidiaries (formerly
Armstrong Land Company, LLC and Subsidiaries) (the Company) as of December 31, 2010 and 2009, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for years then ended. These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal
control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of the Company at December 31, 2010 and 2009, and the consolidated results of its operations and its cash
flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 3, the consolidated financial statements have been restated to properly record depletion and
amortization of mineral rights, mine development and asset retirement obligations.
St. Louis, Missouri /s/ Ernst & Young LLP
May 9, 2011
Except for Notes 17 and 20, as to which date is
October 7, 2011 and Note 3, as to which the date is
February 10, 2012
F-2
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Armstrong Energy, Inc. and Subsidiaries (formerly Armstrong Land Company, LLC and Subsidiaries)
We have audited the accompanying consolidated statements of operations, stockholders’ equity and cash flows of
Armstrong Energy, Inc. (a Delaware Corporation) and subsidiaries (formerly Armstrong Land Company, LLC and
subsidiaries) (the “Company”) for the year ended December 31, 2008. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to
perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results
of operations and cash flows of Armstrong Energy, Inc. and subsidiaries (formerly Armstrong Land Company, LLC and
subsidiaries) for the year ended December 31, 2008 in conformity with accounting principles generally accepted in the
United States of America.
/s/ GRANT THORNTON LLP
St. Louis, Missouri
July 30, 2010 (except for Note 17
and the “Reorganization” paragraph
in Note 20, as to which the
date is October 7, 2011)
F-3
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
2010 2009
Restated Restated
ASSETS
Current assets:
Cash and cash equivalents $ 8,101 $ 16,597
Accounts receivable 13,927 18,888
Inventories 13,011 5,774
Prepaid and other assets 1,357 1,139
Total current assets 36,396 42,398
Property, plant, equipment, and mine development, net 425,719 395,476
Intangible assets, net 2,037 2,742
Other noncurrent assets 13,886 10,002
Total assets $ 478,038 $ 450,618
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 18,681 $ 16,725
Accrued liabilities and other 8,697 10,521
Construction retainage 625 853
Current portion of capital lease obligations 3,802 3,307
Short-term debt 1,686 28,741
Total current liabilities 33,491 60,147
Long-term debt 122,310 112,483
Asset retirement obligations 13,249 7,324
Accrued interest — 889
Capital lease obligations 12,073 14,310
Other non-current liabilities 234 132
Total liabilities 181,357 195,285
Stockholders’ equity:
Common stock, $0.01 par value, 70,000,000 shares authorized, 19,110,500 and shares
issued and outstanding as of December 31, 2010 and 2009, respectively 191 191
Preferred stock, $0.01 par value, 1,000,000 shares authorized, no shares issued and
outstanding as of December 31, 2010 and 2009, respectively
Additional paid-in-capital 204,888 204,809
Accumulated deficit (34,274 ) (39,092 )
Armstrong Energy, Inc.’s equity 170,805 165,908
Non-controlling interest 125,876 89,425
Total stockholders’ equity 296,681 255,333
Total liabilities and stockholders’ equity $ 478,038 $ 450,618
See accompanying notes to consolidated financial statements.
F-4
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
Year Ended December 31,
2010 2009 2008
Restated Restated
Revenue $ 220,625 $ 167,904 $ 57,069
Costs and expenses:
Operating costs and expenses 151,838 127,886 45,817
Depreciation, depletion, and amortization 18,892 12,480 5,451
Asset retirement obligation expenses 3,087 1,984 359
Selling, general, and administrative costs 27,656 24,336 13,040
Operating income (loss) 19,152 1,218 (7,598 )
Other income (expense):
Interest income 198 169 375
Interest expense (11,070 ) (12,651 ) (14,752 )
Other income (expense), net (111 ) 819 596
Net income (loss) 8,169 (10,445 ) (21,379 )
Income (loss) attributable to non-controlling interest (3,351 ) 1,730 5,552
Net income (loss) attributable to common stockholders $ 4,818 $ (8,715 ) $ (15,827 )
Net income (loss) per share attributable to common stockholders:
Basic and diluted $ 0.25 $ (0.50 ) $ (1.35 )
See accompanying notes to consolidated financial statements.
F-5
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 2010, 2009 and 2008
(Amounts in thousands)
Stockholders’ Equity Total
Common Additional Accumulated Non-Controlling Stockholders’
Amoun
Stock t Paid-in-Capital Deficit Interest Equity
Balance at December 31,
2007 9,250 $ 93 $ 98,578 $ (14,550 ) $ 671 $ 84,792
Issuance of common stock 4,745 47 50,878 — — 50,925
Stock compensation
expense — — 163 — — 163
Minority contributions — — — — 54,500 54,500
Purchase of minority
interest — — — — (84 ) (84 )
Other — — — — 14 14
Net loss — — — (15,827 ) (5,552 ) (21,379 )
Balance at December 31,
2008 13,995 140 149,619 (30,377 ) 49,549 168,931
Issuance of common stock 5,116 51 55,124 — — 55,175
Stock compensation
expense — — 66 — — 66
Minority contributions — — — — 41,606 41,606
Net loss (Restated) — — — (8,715 ) (1,730 ) (10,445 )
Balance at December 31,
2009 (Restated) 19,111 191 204,809 (39,092 ) 89,425 255,333
Issuance of common stock — — — — — —
Stock compensation
expense — — 79 — — 79
Minority contributions — — — — 33,100 33,100
Net income (Restated) — — — 4,818 3,351 8,169
Balance at December 31,
2010 (Restated) 19,111 $ 191 $ 204,888 $ (34,274 ) $ 125,876 $ 296,681
See accompanying notes to consolidated financial statements.
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
2010 2009 2008
(Restated) (Restated)
Operating activities
Net income (loss) $ 8,169 $ (10,445 ) $ (21,379 )
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Non-cash stock compensation expense 79 66 163
Depreciation, depletion, and amortization 18,892 12,480 5,451
Accretion of asset retirement obligations 3,933 2,439 544
Gain on sale of property, plant, and equipment (68 ) (7 ) (141 )
Interest on long-term obligations 12,593 2,675 14,150
Change in working capital accounts:
Increase (decrease) in accounts receivable 4,961 (11,357 ) (7,265 )
Increase in inventories (7,237 ) (3,028 ) (2,581 )
Decrease (increase) in prepaid assets and other (218 ) (242 ) 90
Increase in other non-current assets (3,883 ) (858 ) (5,911 )
Decrease in accounts payable and accrued liabilities 1,328 11,384 6,130
Decrease in other non-current liabilities (1,355 ) (53 ) (330 )
Net cash provided by (used in) operating activities 37,194 3,054 (11,079 )
Investing activities
Investment in property, plant, equipment, and mine development (41,755 ) (62,476 ) (80,288 )
Proceeds from sale of fixed assets — — 352
Other — — (84 )
Net cash used in investing activities (41,755 ) (62,476 ) (80,020 )
Financing activities
Payment on capital lease obligation (3,692 ) (2,824 ) (1,159 )
Payment of debt (33,343 ) (29,103 ) (24,864 )
Member contributions — 55,175 50,925
Minority contributions 33,100 41,606 54,500
Net cash provided by (used in) financing activities (3,935 ) 64,854 79,402
Net (decrease) increase in cash and cash equivalents (8,496 ) 5,432 (11,697 )
Cash and cash equivalents, at beginning of year 16,597 11,165 22,862
Cash and cash equivalents, at end of year $ 8,101 $ 16,597 $ 11,165
Year Ended December 31,
2010 2009 2008
Supplemental cash flow information:
Cash paid for interest $ 30,440 $ 12,877 $ 5,003
Non-cash transactions:
Investment in property, plant, and equipment; mine development; and
intangibles acquired with debt 2,638 — 54,000
Assets acquired by capital lease 1,951 5,689 14,050
Member contributions financed — 125 375
Intangibles acquired in exchange of property, plant, and equipment — — 3,354
Interest on long-term obligations 12,593 2,675 14,150
See accompanying notes to consolidated financial statements.
F-7
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. DESCRIPTION OF BUSINESS AND ENTITY STRUCTURE
Armstrong Energy, Inc. (formerly Armstrong Land Company, LLC) (AE) and subsidiaries (collectively, the Company)
commenced business on September 19, 2006 (inception), for the purpose of owning and operating coal reserves (also
referred to as mineral rights) and production assets. The Company is headquartered in St. Louis, Missouri, with operational
facilities in western Kentucky. As of December 31, 2010, the Company had approximately 675 employees, none of whom
are under a collective bargain arrangement.
All of the Company’s subsidiaries are majority-owned by the Company with the exception of Armstrong Resource
Partners, L.P. (formerly Elk Creek, LP) (ARP) and its subsidiaries, which were not majority-owned by the Company as of
December 31, 2010, but whose results have been consolidated in accordance with Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) 810-20, Consolidation — Control of Partnerships and Similar Entities.
ARP was set up on March 31, 2008, for the purpose of owning and subleasing coal production assets. The Company as Elk
Creek General Partner (ECGP) has an approximate 0.4% ownership in ARP. The various limited partners of ARP are related
parties, as the entities are owned by certain private equity funds that also own AE. General creditors of ARP and subsidiaries
have no recourse to the assets of the Company and its majority-owned subsidiaries.
The Company acquired mineral rights and other assets from inception. Significant purchase transactions are outlined as
follows:
• On September 19, 2006, the Company purchased land and mineral rights in western Kentucky from an unrelated
third party for $7,000 in cash and a promissory note with a principal amount of $29,000, which has been discounted
using an effective interest rate of 10% due to the seller in various amounts from 2009 to 2011.
• On December 6, 2006, the Company purchased land and mineral rights, an office and building, easements (for roads
and transmission lines), and spare parts in western Kentucky from an unrelated third party for $12,500 in cash and a
$45,400 promissory note, which has been discounted using an effective interest rate of 10% due to the seller in
various amounts from 2009 to 2012.
• On March 7, 2007, the Company purchased land, mineral rights, and various easements in western Kentucky from
an unrelated third party for $14,300 in cash and a $50,900 promissory note, which has been discounted using an
effective interest rate of 10% due to the seller in various amounts from 2010 to 2013.
• On May 31, 2007, the Company purchased land, mineral rights, a building, various easements, and spare parts in
western Kentucky from an unrelated third party for $12,500 in cash and a $58,107 promissory note, which has been
discounted using an effective interest rate of 10% due to the seller in various amounts from 2010 to 2014.
• On March 31, 2008, ARP purchased land and mineral rights in western Kentucky from an unrelated third party for
$21,500 cash and a promissory note with a principal balance of $54,000, partially paid in December 2008 and the
balance paid in June 2009. An effective interest rate of 12% has been applied to any unpaid portion of the note from
January 1, 2009, until the date of the final payment.
• On October 29, 2010, the Company entered into a lease that gives it the right to mine the coal reserves in a western
Kentucky property. The Company is in process of having a third party perform a study to determine the estimated
proven and probable reserves in the lease. Though not determined proven and probable as of the date of this report,
the Company estimates that there are at least 400 million tons (unaudited) of recoverable reserves. Prior to the
commencement of mining, the lease requires annual
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
advance royalties in the form of 16,000 tons, which are recoupable against future production royalties. Once
production commences, the lessor has the ability to take either a cash royalty of 6% of the selling price or a stated
amount of 60,000 tons. Advanced royalties are recoupable against such payments. The Company is obligated to
meet certain minimum mining requirements or pay additional advance royalties prior to the commencement of
mining.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Factors Affecting Comparability
Certain prior year amounts have been reclassified to conform to current year presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of AE and its wholly and majority-owned subsidiaries. As of
December 31, 2010, 2009 and 2008, the results of ARP and its subsidiaries have been consolidated in accordance with
ASC 810-20. The Company records non-controlling interest for non-wholly-owned subsidiaries. All significant
intercompany balances and transactions were eliminated.
Accounting Pronouncements Adopted
In June 2009, the FASB issued accounting guidance in ASC 810 that modifies how a company determines when an
entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The
guidance clarifies that the determination of whether a company is required to consolidate an entity is based on, among other
things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly
affect the entity’s economic performance. The guidance also requires an ongoing reassessment of whether a company is the
primary beneficiary of a variable interest entity and additional disclosures about a company’s involvement in variable
interest entities and any associated changes in risk exposure. The guidance is applicable for annual periods beginning after
November 15, 2009 (January 1, 2010, for the Company). The Company performed a qualitative assessment of its existing
interests and determined that the new guidance had no impact on the Company’s financial statement presentation.
In January 2010, ASC guidance for fair value measurements and disclosure was updated to require additional
disclosures related to transfers in and out of Level 1 and Level 2 fair value measurements. The guidance was amended to
clarify the level of disaggregation required for assets and liabilities and the disclosures required for inputs and valuation
techniques used to measure the fair value of assets and liabilities that fall in either Level 2 or Level 3. The updated guidance
was effective for the Company’s fiscal year beginning January 1, 2010. The adoption had no impact on the Company’s
consolidated financial position, results of operations, or cash flows.
Use of Estimates
The preparation of consolidated financial statements in conformity with United States generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of income and loss during the reporting periods. Actual results could differ from those estimates.
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Revenue
Coal sales are recognized as revenue when title and risk of loss passes to the customer. Coal sales are made to
customers under the terms of supply agreements, most of which are long-term (greater than one year). Under the terms of the
Company’s coal supply agreements, title and risk of loss typically transfer to the customer at the mine where coal is loaded
on the truck, rail, or barge. Coal sales include the freight charged to the customer on destination contracts.
Other Income
Other income includes farm income, timber income, and other income from the lease of property.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates fair value. The Company considers all cash and
temporary investments having an original maturity of less than three months to be cash equivalents.
Financial Instruments
Cash and cash equivalents, accounts receivable, accounts payable, and debt are stated at their approximate fair value on
the consolidated balance sheets due to the short maturity and financial nature of the balances.
Accounts and Other Receivables
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company evaluates the need for
an allowance for doubtful accounts based on anticipated recovery and industry data. As of December 31, 2010, 2009 and
2008, the Company had not established an allowance for accounts receivable.
Inventories
Inventories consist of coal as well as materials and supplies that are valued at the lower of cost or market. Raw coal
stockpiles may be sold in their current condition or processed further prior to shipment. Cost is determined using the first-in,
first-out method for materials and supplies. Coal inventory costs include labor, supplies, equipment cost, royalties, taxes,
other related costs, and, where applicable, preparation plant cost. Stripping costs incurred during the production phase of the
mine are considered variable production costs and are included in the cost of coal during the period the stripping costs are
incurred.
Prepaid Expenses and Other Assets
Prepaid expenses primarily consist of prepaid insurance and workers’ compensation premiums.
Property, Plant, Equipment, and Mine Development
Property, plant, and equipment are recorded at cost. Interest costs applicable to major asset additions are capitalized
during the construction period. Capitalized interest in 2010, 2009 and 2008 was $2,830, $3,954 and $3,521, respectively.
Expenditures that extend the useful lives of existing plant and equipment assets are capitalized, while normal repairs
and maintenance that do not extend the useful life or increase the productivity of the asset are expensed as incurred. Plant
and equipment are depreciated using the straight-line method over the useful lives of the assets, which are detailed below.
F-10
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Asset
Type Life (Years)
Buildings and improvements 7-40
Mine equipment 2-10
Vehicles 3-10
Office equipment and software 3-7
Costs to acquire or construct significant new assets are capitalized and amortized using the units-of-production method
over the estimated recoverable reserves that are associated with the property being benefited, when placed into service, as a
part of the new asset being constructed. These costs include but are not limited to legal fees, permit and license costs,
materials cost, associated labor costs, mine design, construction of access roads, shafts, slopes and main entries, and
removing overburden to access reserves in a new pit. Where multiple assets are acquired for one purchase price, the cost of
the purchase is allocated among the individual assets in proportion to their market value with assistance from a third party
specializing in the valuation of the purchased assets.
Mineral rights are recorded at cost as property, plant, equipment, and mine development. Amortization of mineral rights
and mine development is provided by the units-of-production method over estimated total recoverable proven and probable
reserves.
Costs related to locating coal deposits and evaluating the economic viability of such deposits are expensed as incurred.
The Company did not incur these costs in 2010, 2009 or 2008. Start-up costs are expensed as incurred. Certain costs incurred
to develop coal mines or to expand the capacity of an existing mine are capitalized and amortized using the
units-of-production method.
Other Non-Current Assets
Other non-current assets include advance royalties and amounts held by third parties to guarantee performance on the
delivery of coal, reclamation bonds, and other performance guarantees. The amounts pledged are restricted for the term of
the bonds and cannot be withdrawn without the consent of the bonding companies.
Rights to leased coal and the related surface land can be acquired through royalty payments. Where royalty payments
represent prepayments recoupable against future production, they are recorded as a prepaid asset, and amounts expected to
be recouped within one year are classified as a current asset. As mining occurs on these leases, the prepayment is charged to
cost of coal sales. See Note 12 for further details of royalty agreements.
Long-Lived Assets
If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed for
recoverability. If this review indicates that the carrying value of the asset will not be recovered, as determined based on
projected undiscounted cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its
estimated fair value through an impairment loss. No impairments have been recognized during the years ended
December 31, 2010, 2009 or 2008.
Asset Retirement Obligations (ARO) and Reclamation
The Company’s ARO activities consist of estimated spending related to reclaiming surface land and support facilities at
both surface and underground mines in accordance with federal and state reclamation laws as defined by each mining permit.
Obligations are incurred when development of a mine commences for
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
underground mines and surface facilities or, in the case of support facilities, refuse areas and slurry ponds when construction
begins.
The obligation’s fair value is determined using discounted cash flow techniques and is accreted to its present value at
the end of each period. The Company estimates ARO liabilities for final reclamation and mine closure based upon detailed
engineering calculations of the amount and timing of future cash spending for a third party to perform the required work.
Spending estimates are escalated for inflation and then discounted at the credit-adjusted, risk-free rate. The Company records
an ARO asset associated with the discounted liability for final reclamation and mine closure. The obligation and
corresponding asset are recognized in the period in which the liability is incurred. The ARO asset for equipment, structures,
and buildings is amortized on the straight-line method over their expected lives. Once production commences, the ARO asset
for mine development is amortized using the units-of-production method over the estimated recoverable reserves that are
associated with the property being benefited. The ARO liability is accreted to the projected spending date. As changes in
estimates occur (such as mine plan revisions, changes in estimated costs, or changes in timing of performance of reclamation
activities), the revisions to the obligation and asset are recognized at the appropriate credit-adjusted, risk-fee rate.
Fair Value
For assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements, the
Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
Income Taxes
The Company is subject to taxation. Deferred income taxes are recorded by applying statutory tax rates in effect at the
date of the balance sheet to differences between the income tax bases of assets and liabilities and their carrying amounts for
financial reporting purposes. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available
evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining
whether a valuation allowance is appropriate, projected realization of tax benefits is considered based on expected levels of
future taxable income, available tax planning strategies, and the overall deferred tax position. If actual results differ from the
assumptions made in the evaluation of the amount of the valuation allowance, the Company records a change in the
valuation allowance through income tax expense in the period such determination is made. Certain subsidiaries are
disregarded for income tax purposes and are included in each respective parent entity’s tax returns.
The calculations of the Company’s tax liabilities involve dealing with uncertainties in the application of complex tax
regulations. On January 1, 2008, the Company adopted ASC 740-10-25, Income Taxes — General — Recognition, guidance
related to uncertain tax positions. As a result of implementing this guidance, the Company recognized liabilities for uncertain
tax positions based on the two-step process prescribed in the guidance. The first step is to evaluate the tax position for
recognition by determining whether it is more likely than not that a tax position will be sustained upon examination,
including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second
step requires the Company to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be
realized upon settlement. The Company re-evaluates these uncertain tax positions annually. This evaluation is based on
factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under
audit, or new audit activity. Such a change in recognition or measurement results in the recognition of a tax benefit or an
additional charge to the tax provision.
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Equity Awards
The Company accounts for common stock (and previously, members’ equity units) paid with a note and issued to
employees as compensation expense. Amounts are recorded at fair market value. The Company used the Black-Scholes
option model in estimating the fair value of awards. Compensation expense is measured on grant date and recognized over
the term of the notes payable to the Company.
3. RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS
The Company has restated its previously issued financial statements for the years ended December 31, 2010 and 2009
to correct the accounting for depreciation, depletion, and amortization expense. An error was identified in the calculation of
depreciation, depletion, and amortization expense resulting in a net understatement of the results of operations. The
restatement has no effect on the Company’s net cash flows or liquidity. These adjustments also impact the calculation of
income attributable to non-controlling interests and the determination of deferred tax balances in each of the periods
affected.
Impact of the Financial Statement Adjustments on the Consolidated Statements of Operations
The table below presents the impact of the financial statement adjustments related to the restatement of the Company’s
previously issued Consolidated Statements of Operations for the years ended December 31, 2010 and 2009:
2009 2010
As Reported Adjustment As Adjusted As Reported Adjustment As Adjusted
Depreciation, depletion, and
amortization $ 14,728 $ (2,248 ) $ 12,480 $ 21,122 $ (2,230 ) $ 18,892
Asset retirement obligation
expense 1,505 479 1,984 2,352 735 3,087
Operating income (loss) (551 ) 1,769 1,218 17,657 1,495 19,152
Income (loss) before income
taxes (12,214 ) 1,769 (10,445 ) 6,674 1,495 8,169
Net Income (loss) (12,214 ) 1,769 (10,445 ) 6,674 1,495 8,169
(Income) loss attributable to
non-controlling interest 1,739 (9 ) 1,730 (3,344 ) (7 ) (3,351 )
Net income (loss) attributable to
common stockholders (10,475 ) 1,760 (8,715 ) 3,330 1,488 4,818
Net income (loss) per share
attributable to common
stockholders
Basic and diluted $ (0.61 ) $ 0.11 $ (0.50 ) $ 0.17 $ 0.08 $ 0.25
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Impact of the Financial Statement Adjustments on the Consolidated Balance Sheets
The table below presents the impact of the financial statement adjustments related to the restatement of the Company’s
previously issued Consolidated Balance Sheets for the years ended December 31, 2010 and 2009:
As of December 31, 2009 As of December 31, 2010
As Reported Adjustment As Adjusted As Reported Adjustment As Adjusted
Property, plant, equipment, and
mine development, net $ 393,707 $ 1,769 $ 395,476 $ 422,455 $ 3,264 $ 425,719
Total Assets 448,849 1,769 450,618 474,774 3,264 478,038
Accumulated deficit (40,852 ) 1,760 (39,092 ) (37,522 ) 3,248 (34,274 )
Armstrong Energy, Inc.’s
equity 164,148 1,760 165,908 167,557 3,248 170,805
Non-controlling interest 89,416 9 89,425 125,860 16 125,876
Total stockholders’ equity 253,564 1,769 255,333 293,417 3,264 296,681
Total liabilities and
stockholders’ equity 448,849 1,769 450,618 474,774 3,264 478,038
Impact of the Financial Statement Adjustments on the Consolidated Statements of Cash Flows
The restatement of the Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009 did
not affect the Company’s cash flows from financing or investing activities. The table below reflects adjustments to the
Company’s cash flows from operating activities:
2009 2010
As As
As Reported Adjustment As Adjusted Reported Adjustment Adjusted
Cash flows from operating
activities:
Net income $ (12,214 ) $ 1,769 $ (10,445 ) $ 6,674 $ 1,495 $ 8,169
Depreciation, depletion, and
amortization 14,728 (2,248 ) 12,480 21,122 (2,230 ) 18,892
Asset retirement obligation
expense 1,960 479 2,439 3,198 734 3,932
Net cash provided by
operating activities 3,054 — 3,054 37,194 — 37,194
4. INVENTORIES
Inventories consist of the following amounts:
December 31,
2010 2009
Materials and supplies $ 7,359 $ 4,527
Coal — raw and saleable 5,652 1,247
Total $ 13,011 $ 5,774
5. PROPERTY, PLANT, EQUIPMENT, AND MINE DEVELOPMENT
Mineral rights are estimated to contain 217,415 tons (unaudited) and 101,869 tons (unaudited) of proven and probable
reserves with a net book value of $193,804 and $198,768 at December 31, 2010 and 2009,
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
respectively. The allocation of the costs of the assets acquired reflects fair value based on a valuation completed in 2008.
Included in the book value of mineral rights are leased coal interests with net book value of $28,101 and $30,014 at
December 31, 2010 and 2009, respectively. The remaining net book value of $165,703 and $168,754 at December 31, 2010
and 2009, respectively, relates to coal reserves owned in fee ownership. During 2010, the Company acquired the lease to a
large reserve in western Kentucky. Though not determined proven and probable as of the date of this report, the Company
estimates that there are at least 400,000 tons (unaudited) of recoverable reserves in the area. A reserve study is in process, so
the Company has not included the tonnages in the figures above. Once a reserve study is completed, these reserves will be
included in the Company’s reserve estimates.
Property, plant, equipment, and mine development consist of the following as of December 31, 2010 and 2009:
2010 2009
Land $ 30,536 $ 27,112
Mineral rights 203,051 203,051
Machinery and equipment 105,309 66,865
Buildings and facilities 73,279 55,639
Other items 1,450 1,416
Mine development costs 21,647 7,397
ARO assets 13,093 7,762
Construction-in-progress 18,376 45,374
466,741 414,616
Less accumulated depreciation and depletion (41,022 ) (19,140 )
Total $ 425,719 $ 395,476
Other items include furniture, fixtures, computer hardware, and software. Depreciation expense, including amounts
from capitalized leases, for the years ended December 31, 2010, 2009 and 2008, was $11,375, $8,466 and $3,467,
respectively. For the years ended December 31, 2010, 2009 and 2008, depletion expense related to mineral rights amounted
to $4,443, $2,877 and $1,406, respectively; amortization expense related to mine development costs amounted to $1,707,
$842 and $274, respectively; and depreciation expense related to the ARO assets amounted to $2,241, $1,449 and $224,
respectively.
The Company has pledged substantially all buildings and equipment as security for capital lease obligations.
The Company had outstanding construction commitments as of December 31, 2010, of approximately $26,930. All
construction commitments are expected to be completed within the next fiscal year.
6. INTANGIBLE ASSETS
Intangible assets consist of mine plans and permits acquired in the property acquisitions outlined in Note 1, as well as a
non-compete agreement entered into in conjunction with the purchase of minority unitholders’ interest and settlement of
litigation. Mine plans and permits are being amortized over five years beginning in the year that mining operations
commence on the associated area. The non-compete agreement is being amortized, using the straight-line method, over the
five-year term of the agreement. Amortization expense related to intangible assets amounted to $705, $748 and $304 for the
years ended December 31, 2010, 2009 and 2008, respectively. Amortization expense is estimated to be approximately $732
per year for the next
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
two years, $431 in year three, and $9 in years four and five. Intangible assets consist of the following as of December 31,
2010 and 2009:
2010 2009
Mine plans and other intangibles acquired $ 440 $ 440
Non-compete agreement 3,354 3,354
Amortization of intangible assets (1,757 ) (1,052 )
Total $ 2,037 $ 2,742
7. OTHER NON-CURRENT ASSETS
Other non-current assets consist of the following as of December 31, 2010 and 2009:
2010 2009
Escrows and deposits $ 4,233 $ 3,322
Restricted surety and cash bonds 7,770 5,607
Advanced royalties 1,883 1,073
Total $ 13,886 $ 10,002
8. RISKS AND CONCENTRATIONS
Geographical Concentration
The Company’s operations are concentrated in western Kentucky, and a disruption within that geographic region could
adversely affect the Company’s performance.
Customer Concentration
The Company has multi-year coal supply agreements with six customers. The top two customers accounted for 40%
and 36%, respectively, of net sales at December 31, 2010. The Company seeks to mitigate credit risk by monitoring
creditworthiness of these customers and adjusting credit amounts provided accordingly. Significant interruption to these
customer facilities covered under force majeure provisions of their contracts could adversely affect the Company’s results.
9. RELATED-PARTY TRANSACTIONS
The Company rented office space, equipment, furniture, supplies, and the use of the related party’s employees from a
key employee of the Company. Expenses of $56, $46 and $40 were paid during the years ended December 31, 2010, 2009
and 2008, respectively.
In 2006 and 2007, the Company entered into overriding royalty agreements with two key executive employees to
compensate them $0.05/ton of coal mined and sold from properties owned by certain subsidiaries of the Company. The
agreements remains in effect for the later of 20 years from the date of the agreement or until all salable coal has been
extracted. Both royalties transfer with the property regardless of ownership or lease status. The royalties are payable the
month following the sale of coal mined from the specified properties. The Company accounts for these royalty arrangements
as expense in the period in which the coal is sold. Expense recorded in the years ended December 31, 2010, 2009 and 2008,
was $569, $467 and $146, respectively.
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On November 30, 2009, and again on March 31, 2010, May 31, 2010, and November 30, 2010, AE entered into
promissory notes with ARP whereby ARP loaned funds to AE for the sole purpose of making the scheduled payments under
the debt agreements described in Note 10. The amounts were $11,000 on November 30, 2009; $9,500 on March 31, 2010;
$12,600 on May 31, 2010; and $11,000 on November 30, 2010. The promissory notes have a fixed interest rate of 3%. In
addition, contingent interest equal to 7% of revenue would be accrued to the extent it exceeds the fixed interest amount. The
amount recorded on ARP (which is eliminated in consolidation of the Company) was $4,209 and $161 at December 31, 2010
and 2009, respectively. No payments of principal or interest are due until the earliest of May 31, 2014, or the 91st day after
the debt agreements described in Note 10 have been paid in full. No voluntary prepayments of these notes are allowed.
Further, ARP, in lieu of payment of the outstanding amounts of principal and interest, has the option to purchase an interest
in the mineral reserves of the Company equal to the percentage of the aggregate amount of principal loaned and related
accrued interest to the amount paid by the Company to repay or repurchase and retire the promissory notes discussed in
Note 10. This option can only be exercised if all promissory notes are repaid in full. If ARP exercises the option to purchase
the mineral reserves, ARP will lease to the Company, under mutually agreeable terms and conditions, the interest in the
mineral reserves that ARP acquired. See “Debt Repayment” discussion in Note 20.
10. DEBT
As further explained in Note 20 under “Debt Repayment,” the Company repaid the secured promissory note obligations
through the proceeds associated with a new credit agreement entered into February 9, 2011. Accordingly, the balances of the
secured promissory notes were classified as non-current as of December 31, 2010, since subsequently refinanced on a
long-term basis. Debt discounted using an effective interest rate of 10% consists of the following:
As of December 31,
2010 2009
Type Current Non-Current Current Non-Current
Secured promissory notes, due 2011 through 2014 $ — $ 121,363 $ 28,502 $ 112,483
Secured notes relating to land purchases, due 2011 through
2013 1,686 947 239 —
Total $ 1,686 $ 122,310 $ 28,741 $ 112,483
As detailed in Note 1, the Company has promissory notes outstanding from various acquisitions during 2008 and 2007.
The terms of the notes indicate that, in the event of default, the Company has 30 days after written notice by the owner to
cure the default. If the default has not been remedied, then all notes are considered in default, and the owner may exercise
any and all rights available in the respective notes, which rights include acceleration of payment, foreclosure, and the right to
take possession. Substantially all of the Company’s mineral reserves secure these notes. The Company has recorded the
notes at their net present value using an effective interest rate of 10%. The fair value of debt is $146,697 at December 31,
2010.
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
If the promissory notes had not been repaid in February 2011, there would be required principal payments including
imputed interest using an effective interest rate of 10% after December 31, 2010, as follows:
2011 $ 55,164
2012 44,412
2013 35,833
2014 and thereafter 6,531
Total payments 141,940
Less amounts representing unamortized discount 17,944
Net debt 123,996
Less short-term debt 1,686
Long-term debt $ 122,310
Subsequent to the balance sheet date, the Company refinanced its long-term debt as discussed in Note 20, and therefore
the above payout scheduled has been amended. Commensurate with this refinancing, the Company has required principal
payments of $0 in 2011 and $20 million in 2012, 2013, 2014, and 2015, with the remaining balance to be paid in full in
February 2016.
11. LEASE OBLIGATIONS
The Company leases equipment and facilities directly under various non-cancelable lease agreements. Certain lease
agreements require the maintenance of specified ratios and contain restrictive covenants for the return of collateral or
security deposits. Other leases contain renewal or purchase terms in the contract. Rental expense under operating leases was
$10,683, $8,012 and $3,966 for the years ended December 31, 2010, 2009 and 2008, respectively.
Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess
of one year) and future minimum capital lease payments as of December 31, 2010, are:
Capital Operating
Leases Leases
Year ending December 31:
2011 $ 4,730 $ 15,328
2012 4,606 15,299
2013 4,233 14,189
2014 2,796 10,898
2015 and thereafter 1,870 6,051
Total minimum lease payments 18,235 $ 61,765
Less amount representing interest 2,360
Present value of net minimum capital lease payments 15,875
Less current installments of obligations under capital leases 3,802
Obligations under capital leases, excluding current installments $ 12,073
F-18
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The net amount of leased assets capitalized on the balance sheet is:
December 31,
2010 2009
Asset cost $ 23,741 $ 21,790
Accumulated depreciation (7,059 ) (3,944 )
Net $ 16,682 $ 17,846
12. ROYALTIES
Royalty expense during the years ended December 31, 2010, 2009 and 2008, was $5,372, $3,819 and $146,
respectively. At December 31, 2010 and 2009, the Company recorded $831 and $307, respectively, of advance royalty
payments. These payments are recoupable against royalties generated from future mining activity. Included in the 2010 total
of payments is an advance royalty related to a new leased reserve. The lease requires the Company to provide the owner with
a certain amount of tonnage each year until production commences on the leased reserve. The Company valued this tonnage
using market pricing as of December 31, 2010, at $500 in 2010 and accordingly recorded the value as an advance, as the
value of the tonnage provided is recoupable against royalties generated by future mining activity. The value and term of
future advanced royalties are dependent on the market value of the coal and the date that operations commence on the
property. For disclosure purposes, the Company has included an anticipated annual minimum advance royalty based on
estimated market prices for similar coal through 2016, at which time the lessor can terminate the agreement if mining has not
commenced.
Anticipated future minimum advance royalties as of December 31, 2010, are payable as follows:
2011 $ 782
2012 870
2013 905
2014 925
2015 and thereafter 1,243
Total $ 4,725
In addition to the above advanced royalties, production royalties are payable based on the quantity of coal mined in
future years.
Various royalties and commissions have been negotiated with management, a former minority unitholder, and sales
brokers. See Note 9 for the terms of royalties to employees.
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
13. ASSET RETIREMENT OBLIGATIONS AND RECLAMATION
Asset retirement obligation and reclamation balances consist of the following as of December 31, 2010 and 2009:
Reconciliation of asset retirement obligations
2010 2009
Balance at beginning of year $ 8,524 $ 4,613
Accretion expense 852 455
Liabilities incurred (net) 5,331 3,456
Balance at end of year 14,707 8,524
Less current obligation 1,458 1,200
Total obligation less current portion $ 13,249 $ 7,324
The credit-adjusted, risk-free rate used to discount the estimated liability was 10% in both 2010 and 2009.
14. INCOME TAXES
The income or loss before income taxes and non-controlling interest was income of $8,169 and a loss of $10,445 for the
years ended December 31, 2010 and 2009, respectively.
The income tax rate differed from the U.S. federal statutory rate as follows:
December 31,
2010 2009
(Restated) (Restated)
Tax expense (benefit) at federal statutory rates $ 2,859 $ (3,656 )
State income taxes 577 (407 )
Nontaxable entities, net of non-controlling interest 798 1,771
Other permanent items 102 157
Other 2,074 —
Change in valuation allowance (6,410 ) 2,135
Total $ — $ —
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities
consist of the following:
December 31,
2010 2009
(Restated) (Restated)
Deferred tax assets:
Tax loss carryforwards $ 38,847 $ 32,058
Deferred organization costs and other intangibles 412 100
Vacation accrual 311 478
Deferred compensation costs — 161
Charitable contributions 124 50
Asset retirement obligation 2,150 884
Total gross deferred tax assets 41,844 33,731
Deferred tax liabilities:
Property, plant, and equipment (35,318 ) (20,794 )
Total gross deferred tax liabilities (35,318 ) (20,794 )
Valuation allowance (6,526 ) (12,937 )
Net deferred tax assets $ — $ —
Changes to the valuation allowance during the years ended December 31, 2010 and 2009, were as follows:
(Restated)
Valuation allowance at December 31, 2008 $ 10,802
Increase in valuation allowance 2,135
Valuation allowance at December 31, 2009 12,937
Decrease in valuation allowance (6,411 )
Valuation allowance at December 31, 2010 $ 6,526
The Company’s net deferred tax assets are offset by a valuation allowance of $6,526 and $12,937 at December 31, 2010
and 2009, respectively. The Company evaluated and assessed the expected near-term utilization of net operating loss
carryforwards, book and taxable income trends, available tax strategies, and the overall deferred tax position and believes
that it is more likely than not that the benefit related to the deferred tax assets will not be realized and has thus established
the valuation allowance required as of December 31, 2010 and 2009.
The Company’s net deferred tax assets included federal and state net operating loss (NOL) carryforwards of $102,821
and $73,281, respectively, as of December 31, 2010. The NOLs begin to expire in 2026.
The Company’s federal income tax returns for the tax years from 2006 forward remain subject to examination by the
Internal Revenue Service. The Company’s state income tax returns for the same period remain subject to examination by the
various state taxing authorities.
During 2010, 2009 and 2008, the Company made no federal income tax payments and made only insignificant state and
local income tax payments for the years ended December 31, 2010, 2009 and 2008.
F-21
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
There were no uncertain tax positions as of December 31, 2010 or 2009, and combined with the existence of NOL
carryforwards, the Company has not currently accrued interest or penalties. If the accrual of interest or penalties becomes
appropriate, the Company will record an accrual as part of its income tax provision.
15. EMPLOYEE BENEFIT PLANS
Beginning September 2007, the Company offered a 401(k) savings plan for all employees. The costs included in the
consolidated statements of operations totaled $1,434, $1,090 and $515 for the years ended December 31, 2010, 2009 and
2008, respectively.
16. EQUITY AWARDS
The Chief Executive Officer, the President, and a board member have purchased common stock in the Company, which
have been paid with cash and non-recourse promissory notes. Certain minority stockholders also have purchased common
stock in the majority-owned, consolidated subsidiaries that have been paid with cash and non-recourse promissory notes. All
notes carry a stated interest rate of 6% simple interest per annum. All notes are due eight years from their date of issuance.
All promissory notes are collateralized by both paid and unpaid ownership interest, as well as dividends, proceeds, or other
benefits obtained by the holder of the common stock. No portions of the notes are subject to release until full payment has
been tendered on the applicable note. In the event of default, the notes shall bear interest at 12% per annum. As of
December 31, 2010, there are no defaults under the terms of the notes.
The common stock purchased with non-recourse notes are accounted for as equity awards. The Company recorded $0,
$66 and $163 of expense related to the awards during the years ended December 31, 2010, 2009 and 2008. As the awards
were fully vested at the date of issuance, the associated compensation expense was recognized at the date of issuance and
was recorded under selling, general, and administrative costs in the consolidated statements of operations. No awards were
granted in 2010. The weighted-average grant-date fair value of the awards issued during the year ended December 31, 2009,
was $5.67 per share. As of December 31, 2010 and 2009, there was no unrecognized compensation cost.
Weighted-
Number of Average Grant Date Fair Average
Common Shares Exercise Price Value Remaining Life
Outstanding at January 1, 2010 277,500 $ 16.00 $ 1,400 5.15
Granted — — — —
Exercised — — — —
Forfeited — — — —
Outstanding at December 31, 2010 277,500 $ 16.00 $ 1,400 4.23
Exercisable 277,500 $ — $ — 4.23
Weighted-average assumptions used in determining fair value, using a Black-Scholes option pricing model, are as
follows:
2010 2009
Risk-free interest rate N/
A 2.0 %
Expected unit price volatility N/
A 0.55 %
Expected term (years) N/
A 8
Expected dividends — —
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company concluded that there was a remote probability of early repayment of the non-recourse promissory notes;
therefore, the expected term is the term of the notes. The amounts due on the notes held by award holders are offset to the
respective entity’s equity account. Notes receivable, including accrued interest, offset against members’ equity as of
December 31, 2010 and 2009, were $3,724 and $3,568, respectively.
The Company may issue restricted shares which require no payment from the employee. Restricted shares cliff-vest at
various dates. Compensation expense is based on the fair value on the grant date and is recorded ratably over the vesting
period.
Information regarding restricted shares activity and weighted-average grant-date fair value follows for the year ended
December 31, 2010:
Restricted Shares
Weighted-
Average Grant-
Shares Date Fair Value
(In thousands)
Outstanding at January 1 — $ —
Granted 35.2 6.23
Vested — —
Canceled — —
Outstanding at December 31 35.2 $ 6.23
Unearned compensation of $140 will be recognized over the remaining vesting period of the outstanding restricted
shares. The Company recognized expense of approximately $79 related to restricted shares for the year ended December 31,
2010.
17. EARNINGS PER SHARE
The computation of basic and diluted earnings per common share is as follows (in thousands, except per share
amounts):
December 31, December 31, December 31,
2010 2009 2008
(Restated) (Restated)
Net income (loss) applicable to common stockholders — basic and
diluted $ 4,818 $ (8,715 ) $ (15,827 )
Basic weighted average number of common shares outstanding 19,111 17,265 11,713
Effect of dilutive securities 22 — —
Diluted weighted average number of common shares outstanding 19,133 17,265 11,713
Earnings (loss) per common share — basic and diluted $ 0.25 $ (0.50 ) $ (1.35 )
As of December 31, 2009 and 2008, there were no unvested restricted stock awards outstanding.
18. MEMBERS’ EQUITY
No distributions have been made to any of the members of AE or any of its subsidiaries, including distributions to
minority unitholders.
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
19. COMMITMENTS AND CONTINGENCIES
The Company is subject to various market, operational, financial, regulatory, and legislative risks. Numerous federal,
state, and local governmental permits and approvals are required for mining operations. Federal and state regulations require
regular monitoring of mines and other facilities to document compliance. Monetary penalties of $602, $535 and $62 related
to Mine Safety and Health Administration (MSHA) fines were accrued in the results of operations for 2010, 2009 and 2008.
Periodically, there may be various claims and legal proceedings against the Company arising from the normal course of
business. The Company is also involved in litigation matters arising in the ordinary course of business. In the opinion of
management, the resolution of these matters will not have a material adverse effect on the Company’s consolidated financial
statements.
The Company, via contractual agreements, has committed volumes of sales in 2011 and 2012 of 7.6 million tons and
8.3 million tons, respectively.
Equipment Commitments
During 2010, the Company entered into lease agreements for approximately $5,550 of equipment that will be delivered
in 2011.
Coal Transportation Agreements
In December 2007, the Company entered into a lease services agreement with a third party commencing January 2008
and expiring December 2015. The third party will provide all barge switching, coal loading, tug, hauling, and similar
services necessary for the Company’s operations. During the term of the agreement, the Company will pay a monthly
amount based on the annual volume of tons of coal loaded at the dock facility. The Company commenced activity under the
lease in January 2009 and incurred $835 and $501 of expense during the years ended December 31, 2010 and 2009,
respectively.
20. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date of this report, May 9, 2011.
Debt Repayment
On February 9, 2011, the Company repaid its secured promissory note obligations through the proceeds associated with
a new credit agreement. The new credit agreement consists of a $100 million term loan and a $50 million revolving credit
facility. The term loan has a term of five years, with principal repayment amounts of $5 million on the first day of each
quarter commencing on January 1, 2012 through January 1, 2016, with the remaining principal balance payable at maturity.
Interest payments are also payable quarterly in arrears on the first day of each quarter. The interest rate fluctuates based on
the Company’s leverage ratio and the applicable interest option elected. The interest rate as of June 30, 2011 was 5.75%. The
revolving credit facility provides for quarterly interest payments in arrears that fluctuate on the same method as the term
loan. The revolving credit facility also calls for a commitment fee based on the unused portion of the facility. As of June 30,
2011, the Company has $28.5 million outstanding under this revolving credit facility. The obligations under the credit
agreement are secured by a first lien on substantially all of the Company’s assets, including but not limited to certain of the
Company’s mines, coal reserves, and related fixtures. The credit agreement contains certain customary covenants as well as
certain limitations on, among other things, additional debt, liens, investments, acquisitions and capital expenditures, future
dividends, and asset sales. The Company incurred approximately $3.2 million in fees related to the new credit agreement.
These fees will be amortized over the term of the agreements. The Company has also entered into an interest rate swap
agreement with an
F-24
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
effective date of January 1, 2012, which will terminate in February 2016. The initial amount of the arrangement is
$47.5 million with a fixed rate of 2.89%. The amount will decline as principal payments are made on the term note. As a
result of the repayment of the existing debt obligations, the Company will recognize a gain of approximately $6.9 million in
2011.
As a result of the repayment of the secured promissory notes, the related party promissory notes to ARP were converted
at ARP’s option to a 39.45% undivided interest in the original non-ARP reserves held by the Company. The Company will
now pay to a subsidiary of ARP a royalty based on its interest in the reserves at a rate of 7% of revenue. In addition, ARP is
a guarantor of the new Armstrong Coal Company credit agreement, and its assets are pledged as collateral. ARP will receive,
as compensation for these restrictions, a fee of 1% of the weighted-average outstanding balance under the credit agreements.
Ownership Items
On January 17, 2011, additional capital of $5,000 was contributed by the limited partners in ARP as part of the
repayment of its secured promissory note obligations and entering into the new credit facility.
Equipment Purchase Agreements
Agreements to purchase or lease various pieces of surface and underground equipment totaled approximately $17,200
and were signed in 2011.
Reorganization
In August 2011, Armstrong Resources Holdings, LLC merged with and into Armstrong Energy, Inc., which
subsequently changed its name to Armstrong Energy Holdings, Inc. Subsequently, Armstrong Land Company, LLC
(“ALC”) adopted a Plan of Conversion (the “Plan”), which resulted in ALC being converted to a C-corporation named
Armstrong Land Company, Inc. (“ALCI”) effective October 1, 2011. In addition, the Plan authorized the conversion of each
issued and outstanding membership units of ALC into 9.25 shares of common stock of ALCI. Concurrent with the
effectiveness of the Plan, ALCI changed its name to Armstrong Energy, Inc. (collectively, the “Reorganization”). As a result
of the Reorganization, the Company will have 70,000,000 authorized shares of common stock with a par value of $0.01 per
share, 19,095,763 shares of common stock which are issued and outstanding and 1,000,000 authorized shares of preferred
stock with a par value of $0.01 per share, of which none are issued and outstanding as of October 1, 2011.
In accordance with SEC Staff Accounting Bulletin Topic 4.C, Changes in Capital Structure, all common share
information presented has been retroactively adjusted to reflect the common stock conversion.
Deconsolidation of Armstrong Resource Partners
On October 1, 2011, the partners of ARP entered into the Amended and Restated Agreement of Limited Partnership of
Armstrong Resource Partners, L.P. (the “ARP LPA”). Pursuant to the ARP LPA, effective October 1, 2011, investment
funds managed by Yorktown Partners LLC, unilaterally may remove the Company’s subsidiary, Elk Creek GP, as general
partner of ARP or otherwise cause a change of control of ARP without the Company’s consent or the consent of the holders
of ARP’s equity units. As a result, the Company will no longer consolidate the results of operations of ARP in accordance
with ASC 810-20 effective October 1, 2011 and will begin to account for its ownership in ARP under the equity method of
F-25
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
accounting. The following is summarized financial information of ARP as of December 31, 2010 (in thousands):
Total assets $ 137,929
Total liabilities $ 12,000
Partners’ capital 125,929
Total liabilities and partners capital $ 137,929
Executive Stock Repurchase
In 2006 thru 2008, the Company’s Board of Directors approved the issuance of promissory notes payable to the
Company to certain executive officers to finance the purchase of membership units of the Company’s predecessor.
Promissory notes payable to the Company, including accrued and unpaid interest, were $2,687 and $2,623 as of June 30,
2011 and December 31, 2010, respectively, but are not recorded within the consolidated balance sheet as these notes are
non-recourse. In September 2011, all promissory notes outstanding as of June 30, 2011 were repaid in full through the sale
of membership units back to the Company’s predecessor by the borrowers.
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
2011 2010
(Unaudited)
(Restated) (Restated)
ASSETS
Current assets:
Cash and cash equivalents $ 7,547 $ 8,101
Accounts receivable 23,289 13,927
Inventories 10,887 13,011
Prepaid and other assets 3,476 1,357
Total current assets 45,199 36,396
Property, plant, equipment, and mine development, net 451,008 425,719
Investment in affiliate 2,470 —
Intangible assets, net 1,488 2,037
Other non-current assets 16,134 13,886
Total assets $ 516,299 $ 478,038
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 24,628 $ 18,681
Accrued liabilities and other 14,831 8,697
Construction retainage 375 625
Current portion of capital lease obligations 4,331 3,802
Current maturities of long-term debt 15,976 1,686
Total current liabilities 60,141 33,491
Long-term debt, less current maturities 121,100 122,310
Asset retirement obligations 14,352 13,249
Long-term portion of capital lease obligations 10,800 12,073
Other non-current liabilities 1,976 234
Total liabilities 208,369 181,357
Stockholders’ equity:
Common stock, $0.01 par value, 70,000,000 shares authorized, 19,095,763 and
19,110,500 shares issued and outstanding as of September 30, 2011 and
December 31, 2010, respectively 191 191
Preferred stock, $0.01 par value, 1,000,000 shares authorized, no shares issued and
outstanding as of September 30, 2011 and December 31, 2010, respectively — —
Additional paid-in-capital 206,790 204,888
Accumulated deficit (35,257 ) (34,274 )
Accumulated other comprehensive income (loss) (1,778 ) —
Armstrong Energy, Inc.’s equity 169,946 170,805
Non-controlling interest 137,984 125,876
Total stockholders’ equity 307,930 296,681
Total liabilities and stockholders’ equity $ 516,299 $ 478,038
See accompanying notes to unaudited condensed consolidated financial statements.
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
Nine Months Ended
September 30,
2011 2010
(Restated) (Restated)
Revenue $ 229,980 $ 176,311
Costs and Expenses:
Operating costs and expenses 170,297 120,204
Depreciation, depletion, and amortization 21,478 14,017
Asset retirement obligation expenses 2,942 2,545
Selling, general and administrative costs 28,834 21,403
Operating income 6,429 18,142
Other income (expense):
Interest income 118 143
Interest expense (6,073 ) (8,532 )
Other income / (expense), net (154 ) 116
Gain on early extinguishment of debt 6,954 —
Income before income taxes 7,274 9,869
Income tax provision 809 —
Net income 6,465 9,869
Income attributable to non-controlling interests (7,448 ) (2,814 )
Net (loss) income attributable to common stockholders $ (983 ) $ 7,055
Net (loss) income per share attributable to common stockholders
Basic and diluted $ (0.05 ) $ 0.37
See accompanying notes to unaudited condensed consolidated financial statements.
F-28
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Nine Months Ended September 30, 2011
(Amounts in thousands)
Accumulated
Stockholders’
Equity Other Non- Total
Common Additional Accumulated Comprehensive Controlling Stockholders’
Amoun
Stock t Paid-in-Capital Deficit Loss Interest Equity
(Restated)
(Restated) (Restated) (Restated)
Balance at December 31, 2010 19,111 $ 191 $ 204,888 $ (34,274 ) $ — $ 125,876 $ 296,681
Comprehensive income:
Net income (loss) — — (983 ) — 7,448 6,465
Decrease in fair value of cash flow
hedge — — — (1,778 ) — (1,778 )
Comprehensive income 4,687
Stock based compensation — — 279 — — — 279
Acquisition of non-controlling interest 74 1 472 — — (340 ) 133
Issuance of common stock to
non-employees 41 0 217 — — — 217
Repurchase of common stock (149 ) (1 ) 934 — — — 933
Shares issued under employee plan 19 — — — — — —
Minority contributions — — — — 5,000 5,000
—
Balance at September 30, 2011 19,096 $ 191 $ 206,790 $ (35,257 ) $ (1,778 ) $ 137,984 $ 307,930
See accompanying notes to unaudited condensed consolidated financial statements.
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine Months Ended
September 30,
2011 2010
(Restated) (Restated)
Cash Flows from Operating Activities:
Net income $ 6,465 $ 9,869
Adjustments to reconcile net income to cash provided by operating activities:
Gain on early extinguishment of debt (6,954 ) —
Gain on disposal of assets (36 ) —
Non-cash stock compensation expense 1,212 54
Non-cash charge related on non-recourse notes 218 —
Amortization of debt issuance costs 440 —
Depreciation, depletion and amortization 21,478 13,961
Asset retirement obligation expenses 2,942 2,545
Interest on long-term obligations 2,428 10,933
Change in operating assets and liabilities:
Accounts receivable (9,362 ) 1,206
Inventories 2,124 (2,517 )
Prepaid and other assets (2,119 ) 134
Other non-current assets 1,711 (3,339 )
Accounts payable and accrued liabilities 10,615 (6,087 )
Other non-current liabilities (36 ) 45
Net cash provided by operating activities: 31,126 26,804
Cash Flows from Investing Activities:
Investment in property, plant, equipment, and mine development (45,035 ) (24,681 )
Investment in affiliate (2,470 ) —
Proceeds from the sale of fixed assets 119 —
Net cash used in investing activities (47,386 ) (24,681 )
Cash Flows from Financing Activities:
Payment on capital lease obligations (3,040 ) (2,774 )
Payment of secured promissory notes (115,679 ) (25,100 )
Payment of secured notes (908 ) (243 )
Payment of financing costs and fees (4,399 ) —
Proceeds from senior secured term loan 100,000 —
Proceeds from senior secured revolving credit facility 34,600 —
Proceeds from the acquisition of non-controlling interest 132 —
Minority contributions 5,000 22,100
Net cash provided by (used in) financing activities 15,706 (6,017 )
Net change in cash and cash equivalents (554 ) (3,894 )
Cash, at the beginning of the period 8,101 16,597
Cash, at the end of the period $ 7,547 $ 12,703
Nine Months Ended
September 30,
Supplemental cash flow information: 2011 2010
Non-Cash Transactions:
Assets acquired by capital lease $ 2,296 $ 994
Investment in property, plant, equipment, and mine development acquired with debt $ 750 $ —
See accompanying notes to unaudited condensed consolidated financial statements.
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(unaudited)
1. DESCRIPTION OF BUSINESS AND ENTITY STRUCTURE
In August 2011, Armstrong Resources Holdings, LLC merged with and into Armstrong Energy, Inc., which
subsequently changed its name to Armstrong Energy Holdings, Inc. Subsequently, Armstrong Land Company, LLC
(“ALC”) adopted a Plan of Conversion (the “Plan”), which resulted in ALC being converted to a C-corporation named
Armstrong Land Company, Inc. (“ALCI”) effective October 1, 2011. Concurrent with the effectiveness of the Plan, ALCI
changed its name to Armstrong Energy, Inc. (collectively, the “Reorganization”).
The accompanying unaudited condensed consolidated financial statements include the accounts of Armstrong Energy,
Inc. and its subsidiaries and controlled entities (collectively the “Company” or “AE”). The Company’s primary business is
the production of thermal coal from surface and underground mines located in western Kentucky, for sale to utility,
industrial and export markets. Intercompany transactions and accounts have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with
U.S. generally accepted accounting principles for interim financial reporting and U.S. Securities and Exchange Commission
regulations. In the opinion of management, all adjustments, consisting of normal, recurring accruals considered necessary for
a fair presentation, have been included. Results of operations for the nine months ended September 30, 2011 are not
necessarily indicative of results to be expected for the year ending December 31, 2011. These financial statements should be
read in conjunction with the audited financial statements and related notes as of and for the year ended December 31, 2010.
All of the Company’s subsidiaries are majority-owned by the Company with the exception of Armstrong Resource
Partners, L.P. (formerly Elk Creek, LP) (“ARP”) and its subsidiaries, which were not majority-owned by the Company as of
September 30, 2011, but whose results have been consolidated in accordance with Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) 810-20, Consolidation — Control of Partnerships and Similar Entities.
ARP was established on March 31, 2008, for the purpose of owning and subleasing coal production assets. The Company as
Elk Creek General Partner (ECGP) has an approximate 0.4% ownership in ARP. The various limited partners of ARP are
related parties, as the entities are owned by certain private investment funds that also own AE. General creditors of ARP and
subsidiaries have no recourse to the assets of the Company and its majority-owned subsidiaries. As a result of an amendment
to the partnership agreement, ARP will be deconsolidated from the operating results of the Company effective October 1,
2011 (see Note 16).
The Company has evaluated subsequent events and transactions for potential recognition or disclosure in the financial
statements through the day the financial statements are available to be issued.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Derivatives
Derivative instruments are accounted for in accordance with the applicable FASB guidance on accounting for derivative
instruments and hedging activity. This guidance provides comprehensive and consistent standards for the recognition and
measurement of derivative and hedging activities. It also requires that derivatives be recorded on the consolidated balance
sheet at fair value and establishes criteria for hedges of changes in fair values of assets, liabilities, or firm commitments;
hedges of variable cash flows of forecasted transactions; and hedges of foreign currency exposures of net investments in
foreign operations. The Company currently uses derivatives only to hedge the variable cash flows of future interest payments
on long-term debt. To the extent a derivative qualifies as a cash flow hedge, the gain or loss associated with the effective
portion
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands)
(unaudited)
is recorded as a component of Accumulated Other Comprehensive Income (Loss). Changes in the fair value of derivatives
that do not meet the criteria for hedge accounting would be recognized in the consolidated statements of operations. When
an interest rate swap agreement terminates, any resulting gain or loss is recognized over the shorter of the remaining original
term of the hedging instrument or the remaining life of the underlying debt obligation. The Company does not anticipate any
nonperformance by the counterparty.
Newly Adopted Accounting Standard
In January 2010, the FASB issued accounting guidance that requires new fair value disclosures, including disclosures
about significant transfers into and out of Level 1 and Level 2 fair-value measurements and a description of the reasons for
the transfers. In addition, the guidance requires new disclosures regarding activity in Level 3 fair value measurements,
including a gross basis reconciliation. The new disclosure requirements became effective for interim and annual periods
beginning January 1, 2010, except for the disclosure of activity within Level 3 fair value measurements, which became
effective January 1, 2011. The new guidance did not have an impact on the Company’s consolidated financial statements.
Accounting Standards Not Yet Implemented
In June 2011, the FASB amended requirements for the presentation of other comprehensive income (loss), requiring
presentation of comprehensive income (loss) in either a single, continuous statement of comprehensive income or on
separate but consecutive statements, the statement of operations and the statement of other comprehensive income (loss).
The amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, or
March 31, 2012 for the Company. The adoption of this guidance will not impact the Company’s financial position, results of
operations or cash flows and will only impact the presentation of other comprehensive income (loss) on the financial
statements.
In May 2011, the FASB amended the guidance regarding fair value measurement and disclosure. The amended
guidance clarifies the application of existing fair value measurement and disclosure requirements. The amendment is
effective for interim and annual periods beginning after December 15, 2011, or March 31, 2012 for the Company. Early
adoption is not permitted. The adoption of this amendment is not expected to materially affect the Company’s consolidated
financial statements.
3. RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS
The Company has restated its previously issued financial statements for the years ended December 31, 2010 and 2009,
and the interim periods of fiscal years 2011 and 2010, to correct the accounting for depreciation, depletion, and amortization
expense. An error was identified in the calculation of depreciation, depletion, and amortization expense resulting in a net
understatement of the results of operations. The restatement has no effect on the Company’s net cash flows or liquidity.
These adjustments also impact the calculation of income attributable to non-controlling interests and the determination of
deferred tax balances in each of the periods affected.
In addition, during the third quarter of 2011, the Company has restated its previously issued unaudited consolidated
financial statements as of and for the six months ended June 30, 2011 to correct its calculation of income attributable to
non-controlling interests.
The Company identified adjustments in the determination of income attributable to non-controlling interests related to
the treatment of certain related-party expenses arising from the financing arrangement entered into on February 9, 2011 with
ARP. The effect of the correction resulted in the increase in the net loss
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands)
(unaudited)
attributable to common stockholders, net loss per share attributable to common stockholders and income attributable to
non-controlling interests.
Impact of the Financial Statement Adjustments on the Consolidated Statements of Operations
The table below presents the impact of the financial statement adjustments related to the restatement of the Company’s
previously issued Consolidated Statements of Operations for the years ended December 31, 2010 and 2009 and interim
periods of fiscal years 2011 and 2010:
2009 2010
As As
As Reported Adjustment As Adjusted Reported Adjustment Adjusted
Depreciation, depletion, and
amortization $ 14,728 $ (2,248 ) $ 12,480 $ 21,122 $ (2,230 ) $ 18,892
Asset retirement obligation
expense 1,505 479 1,984 2,352 735 3,087
Operating income (loss) (551 ) 1,769 1,218 17,657 1,495 19,152
Income (loss) before income
taxes (12,214 ) 1,769 (10,445 ) 6,674 1,495 8,169
Net Income (loss) (12,214 ) 1,769 (10,445 ) 6,674 1,495 8,169
(Income) loss attributable to
non-controlling interest 1,739 (9 ) 1,730 (3,344 ) (7 ) (3,351 )
Net income (loss) attributable to
common stockholders (10,475 ) 1,760 (8,715 ) 3,330 1,488 4,818
Net income (loss) per share
attributable to common
stockholders
Basic and diluted $ (0.61 ) $ 0.11 $ (0.50 ) $ 0.17 $ 0.08 $ 0.25
Nine Months Ended September 30, 2010 Nine Months Ended September 30, 2011
As As As As
Reported Adjustment Adjusted Reported Adjustment Adjusted
Depreciation, depletion, and
amortization $ 15,817 $ (1,800 ) $ 14,017 $ 22,101 $ (623 ) $ 21,478
Asset retirement obligation expense 1,938 607 2,545 2,859 83 2,942
Operating income 16,949 1,193 18,142 5,889 540 6,429
Income before income taxes 8,676 1,193 9,869 6,734 540 7,274
Income tax provision — — — 726 83 809
Net Income 8,676 1,193 9,869 6,008 457 6,465
Income attributable to
non-controlling interest (2,808 ) (6 ) (2,814 ) (7,445 ) (3 ) (7,448 )
Net income attributable to common
stockholders 5,868 1,187 7,055 (1,437 ) 454 (983 )
Net income (loss) per share
attributable to common
stockholders
Basic and diluted $ 0.31 $ 0.06 $ 0.37 $ (0.07 ) $ 0.02 $ (0.05 )
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands)
(unaudited)
Six Months Ended June 30, 2010 Six Months Ended June 30, 2011
As As As As
Reported Adjustment Adjusted Reported Adjustment Adjusted
Depreciation, depletion, and
amortization $ 10,448 $ (1,197 ) $ 9,251 $ 14,621 $ (876 ) $ 13,745
Asset retirement obligation expense 1,249 384 1,633 1,724 63 1,787
Operating income 13,061 813 13,874 (3,074 ) 813 (2,261 )
Income before income taxes 7,594 813 8,407 71 813 884
Net Income 7,594 813 8,407 (766 ) 813 47
Income attributable to
non-controlling interest (1,531 ) (4 ) (1,535 ) (1,703 ) (2,661 ) (4,364 )
Net income attributable to common
stockholders 6,063 809 6,872 (2,469 ) (1,848 ) (4,317 )
Net income (loss) per share
attributable to common
stockholders
Basic and diluted $ 0.32 $ 0.04 $ 0.36 $ (0.13 ) $ (0.10 ) $ (0.23 )
Impact of the Financial Statement Adjustments on the Consolidated Balance Sheets
The table below presents the impact of the financial statement adjustments related to the restatement of the Company’s
previously issued Consolidated Balance Sheets for the years ended December 31, 2010 and 2009 and interim periods of
fiscal years 2011 and 2010:
As of December 31, 2009 As of December 31, 2010
As Reported Adjustment As Adjusted As Reported Adjustment As Adjusted
Property, plant, equipment, and
mine development, net $ 393,707 $ 1,769 $ 395,476 $ 422,455 $ 3,264 $ 425,719
Total Assets 448,849 1,769 450,618 474,774 3,264 478,038
Accumulated deficit (40,852 ) 1,760 (39,092 ) (37,522 ) 3,248 (34,274 )
Armstrong Energy, Inc.’s
equity 164,148 1,760 165,908 167,557 3,248 170,805
Non-controlling interest 89,416 9 89,425 125,860 16 125,876
Total stockholders’ equity 253,564 1,769 255,333 293,417 3,264 296,681
Total liabilities and
stockholders’ equity 448,849 1,769 450,618 474,774 3,264 478,038
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands)
(unaudited)
As of June 30, 2011 As of September 30, 2011
As Reported Adjustment As Adjusted As Reported Adjustment As Adjusted
Property, plant, equipment, and
mine development, net $ 436,057 $ 4,076 $ 440,133 $ 447,204 $ 3,804 $ 451,008
Total assets 490,860 4,076 494,936 512,495 3,804 516,299
Accrued liabilities and other 13,307 — 13,307 14,748 83 14,831
Total current liabilities 47,641 — 47,641 60,058 83 60,141
Total liabilities 194,275 — 194,275 208,286 83 208,369
Accumulated deficit (39,991 ) 1,399 (38,592 ) (38,959 ) 3,702 (35,257 )
Additional paid in capital 204,998 — 204,998 206,771 19 206,790
Armstrong Energy, Inc.’s
equity 164,022 1,399 165,421 166,225 3,721 169,946
Non-controlling interest 132,563 2,677 135,240 137,984 — 137,984
Total stockholders’ equity 296,585 4,076 300,661 304,209 3,721 307,930
Total liabilities and
stockholders’ equity 490,860 4,076 494,936 512,495 3,804 516,299
Impact of the Financial Statement Adjustments on the Consolidated Statements of Cash Flows
The restatement of the Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009 and
interim periods of fiscal years 2011 and 2010 did not affect the Company’s cash flows from financing or investing activities.
The table below reflects adjustments to the Company’s cash flows from operating activities:
2009 2010
As As
As Reported Adjustment As Adjusted Reported Adjustment Adjusted
Cash flows from operating
activities:
Net income $ (12,214 ) $ 1,769 $ (10,445 ) $ 6,674 $ 1,495 $ 8,169
Depreciation, depletion, and
amortization 14,728 (2,248 ) 12,480 21,122 (2,230 ) 18,892
Asset retirement obligation
expense 1,960 479 2,439 3,198 734 3,932
Net cash provided by operating
activities 3,054 — 3,054 37,194 — 37,194
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands)
(unaudited)
Nine Months Ended September 30, 2010 Nine Months Ended September 30, 2011
As As As As
Reported Adjustment Adjusted Reported Adjustment Adjusted
Cash flows from operating
activities:
Net income $ 8,676 $ 1,193 $ 9,869 $ 6,008 $ 457 $ 6,465
Depreciation, depletion, and
amortization 15,761 (1,800 ) 13,961 22,101 (623 ) 21,478
Asset retirement obligation expense 1,938 607 2,545 2,859 83 2,942
Increase/(decrease) in accounts
payable and accrued liabilities (6,087 ) — (6,087 ) 10,532 83 10,615
Net cash provided by operating
activities 26,804 — 26,804 31,126 — 31,126
Six Months Ended June 30, 2010 Six Months Ended June 30, 2011
As As As As
Reported Adjustment Adjusted Reported Adjustment Adjusted
Cash flows from operating
activities:
Net income $ 7,594 $ 813 $ 8,407 $ (766 ) $ 812 $ 46
Depreciation, depletion, and
amortization 10,448 (1,197 ) 9,251 14,621 (875 ) 13,746
Asset retirement obligation expense 1,249 384 1,633 1,724 63 1,787
Net cash provided by operating
activities 17,571 — 17,571 15,706 — 15,706
4. INVENTORIES
Inventories consist of the following amounts:
September 30, 2011 2010 December 31,
Materials and supplies $ 9,183 $ 7,359
Coal — raw and saleable 1,704 5,652
Total $ 10,887 $ 13,011
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands)
(unaudited)
5. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consist of the following amounts:
September 30, 2011 December 31, 2010
Payroll and related benefits $ 6,436 $ 4,761
Taxes other than income taxes 3,581 1,240
Interest 1,174 23
Asset retirement obligations 1,458 1,458
Royalties 1,197 686
Other 985 529
Total $ 14,831 $ 8,697
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures the fair value of assets and liabilities using a three-tier fair value hierarchy which prioritizes the
inputs used in measuring fair value as follows: Level 1 — observable inputs such as quoted prices in active markets;
Level 2 — inputs, other than quoted market prices in active markets, which are observable, either directly or indirectly; and
Level 3 — valuations derived from valuation techniques in which one or more significant inputs are unobservable. In
addition, the Company may use various valuation techniques including the market approach, using comparable market
prices; the income approach, using present value of future income or cash flow; and the cost approach, using the replacement
cost of assets.
The Company’s financial instruments consist of cash equivalents, accounts receivable, long-term debt, and other
long-term obligations. For cash equivalents, accounts receivable and other long-term obligations, the carrying amounts
approximate fair value. The estimated fair market values of the Company’s debt instruments and cash flow hedge are as
follows:
September 30, 2011 December 31, 2010
Fair Carrying Fair Carrying
Value Value Value Value
Senior Secured Term Loan $ 100,000 $ 100,000 $ — $ —
Senior Secured Revolving Credit Agreement 34,600 34,600 — —
Cash flow hedge 1,778 1,778 — —
Secured promissory notes — — 146,697 121,363
Total $ 136,378 $ 136,378 $ 146,697 $ 121,363
As the Senior Secured Term Loan and the Senior Secured Revolving Credit Agreement bear interest at a variable rate,
the carrying value of these debt instruments approximates their fair value. The fair value of the secured promissory notes
was estimated based on the cash flows discounted to their present value.
7. RELATED-PARTY TRANSACTIONS
On November 30, 2009, and again on March 31, 2010, May 31, 2010, and November 30, 2010, AE entered into
promissory notes with ARP (“ARP promissory notes”) whereby ARP loaned funds to AE for the sole purpose of making the
scheduled payments under the secured debt agreements outstanding with various third parties existing at December 31, 2010
(“secured promissory notes”). The amounts were $11,000 on
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands)
(unaudited)
November 30, 2009; $9,500 on March 31, 2010; $12,600 on May 31, 2010; and $11,000 on November 30, 2010. The ARP
promissory notes had a fixed interest rate of 3%. In addition, contingent interest equal to 7% of revenue would be accrued to
the extent it exceeds the fixed interest amount. No payments of principal or interest were due until the earliest of May 31,
2014, or the 91st day after the secured promissory notes had been paid in full. Further, ARP, in lieu of payment of the
outstanding amounts of principal and interest, had the option to obtain an interest in the mineral reserves of the Company
equal to the percentage of the aggregate amount of principal loaned and related accrued interest to the amount paid by the
Company to repay or repurchase and retire the ARP promissory notes. This option could only be exercised if all secured
promissory notes are repaid in full.
As discussed in Note 8, the secured promissory notes were repaid in full on February 9, 2011, which resulted in ARP
exercising its option to convert the ARP promissory notes to a 39.45% undivided interest in the original non-ARP land and
mineral reserves held by the Company. Outstanding principal and interest of the ARP promissory notes totaled $46,620 as of
February 9, 2011. As additional consideration for the land and mineral reserves transferred, ARP paid $5,000 cash and
certain amounts due ARP totaling $17,871 were forgiven, resulting in aggregate consideration of $69,491. Simultaneous
with this transaction, the Company entered into a lease agreement with a subsidiary of ARP, under mutually agreeable terms
and conditions, to mine the acquired mineral reserves. The lease is for a term of 10 years and can be extended for additional
periods until all the respective merchantable and mineable coal is removed. Due to the Company’s continuing involvement
in the land and mineral reserves transferred, this transaction has been accounted for as a financing arrangement. A long-term
obligation has been established that will be amortized over a 20 year period, or the estimated life of the mineral reserves, at
an annual rate of 7% of the estimated gross revenue generated from the sale of the coal originating from the leased mineral
reserves. Based on the Company’s estimates, the effective interest rate of the lease was 12.5% at the time of the transaction,
which will be adjusted prospectively based on changes to the mine plan. As the financial results of ARP have been
consolidated in accordance with ASC 810-20, this transaction does not have an impact on the consolidated results of
operations or financial condition of the Company for the period ended or as of September 30, 2011. Had the results of ARP
not been consolidated, during the nine month period ended September 30, 2011, the Company would have recorded interest
expense of $6,227 related to this obligation and had an outstanding obligation of $70,349 as of September 30, 2011.
8. DEBT
September 30, 2011 December 31, 2010
Type Current Non-Current Current Non-Current
Secured promissory notes, due 2011 through 2014 $ — $ — $ — $ 121,363
Secured notes relating to land purchases, due 2011 through
2013 976 1,500 1,686 947
Senior secured term loan 15,000 85,000 — —
Senior secured revolving credit facility — 34,600 — —
$ 15,976 $ 121,100 $ 1,686 $ 122,310
At December 31, 2010, the secured promissory notes were recorded at their net present value using an effective interest
rate of 10%. On February 9, 2011, the Company entered into a new credit facility (the “Senior Secured Credit Facility”),
which is comprised of a $100,000 term loan (the “Senior Secured Term Loan”) and a $50,000 revolving credit facility (the
“Senior Secured Revolving Credit Facility”). The Senior
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands)
(unaudited)
Secured Term Loan is a five-year term loan that requires principal payments in the amount of $5,000 on the first day of each
quarter commencing on January 1, 2012 through January 1, 2016, with the remaining outstanding principal and interest
balance due upon maturity on February 9, 2016. Interest payments are also payable quarterly in arrears on the first day of
each quarter. The interest rate fluctuates based on our leverage ratio and the applicable interest option elected. The Senior
Secured Revolving Credit Facility provides for quarterly interest payments in arrears that fluctuate on the same terms as our
term loan and also provides for a commitment fee based on the unused portion of the facility at certain times. The interest
rate on the Senior Secured Credit Facility as of September 30, 2011 was 5.75%, which was reduced to 5.25% on
November 14, 2011. The Company incurred $3,317 of deferred financing fees related to the Senior Secured Credit Facility
that have been capitalized and will be amortized over the life of the Senior Secured Term Loan. As of September 30, 2011,
the Company had $15,400 available for borrowing under the Senior Secured Revolving Credit Facility. The obligations
under the Senior Secured Credit Facility are secured by a first lien on substantially all of the Company’s assets, including but
not limited to certain of our mines, coal reserves and related fixtures. In addition, ARP is a co-borrower under the Senior
Secured Term Loan and guarantor on the Senior Secured Revolving Credit Facility and the Senior Secured Term Loan, and
substantially all of its assets are pledged as collateral. ARP will receive, as compensation for these restrictions, a fee of 1%
of the weighted-average outstanding balance under the Senior Secured Credit Facility, which for the nine months ended
September 30, 2011 totaled $810.
The Senior Secured Credit Facility contains certain customary covenants as well as certain limitations on, among other
things, additional debt, liens, investments, acquisitions and capital expenditures, future dividends, and asset sales. In July
2011, the Company amended the Senior Secured Credit Facility in connection with a contemplated equity offering. The
Senior Secured Credit Facility was amended to allow the equity offering, allow the Company to use a portion of the proceeds
to reduce the revolving portion of the credit agreement, revise certain financial covenants based on current expectations, and
allow other items impacted by the equity offering. The Company was in compliance with each of the covenants as of
September 30, 2011. Deferred financing fees of $1,082 were incurred related to the amendment to the agreement, which will
be amortized over the remaining life of the Senior Secured Term Loan.
Proceeds from the Senior Secured Term Loan and borrowings under the Senior Secured Revolving Credit Facility were
used to repay the outstanding principal and interest balance of the secured promissory notes. As a result of the repayment of
the existing debt obligations, the Company recognized a gain on early extinguishment of debt of approximately $6,954.
9. INCOME TAXES
The Company recorded an income tax provision of $809 for the nine months ended September 30, 2011, related
primarily to a liability for alternative minimum tax and certain state income tax. Because of substantial net operating loss
carryforwards, the Company has not recognized certain income tax benefits as it does not believe it is more likely than not it
will be able to realize its net deferred tax assets. The Company has therefore established a valuation allowance against its net
deferred tax assets as of September 30, 2011.
In connection with the Reorganization, effective October 1, 2011, the Company converted its legal structure from a
partnership to a corporation for income tax purposes. The conversion of the Company to a corporation will result in the
recognition of deferred tax assets and liabilities for the difference between its asset basis for financial reporting and income
tax purposes. However, consistent with the prior reporting of the subsidiary corporations, the consolidated income tax filing
group will recognize a full valuation allowance
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands)
(unaudited)
against its net deferred tax assets. Therefore, there is no expected impact to the statements of operations or financial position
as a result of this transaction.
10. INVESTMENT
On June 1, 2011, the Company entered into an agreement to acquire an approximate 8.4% equity interest in RAM
Terminal, LLC (“RAM”) for $2,470. RAM owns 600 acres of Mississippi River front property approximately 10 miles south
of New Orleans and intends to permit, design and construct a seaborne coal export terminal with an annual through-put
capacity of up to 10 million tons. All future expenditures are expected to be funded by a related party and therefore the
Company’s equity interest will be significantly reduced in the future. Because of the Company’s limited influence over the
investment and future dilution of ownership interest, the cost method is used to account for this investment.
11. DERIVATIVES
In order to manage the risk associated with changes in interest rates, the Company entered into an interest rate swap
agreement that effectively converts a portion of its floating-rate debt to a fixed-rate basis, thereby reducing the impact of
interest rate changes on future cash interest payments beginning January 1, 2012. On September 30, 2011, the notional
amount of the outstanding interest rate swap agreement, which expires in February 2016, was $47,500. The swap is
designated as a cash flow hedge of expected future interest payments and measured at fair value on a recurring basis. Under
the interest rate swap agreement, the Company receives three-month LIBOR based interest payments from the swap
counterparty and pays a fixed rate of 2.89%. The interest rate swap agreement contains an embedded floor, whereby the
Company receives a minimum 1% floating interest rate. LIBOR was 0.374% as of September 30, 2011.
The Company endeavors to utilize the best available information in measuring fair value. The interest rate swap is
valued based on quoted data from the counterparty, corroborated with indirectly observable market data, which, combined,
are deemed to be a Level 2 input in the fair value hierarchy. At September 30, 2011, the Company recorded a liability of
$1,778, in other long term liabilities on the condensed consolidated balance sheet for the fair value of the swap. The effective
portion of the related loss on the swap of $1,778, net of tax of $0, is deferred in accumulated other comprehensive income
(loss) and will subsequently be reclassified into interest expense during the same period in which the interest payments being
hedged affect earnings. No ineffectiveness was recorded in the condensed consolidated statement of operations during the
nine months ended September 30, 2011. In addition, there was no amount reclassified from accumulated other
comprehensive income (loss) to interest expense related to the effective portion of the interest rate swap during the nine
months ended September 30, 2011. The amount of loss expected to be reclassified from accumulated other comprehensive
income (loss) to interest expense over the next twelve months is approximately $300.
12. EQUITY AWARDS
On June 1, 2011, the Company awarded 74,000 restricted shares, which vest on April 1, 2013, to certain executive
officers. In addition, on June 1, 2011 and September 21, 2011, 9,250 shares and 9,250 shares were issued to certain
non-executive officers that will vest on April 1, 2014 and August 1, 2014, respectively. The awards contain normal
conditions regarding employment status and any change-of-control during the vesting period. Because the Company’s
common stock is not publicly traded, the fair value of the restricted shares at the date of grant was determined utilizing
multiple valuation methods, including a market approach and
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands)
(unaudited)
income approach, and is amortized to expense ratably over the vesting period. Stock compensation expense related to
restricted stock awards for the nine months ended September 30, 2011 was $279.
13. EARNINGS PER SHARE
Effective October 1, 2011, the Plan authorized the conversion of each issued and outstanding membership unit of ALC
into 9.25 shares of common stock of AE. As a result, the Company had 19,095,763 shares of common stock issued and
outstanding as of October 1, 2011. In accordance with SEC Staff Accounting Bulletin Topic 4.C, Changes in Capital
Structure , all common share information presented has been retroactively adjusted to reflect the common stock conversion.
The computation of basic and diluted earnings (loss) per common share is as follows (in thousands, except per share
amounts):
Nine-months ended September
30,
2011 2010
(Restated) (Restated)
Net (loss) income attributable to common stockholders
— basic and diluted $ (983 ) $ 7,055
Basic weighted average number of common shares outstanding 19,132 19,111
Effect of dilutive securities — 9
Diluted weighted average number of common shares outstanding 19,132 19,120
Earnings (loss) per common share — basic and diluted $ (0.05 ) $ 0.37
The diluted weighted average number of common shares calculation excludes all unvested restricted stock for the nine
months ended September 30, 2011, as they would be antidilutive. As of September 30, 2011, there were 109,150 unvested
restricted stock awards outstanding.
14. COMMITMENTS AND CONTINGENCIES
Coal Sales Contracts
The Company is committed under multi-year supply agreements to sell coal that meets certain quality requirements at
specified prices. These contracts typically have specific and possibly different volume and pricing arrangements for each
year of the agreement, which allows customers to secure a supply for their future needs and provides the Company with
greater predictability of sales volume and sales prices. Quantities sold under some of these contracts may vary from year to
year within certain limits at the option of the customer or the Company. The remaining terms of the Company’s long-term
contracts range from one to eight years.
Legal
Periodically, there may be various claims and legal proceedings against the Company arising from the normal course of
business. The Company is also involved in litigation matters arising in the ordinary course of business. In the opinion of
management, the resolution of these matters will not have a material adverse effect on the Company’s consolidated financial
statements.
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Table of Contents
Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands)
(unaudited)
15. EXECUTIVE STOCK REPURCHASE
In 2006 thru 2008, the Company’s Board of Directors approved the issuance of promissory notes payable to the
Company to certain executive officers to finance the purchase of membership units of the Company’s predecessor.
Promissory notes payable to the Company, including accrued and unpaid interest, were $2,716 and $2,623 as of
September 30, 2011 and December 31, 2010, respectively, but are not recorded within the consolidated balance sheet as
these notes are non-recourse. On September 30, 2011, all promissory notes outstanding were repaid in full through the sale
of membership units back to the Company’s predecessor by the borrowers. As the membership units were repurchased at a
discount from the fair value on the date of acquisition, a non-cash charge of $933 was recognized in the results of operations
as a component of selling, general, and administrative expense for the nine months ended September 30, 2011.
16. DECONSOLIDATION OF ARMSTRONG RESOURCE PARTNERS
The Company has historically consolidated the results of ARP in accordance with ASC 810-20 as ECGP was presumed
to control the partnership. On October 1, 2011, the partners of ARP entered into the Amended and Restated Agreement of
Limited Partnership of Armstrong Resource Partners, L.P. (the “ARP LPA”). Pursuant to the ARP LPA, effective October 1,
2011, investment funds managed by Yorktown Partners LLC, ARP’s largest unit holder, unilaterally may remove the
Company’s subsidiary, ECGP, as general partner of ARP or otherwise cause a change of control of ARP without the
Company’s consent or the consent of the holders of ARP’s equity units. As a result of the loss of control of ARP by ECGP,
the Company will no longer consolidate the results of operations of ARP effective October 1, 2011 and will begin to account
for its ownership in ARP under the equity method of accounting. Under the deconsolidation accounting guidelines, the
investor’s opening investment is recorded at fair value as of the date of deconsolidation. The difference between this initial
fair value of the investment and the net carrying value is recognized as a gain or loss in earnings.
In order to determine the fair value of its initial investment in ARP, the Company completed a valuation analysis based
on the income approach using the discounted cash flow method. The discount rate, long-term growth rate, and profitability
assumptions are material inputs utilized in the discounted cash flow model. Based on the results of this valuation, the
deconsolidation date fair value of the Company’s investment in ARP was determined to be $716. The Company will
recognize a non-cash gain included as a component of other income (expense), net of approximately $308 in the fourth fiscal
quarter of 2011 related to the deconsolidation of ARP.
The following is summarized financial information of ARP as of September 30, 2011 (in thousands):
Total assets $ 146,738
Total liabilities $ 11,957
Partners’ capital $ 134,781
Total liabilities and partners’ capital $ 146,738
17. ACQUISITION OF NON-CONTROLLING INTEREST
Prior to the Reorganization in August 2011, the Company acquired all of the outstanding common stock held by certain
third parties in the former Armstrong Energy, Inc. and Armstrong Resources Holdings, LLC. A portion of the outstanding
shares were acquired in exchange for membership interests in ALC, which totaled 7,957.5 units of membership interest
(73,606 shares of common stock of AE). In addition, the Company had
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Armstrong Energy, Inc. and Subsidiaries
(formerly Armstrong Land Company, LLC and Subsidiaries)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands)
(unaudited)
outstanding non-recourse promissory notes with these third parties related to a portion of their original purchase of shares in
Armstrong Energy, Inc. in December 2006 and March 2007. The non-recourse notes, including all accrued and unpaid
interest, were repaid in full through payment of cash of $125 and the sale of their remaining shares in the former Armstrong
Energy, Inc. to the Company. Simultaneous with the above, the Company sold 4,520 units of membership interest in ALC
(41,810 shares of common stock of AE) to these third party investors financed with new non-recourse promissory notes
totaling $452, which are not recorded within the consolidated balance sheet as these notes are non-recourse. Each of the
promissory notes carries a stated interest rate of 6% per annum and are collateralized by the unpaid ownership interest. No
portions of the promissory notes are subject to release until full payment has been tendered on the applicable note. In the
event of default, the notes shall bear interest at 12% per annum.
The units purchased with non-recourse notes are accounted for as options. As the options were fully vested at the date
of issuance, the Company recognized a non-cash charge in the nine months ended September 30, 2011 of $217 within other
income (expense), net, which represents the total fair value of the options awarded.
18. SUBSEQUENT EVENT
On October 28, 2011, a portion of the highwall at the Company’s Equality Mine collapsed, fatally injuring two
employees of a local blasting company. Following the accident, pursuant to Section 103(k) of the Mine Act, the Federal
Mine Safety and Health Administration (MSHA) issued an order prohibiting all activity at the Equality Mine until it was
determined to be safe to resume normal mining operations. MSHA approved resuming mining of the uppermost coal seam
on November 2, 2011. An addendum to the ground control plan was submitted to MSHA and approved on November 8,
2011, which allowed for mining of the lower seams to resume. The Company is currently unable to estimate the total cost of
this accident, but does not believe the impact should have a material adverse effect on its consolidated cash flows, results of
operations or financial condition. The Company will continue to evaluate the need for any necessary accruals or other related
expenses as a result of the accident and record the charges in the period in which the determination is made.
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ARMSTRONG ENERGY, INC.
Shares
of
Common Stock
PROSPECTUS
FBR
RAYMOND JAMES
, 2012
Dealer Prospectus Delivery Obligation
Through and including , 2012 (the 25th day after the date of this prospectus), all dealers effecting transactions in
these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to
the dealer’s obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or
subscriptions.
Table of Contents
PART II:
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable
solely by Armstrong Energy, Inc. (the “Company”) and expected to be incurred in connection with the offer and sale of the
securities being registered. All amounts are estimates, except the SEC registration fee and the FINRA filing fee.
Amount to be Paid
SEC registration fee $ 7,907.40
FINRA filing fee $ 7,400.00
Blue sky fees and expenses*
Nasdaq listing fee*
Printing and engraving expenses*
Legal fees and expenses*
Accounting fees and expenses*
Transfer agent fees*
Miscellaneous*
Total*
* To be completed by amendment.
Item 14. Indemnification of Directors and Officers
Section 145 of the DGCL permits a Delaware corporation to indemnify its officers, directors and other corporate agents
to the extent and under the circumstances set forth therein.
Our amended and restated certificate of incorporation and bylaws provide that, to the fullest extent permitted by the
DGCL, directors shall not be personally liable to the Company or its stockholders for monetary damages for breach of duty
as a director. Pursuant to Section 102(b)(7) of the DGCL, our amended and restated certificate of incorporation eliminates
the personal liability of a director to us or our shareholders for monetary damages for a breach of fiduciary duty as a director,
except for liabilities:
• for any breach of the director’s duty of loyalty to us or our shareholders;
• for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
• under Section 174 of the DGCL; and
• for any transaction from which the director derived an improper personal benefit.
Pursuant to our amended and restated certificate of incorporation, each person who was or is made a party or is
threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a “proceeding”), by reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Company, or serves, in any capacity, any corporation, partnership or
other entity in which the Company has a partnership or other interest, including service with respect to employee benefit
plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent
or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by
the Company to the fullest extent authorized by the DGCL, against all expense, liability and loss reasonably incurred or
suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be
a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators. The
Company may provide indemnification to employees or agents of the
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Company with the same scope and effect as the foregoing indemnification of directors and officers. These indemnification
provisions may be sufficiently broad to permit indemnification of the registrant’s executive officers and directors for
liabilities, including reimbursement of expenses incurred, arising under the Securities Act.
The above discussion of Section 145 of the DGCL and of our amended and restated certificate of incorporation and
bylaws is not intended to be exhaustive and is respectively qualified in its entirety by Section 145 of the DGCL, our
amended and restated certificate of incorporation and our bylaws.
As permitted by Section 145 of the DGCL, we intend to carry primary and excess insurance policies insuring our
directors and officers against certain liabilities they may incur in their capacity as directors and officers. Under the policies,
the insurer, on our behalf, may also pay amounts for which we granted indemnification to our directors and officers.
Item 15. Recent Sales of Unregistered Securities
In the three years preceding the filing of this registration statement, Armstrong Energy, Inc. and Armstrong Energy,
Inc.’s predecessor, Armstrong Land Company, LLC (“Armstrong Land”), issued the following securities that were not
registered under the Securities Act:
1. On October 1, 2008, Armstrong Land issued 925,000 shares of common stock to Yorktown Energy
Partners VIII, L.P. in consideration of $10,000,000. These shares were issued in a transaction exempt from the
registration requirements of the Securities Act under Section 4(2) of the Securities Act.
2. On February 10, 2009, Armstrong Land issued 1,850,000 shares of common stock to Yorktown Energy
Partners VIII, L.P. in consideration of $20,000,000. These shares were issued in a transaction exempt from the
registration requirements of the Securities Act under Section 4(2) of the Securities Act.
3. On May 6, 2009, Armstrong Land issued (i) 1,850,000 shares of common stock 200,000 units of membership
interest to Yorktown Energy Partners VIII, L.P., (ii) 23,125 shares of common stock to James H. Brandi and
(iii) 4,625 shares of common stock to LucyB Trust in consideration of $20,300,000 in the aggregate, $125,000 of which
was evidenced by a non-recourse promissory note executed by Mr. Brandi and secured by a pledge of the shares
purchased by Mr. Brandi. These units were issued in a transaction exempt from the registration requirements of the
Securities Act under Section 4(2) of the Securities Act.
4. On September 15, 2009, Armstrong Land issued 1,387,500 shares of common stock to Yorktown Energy
Partners VIII, L.P. in consideration of $15,000,000. These shares were issued in a transaction exempt from the
registration requirements of the Securities Act under Section 4(2) of the Securities Act.
5. On January 1, 2010, Armstrong Land issued 18,500 shares of restricted stock to one of its employees. These
shares were issued in a transaction exempt from the registration requirements of the Securities Act under Rule 701,
promulgated under the Securities Act.
6. On August, 16, 2010, Armstrong Land issued 16,650 shares of restricted stock to one of its employees. These
shares were issued in a transaction exempt from the registration requirements of the Securities Act under Rule 701,
promulgated under the Securities Act.
7. On June 1, 2010 Armstrong Land issued 83,250 shares of restricted stock to certain of its employees. These
shares were issued in a transaction exempt from the registration requirements of the Securities Act under Rule 701,
promulgated under the Securities Act.
8. On August 9, 2011, Armstrong Land issued (i) 37,024 shares of common stock to John Stites and
(ii) 78,394 shares of common stock to Hutchinson Brothers, LLC. $452,000 of the consideration was paid by
non-recourse promissory notes secured by a pledge of the shares purchased, and the balance was evidenced by the
contribution to Armstrong Land of minority interests in subsidiaries of Armstrong Land. These shares were issued in a
transaction exempt from the registration requirements of the Securities Act under Section 4(2) of the Securities Act.
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9. On September 21, 2011 Armstrong Land issued 9,250 shares of common stock to one of its employees. These
shares were issued in a transaction exempt from the registration requirements of the Securities Act under Rule 701,
promulgated under the Securities Act.
10. On January 13, 2012, Armstrong Energy, Inc. issued 300,000 shares of Series A convertible preferred stock to
Yorktown Energy Partners IX, L.P. in consideration of $30,000,000. These shares were issued in a transaction exempt
from the registration requirements of the Securities Act under Section 4(2) of the Securities Act.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this
registration statement on Form S-1, which Exhibit Index is incorporated herein by reference.
(b) Financial Statement Schedules.
None.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the “Securities Act”),
may be permitted to directors, officers and controlling persons pursuant to the provisions described in Item 14 above, or
otherwise, it is the opinion of the Securities and Exchange Commission that such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person of us in the
successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection
with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public
policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting
agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
We hereby undertake that:
(i) for purposes of determining any liability under the Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective; and
(ii) for purposes of determining any liability under the Securities Act, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, Armstrong Energy, Inc. has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the County of St. Louis,
State of Missouri, on February 10, 2012.
ARMSTRONG ENERGY, INC.
By: /s/ Martin D. Wilson
Martin D. Wilson
President
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following
persons in the capacities indicated on February 10, 2012.
Signature Title
* Chairman and Chief Executive Officer
J. Hord Armstrong, III (Principal Executive Officer)
/s/ Martin D. Wilson President and Director
Martin D. Wilson
* Senior Vice President, Finance and Administration
J. Richard Gist and Chief Financial Officer
(Principal Financial and Accounting Officer)
* Director
Anson M. Beard, Jr.
* Director
James C. Crain
* Director
Richard F. Ford
* Director
Bryan H. Lawrence
* Director
Greg A. Walker
*By: /s/ Martin D. Wilson
Attorney-in-fact
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Table of Contents
EXHIBIT INDEX
Exhibit
Numbe
r Description
1 .1* Form of Underwriting Agreement.
3 .1** Certificate of Conversion of Armstrong Land Company, LLC to Armstrong Land Company, Inc., effective
as of October 1, 2011.
3 .2** Certificate of Incorporation of Armstrong Land Company, Inc., effective as of October 1, 2011.
3 .3** Certificate of Amendment to Certificate of Incorporation of Armstrong Land Company, Inc., effective as of
October 5, 2011.
3 .4 Certificate of Designations of Series A Convertible Preferred Stock of Armstrong Energy, Inc., effective as
of January 13, 2012.
3 .5** Bylaws of Armstrong Energy, Inc., effective as of October 3, 2011.
3 .6 Survant Mining Company, LLC Limited Liability Company Agreement (The Operating Agreement)
effective as of December 2011 by and among Cyprus Creek Land Resources, LLC and Armstrong Coal
Company, Inc.
4 .1* Agreement to Enter into Voting and Stockholders Agreement by and among Armstrong Energy, Inc., J.
Hord Armstrong, III, Martin D. Wilson, Yorktown Energy Partners VI, L.P., Yorktown Energy Partners
VII, L.P., Yorktown Energy Partners VIII, L.P., James H. Brandi, LucyB Trust, Lorenzo Weisman/Danielle
Weisman Joint Ownership with Right of Survivorship, Brim Family 2004 Trust, Franklin W. Hobbs IV,
Hutchinson Brothers, LLC and John H. Stites, III, dated as of October 1, 2011.
4 .2 Extension of Agreement to Enter into Voting and Stockholders’ Agreement by and among Armstrong
Energy, Inc., Yorktown Energy Partners VI, L.P., Yorktown Energy Partners VII, L.P. and Yorktown
Energy Partners VIII, dated as of February 1, 2012.
5 .1** Form of Opinion of Armstrong Teasdale LLP.
10 .1** Credit Agreement by and among Armstrong Coal Company, Inc., Armstrong Land Company, LLC,
Western Mineral Development, LLC, Western Diamond, LLC, Western Land Company, LLC and Elk
Creek, L.P., as Borrowers, the Lenders party thereto, The Huntington National Bank, as Syndication Agent,
Union Bank, N.A. as Documentation Agent and PNC Bank, National Association, as Administrative Agent,
dated as of February 9, 2011.
10 .2** First Amendment to Credit Agreement by and among Armstrong Coal Company, Inc., Armstrong Land
Company, LLC, Western Mineral Development, LLC, Western Diamond, LLC, Western Land Company,
LLC and Elk Creek, L.P., as Borrowers, the Guarantors party thereto, the financial institutions party thereto
and PNC Bank, National Association, as Administrative Agent, dated as of July 1, 2011.
10 .3** Second Amendment to Credit Agreement by and among Armstrong Coal Company, Inc., Armstrong Land
Company, LLC, Western Mineral Development, LLC, Western Diamond, LLC, Western Land Company,
LLC and Elk Creek, L.P., as Borrowers, the Guarantors party thereto, the financial institutions party thereto
and PNC Bank, National Association, as Administrative Agent, dated as of September 29, 2011.
10 .4* Third Amendment to Credit Agreement by and among Armstrong Coal Company, Inc., Armstrong Energy,
Inc., Western Mineral Development, LLC, Western Diamond LLC, Western Land Company, LLC and
Armstrong Resource Partners, L.P., as Borrowers, the Guarantors party thereto, the financial institutions
party thereto and PNC Bank, National Association, as Administrative Agent, dated as of December 29,
2011.
10 .5* Fourth Amendment to Credit Agreement by and among Armstrong Coal Company, Inc., Armstrong
Energy, Inc., Western Mineral Development, LLC, Western Diamond LLC, Western Land Company, LLC
and Armstrong Resource Partners, L.P., as Borrowers, the Guarantors party thereto, the financial
institutions party thereto and PNC Bank, National Association, as Administrative Agent, dated as of
February 8, 2012.
10 .6** Coal Mining Lease between Alcoa Fuels, Inc. and Armstrong Coal Company, Inc., dated as of October 27,
2010.
10 .7* Contract for Purchase and Sale of Eastern Coal by and between Tennessee Valley Authority and Armstrong
Coal Company, Inc., dated as of November 30, 2007.
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Exhibit
Numbe
r Description
10 .8 Tennessee Valley Authority Coal Acquisition & Supply Contract Supplement No. 1, dated as of July 29,
2008.
10 .9 Tennessee Valley Authority Coal Acquisition & Supply Contract Supplement No. 2, dated as of July 29,
2008.
10 .10 Tennessee Valley Authority Coal Acquisition & Supply Contract Supplement No. 3, dated as of
November 12, 2008.
10 .11 Tennessee Valley Authority Coal Acquisition & Supply Contract Supplement No. 4, dated as of
December 11, 2008.
10 .12 Tennessee Valley Authority Coal Acquisition & Supply Contract Supplement No. 5, dated as of
February 12, 2009.
10 .13 Tennessee Valley Authority Coal Acquisition & Supply Contract Supplement No. 6, dated as of October
9, 2009.
10 .14 Tennessee Valley Authority Coal Acquisition & Supply Contract Supplement No. 7, dated as of
December 29, 2009.
10 .15 Tennessee Valley Authority Coal Supply & Origination Contract Supplement No. 8, dated as of May 25,
2011.
10 .16 Tennessee Valley Authority Coal Supply & Origination Contract Supplement No. 9, dated as of August
9, 2011.
10 .17* Coal Supply Agreement by and between Louisville Gas and Electric Company and Kentucky Utilities
Company, as Buyer, and Armstrong Coal Company, Inc., as Seller, effective as of January 1, 2008.
10 .18* Amendment No. 1 to Coal Supply Agreement by and between Louisville Gas and Electric Company and
Kentucky Utilities Company, as Buyer, and Armstrong Coal Company, Inc., as Seller, effective as of
July 1, 2008.
10 .19* Amendment No. 2 to Coal Supply Agreement by and between Louisville Gas and Electric Company and
Kentucky Utilities Company, as Buyer, and Armstrong Coal Company, Inc., as Seller, effective as of
December 22, 2009.
10 .20* Letter Agreement by and between Louisville Gas and Electric Company and Kentucky Utilities
Company, as Buyer, and Armstrong Coal Company, Inc., as Seller, dated December 8, 2008.
10 .21* Letter Agreement by and between Louisville Gas and Electric Company and Kentucky Utilities
Company, as Buyer, and Armstrong Coal Company, Inc., as Seller, dated April 1, 2009.
10 .22* Settlement Agreement and Release by and between Louisville Gas and Electric Company and Kentucky
Utilities Company and Armstrong Coal Company, Inc., dated as of December 22, 2009.
10 .23* Coal Supply Agreement by and between Louisville Gas and Electric Company and Kentucky Utilities
Company, as Buyer, and Armstrong Coal Company, Inc., as Seller, effective as of December 22, 2009.
10 .24* Coal Supply Agreement by and between Louisville Gas and Electric Company and Kentucky Utilities
Company, as Buyer, and Armstrong Coal Company, Inc., as Seller, effective as of January 1, 2012.
10 .25* Fuel Purchase Order by and between Louisville Gas and Electric Company and Kentucky Utilities
Company, as Buyer, and Armstrong Coal Company, Inc., as Seller, dated July 1, 2008.
10 .26* Amendment No. 1 to Fuel Purchase Order dated July 1, 2008 by and between Louisville Gas and Electric
Company and Kentucky Utilities Company, as Buyer, and Armstrong Coal Company, Inc., as Seller,
dated July 28, 2008.
10 .27* Fuel Purchase Order by and between Louisville Gas and Electric Company and Kentucky Utilities
Company, as Buyer, and Armstrong Coal Company, Inc., as Seller, dated January 1, 2010.
10 .28**† Letter Agreement between Armstrong Land Company, LLC and J. Richard Gist, dated as of September
14, 2009.
10 .29**† Employment Agreement by and between Armstrong Energy, Inc. and J. Richard Gist, dated as of
October 1, 2011.
10 .30**† Employment Agreement by and between Armstrong Energy, Inc. and J. Hord Armstrong, III, dated as of
October 1, 2011.
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Exhibit
Numbe
r Description
10 .31**† Employment Agreement by and between Armstrong Energy, Inc. and Martin D. Wilson, dated as of
October 1, 2011.
10 .32**† Employment Agreement by and between Armstrong Coal Co. and Kenneth E. Allen, dated as of June 1,
2007.
10 .33**† Employment Agreement by and between Armstrong Coal Co. and David R. Cobb, dated as of January
19, 2007.
10 .34† Employment Agreement by and between Armstrong Energy, Inc. and Brian G. Landry, dated as of
December 1, 2011.
10 .35**† Unit Repurchase Agreement by and between Armstrong Land Company, LLC and J. Hord
Armstrong, III, dated as of September 30, 2011.
10 .36**† Unit Repurchase Agreement by and between Armstrong Land Company, LLC and Martin D. Wilson,
dated as of September 30, 2011.
10 .37**† Form of Director Indemnification Agreement.
10 .38**† Armstrong Energy, Inc. 2011 Long-Term Incentive Plan.
10 .39**† Restricted Stock Unit Award Agreement between Armstrong Land Company, LLC and David Cobb,
dated as of June 1, 2011.
10 .40**† Restricted Stock Unit Award Agreement between Armstrong Land Company, LLC and J. Hord
Armstrong, III, dated as of June 1, 2011.
10 .41**† Restricted Stock Unit Award Agreement between Armstrong Land Company, LLC and Kenny Allen,
dated as of June 1, 2011.
10 .42**† Restricted Stock Unit Award Agreement between Armstrong Land Company, LLC and Martin D.
Wilson, dated as of June 1, 2011.
10 .43† Amended Overriding Royalty Agreement by and among Western Land Company, LLC, Western
Diamond, LLC, Ceralvo Holdings, LLC, Armstrong Mining, Inc., Armstrong Coal Company, Inc.,
Armstrong Land Company, LLC and Kenneth E. Allen, dated as of December 3, 2008.
10 .44**† Amended Overriding Royalty Agreement by and among Western Land Company, LLC, Western
Diamond, LLC, Ceralvo Holdings, LLC, Armstrong Mining, Inc., Armstrong Coal Company, Inc.,
Armstrong Land Company, LLC and David R. Cobb, dated as of December 3, 2008.
10 .45* Administrative Services Agreement by and between Armstrong Energy, Inc., Armstrong Resource
Partners, L.P. and Elk Creek GP, LLC, effective as of January 1, 2011.
10 .46* Promissory Note of Armstrong Land Company, LLC in favor of Elk Creek, L.P. in the principal amount
of $11.0 million, dated November 30, 2009.
10 .47* Promissory Note of Armstrong Land Company, LLC in favor of Elk Creek, L.P. in the principal amount
of $9.5 million, dated March 31, 2010.
10 .48* Promissory Note of Armstrong Land Company, LLC in favor of Elk Creek, L.P. in the principal amount
of $12.6 million, dated May 31, 2010.
10 .49* Promissory Note of Armstrong Land Company, LLC in favor of Elk Creek, L.P. in the principal amount
of $11.0 million, dated November 30, 2010.
10 .50* Credit and Collateral Support Fee, Indemnification and Right of First Refusal Agreement by and between
Armstrong Land Company, LLC, Armstrong Resource Holdings, LLC, Western Diamond, LLC,
Western Land Company, LLC, Armstrong Coal Company, Inc., Elk Creek, L.P., Elk Creek Operating,
L.P., Ceralvo Holdings, LLC and Western Mineral Development, LLC, effective as of February 9, 2011.
10 .51* Lease and Sublease Agreement between Armstrong Coal Company, Inc. and Ceralvo Holdings, LLC,
dated February 9, 2011.
10 .52* Royalty Deferment and Option Agreement by and between Armstrong Coal Company, Inc., Western
Diamond, LLC, Western Land Company, LLC and Western Mineral Development, LLC, effective
February 9, 2011.
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Exhibit
Numbe
r Description
10 .53* Lease Agreement by and between Armstrong Coal Company, Inc. and David and Rebecca Cobb, dated
August 1, 2009.
10 .54 Option Amendment, Option Exercise and Membership Interest Purchase Agreement by and between
Armstrong Land Company, LLC, Armstrong Resource Holdings, LLC, Western Diamond, LLC, Western
Land Company, LLC, Western Mineral Development, LLC, and Elk Creek, L.P., dated as of February 9,
2011.
10 .55 Coal Mining Lease and Sublease by and between Ceralvo Holdings, LLC and Armstrong Coal Company,
Inc., dated as of February 9, 2011.
10 .56* Contract to Sell Real Estate by and between Western Diamond LLC, Western Land Company, LLC and
Western Mineral Development, LLC, dated as of October 11, 2011.
10 .57* Asset Purchase Agreement between Cyprus Creek Land Resources, LLC and Armstrong Coal Company,
Inc., dated as of December 29, 2011, by and between Cyprus Creek Land Resources, LLC and Armstrong
Coal Company, Inc.
10 .58* Formation and Transfer Agreement by and among Cyprus Creek Land Resources, LLC and Cyprus Creek
Land Company, and Armstrong Coal Company, Inc. and Western Land Company, LLC, effective as of
December 29, 2011.
10 .59* Contract to Sell and Lease Real Estate between Midwest Coal Reserves of Kentucky, LLC and Armstrong
Coal Company, Inc. dated December 25, 2011.
10 .60 Membership Interest Purchase Agreement by and between Western Diamond LLC and Western Land
Company, LLC, and Armstrong Resource Partners, L.P.
16 .1** Letter from Grant Thornton LLP to Securities and Exchange Commission.
16 .2** Letter from KPMG LLP to Securities and Exchange Commission.
21 .1** List of Subsidiaries.
23 .1** Consent of Armstrong Teasdale LLP (included in Exhibit 5.1).
23 .2 Consent of Ernst & Young LLP.
23 .3 Consent of Grant Thornton LLP.
23 .4** Consent of Weir International, Inc.
24 .1** Power of Attorney (included on signature page).
99 .1* Audit Committee Charter.
99 .2* Compensation Committee Charter.
99 .3* Nominating and Corporate Governance Committee Charter.
* To be filed by amendment.
** Previously filed.
† Indicates a management contract or compensatory plan or arrangement.
II-8
Exhibit 3.4
CERTIFICATE OF DESIGNATIONS
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
ARMSTRONG ENERGY, INC.
Pursuant to Section 151 of
The General Corporation Law of Delaware
Armstrong Energy, Inc., a Delaware corporation (the “Corporation”), does hereby certify in accordance with Section 103 of the Delaware
General Corporation Law (“DGCL”), that the following resolution was duly adopted by action of the Board of Directors of the Corporation (the
“Board”). Terms used in this Certificate shall have the meanings set forth in Section 8 hereof.
RESOLVED, that pursuant to the authority expressly granted to and vested in the Board by the provisions of Article Sixth of the Certificate
of Incorporation of the Corporation (the “Certificate of Incorporation”), and pursuant to Section 151 of the DGCL, the Board hereby creates a
series of preferred stock of the Corporation and hereby states that the voting powers, designations, preferences and relative, participating,
optional or other special rights of which, and qualifications, limitations or restrictions thereof (in addition to the provisions set forth in the
Certificate of Incorporation which are applicable to the preferred stock of all classes and series), shall be as follows:
Section 1. Number of Shares and Designation.
This series of preferred stock shall be designated as Series A Convertible Preferred Stock (the “Convertible Preferred”) and the number of
shares which shall constitute such series shall be 300,000 shares, par value $.01 per share (the “Shares”), which number may be increased or
decreased (but not below the number thereof then outstanding plus the number required to fulfill the Corporation’s obligations under options,
rights or warrants or securities convertible into Convertible Preferred, issued by the Corporation) from time to time by the Board. The
Convertible Preferred shall not be redeemable without the written consent of the holders thereof.
Section 2. Dividends. The holders of Convertible Preferred shall not be entitled to the payment of any dividends by the Corporation.
Section 3. Liquidation.
Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary (a “Liquidation”), each holder of
Convertible Preferred shall be entitled to receive, out of the assets of the Corporation available for distribution to stockholders, before any
distribution or payment is made upon any Junior Securities, an amount in cash equal to the aggregate Liquidation Value of all Shares held by
such holder. After payment to the holders of the Convertible Preferred in full of the preferential amounts provided for in this Section 3, the
holders of Convertible Preferred shall have no right or claim to any of the remaining assets of the Corporation. If upon any Liquidation the
Corporation’s assets to be distributed among the
holders of the Convertible Preferred are insufficient to permit payment to such holders of the aggregate amount which they are entitled to be
paid under this Section 3, then the entire assets available to be distributed to the Corporation’s stockholders shall be distributed pro rata among
such holders based upon the aggregate Liquidation Value of the Convertible Preferred held by each such holder. Not less than 30 days prior to
the payment date stated therein, the Corporation shall mail written notice of any such Liquidation to each record holder of Convertible
Preferred as of a date at least three Business Days prior to the mailing of such notice, setting forth in reasonable detail the amount of proceeds
to be paid with respect to each share of Convertible Preferred in connection with such Liquidation (assuming no conversion of Shares into
Common Stock). At any time prior to a Liquidation, the holders of Convertible Preferred shall be entitled to convert their Shares into Common
Stock in accordance with the provisions of Section 5 below. Neither the consolidation or merger of the Corporation into or with any other entity
or entities (whether or not the Corporation is the surviving entity), nor the sale, conveyance, exchange or transfer (for cash, securities or other
consideration) by the Corporation of all or any part of its assets, nor the reduction of the capital stock of the Corporation nor any other form of
recapitalization or reorganization affecting the Corporation shall be deemed to be a Liquidation within the meaning of this Section 3.
Section 4. Voting Rights.
4A. Voting Procedures. The holders of Convertible Preferred shall be entitled to notice of all meetings of the Corporation’s stockholders in
accordance with the Corporation’s Bylaws. Each Share of Convertible Preferred shall have one (1) vote per Share, except that when the
Convertible Preferred and the Common Stock shall vote together as a single class, then each holder of Convertible Preferred shall be entitled to
the number of votes with respect to such holder’s Convertible Preferred equal to the number of whole shares of Conversion Stock into which
such Shares would have been converted under the provisions of Section 5B hereof at the Conversion Price then in effect on the record date for
determining stockholders entitled to vote on such matters or, if no record date is specified, as of the date of such vote.
4B. General Voting Rights, The holders of Convertible Preferred shall vote together as a single class with the holders of the Common Stock
as provided in Section 4A above on all matters submitted to a vote of the holders of the Common Stock.
4C. Special Voting Rights. In addition to the voting rights provided in Section 4B above and any voting rights provided by applicable law,
so long as any Convertible Preferred remains outstanding, the holders of a majority of the Convertible Preferred outstanding must approve,
voting separately as a class:
(i) any amendment to the Corporation’s Certificate of Incorporation (including any Certificate of Designations) or Bylaws that would
affect adversely the rights, preferences, privileges or voting rights of holders of the Convertible Preferred or the terms of the Convertible
Preferred;
(ii) any proposed issuance of capital stock of the Corporation that ranks pari passu or senior to the Convertible Preferred, or any
proposed issuance of Junior Securities which
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are required to be redeemed by the Corporation at any time that any Shares of Convertible Preferred are outstanding, whether upon the
occurrence of certain events or otherwise; or
(iii) any increase in the number of authorized shares of capital stock of the Corporation, except as specifically required in this
Certificate of Designations.
Section 5. Conversion.
5A. Automatic Conversion. On the IPO Conversion Date, all of the outstanding shares of Convertible Preferred on such date shall
automatically and without further action required by any Person, convert into that number of shares of Common Stock equal to the quotient
obtained by dividing (a) by (b), where (a) is the aggregate Liquidation Value represented by all the Shares to be converted, and (b) is the IPO
Price minus the Discount Amount.
5B. Conversion at Option of Holder.
(i) At any time commencing January 12, 2013 or earlier in connection with an Exit Transaction and provided that an IPO Conversion
Date has not occurred, any holder of Convertible Preferred may convert all or any portion of the Convertible Preferred held by such holder into
a number of shares of Common Stock equal to the quotient obtained by dividing (a) by (b), where (a) is the aggregate Liquidation Value
represented by all the Shares to be converted, and (b) is the Conversion Price then in effect.
(ii) Each conversion of Convertible Preferred pursuant to this Section 5B shall be deemed to have been effected as of the close of
business on the date on which the certificate or certificates representing the Convertible Preferred to be converted (duly endorsed or assigned to
the Corporation or in blank) have been surrendered for conversion during normal business hours at the principal office of the Corporation,
accompanied by written notice to the Corporation that the holder thereof elects to convert all or any portion of such Shares.
(iii) Notwithstanding the foregoing, if a conversion of Convertible Preferred pursuant to this Section 5B is to be made in connection
with or in anticipation of an Exit Transaction, such conversion may, at the election of the holder thereof, be conditioned upon the
consummation of such Exit Transaction, in which case (x) such conversion shall not be deemed to be effective until immediately prior to the
consummation of such transaction and (y) the holder may convert all or any portion of the Convertible Preferred held by such holder into a
number of shares of Common Stock equal to the quotient obtained by dividing (a) by (b), where (a) is the aggregate Liquidation Value
represented by all the Shares to be converted, and (b) is the lower of (i) the Conversion Price then in effect or (ii) the Exit Price.
5C. Conversion Price.
(i) The initial Conversion Price shall be $100.00. In order to prevent dilution of the conversion rights granted under this Section 5, the
Conversion Price shall be subject to adjustment from time to time pursuant to this Section 5C.
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(ii) If and whenever on or after the date hereof, the Corporation issues or sells for cash, marketable securities or cash equivalents, or in
accordance with Section 5D is deemed to have issued or sold for cash, marketable securities or cash equivalents, any Common Stock for a
consideration per share less than the Conversion Price in effect as of the date of such issue or sale, then immediately upon such issue or sale the
Conversion Price then in effect shall be reduced to the Conversion Price determined by multiplying the Conversion Price in effect immediately
prior to such issue or sale by a fraction, the numerator of which shall be the sum of (1) the number of shares of Common Stock Deemed
Outstanding immediately prior to such issue or sale multiplied by the Conversion Price in effect as of the date of such issuance or sale, plus
(2) the consideration received (and deemed to be received hereunder) by the Corporation upon such issue or sale, and the denominator of which
shall be the product derived by multiplying the Conversion Price then in effect by the number of shares of Common Stock Deemed Outstanding
immediately after such issue or sale.
(iii) Notwithstanding the foregoing, no adjustment of the Conversion Price pursuant to this Section 5C or Section 5D shall be made
(1) upon the conversion of Convertible Preferred, (2) upon the issuance or sale of Common Stock, Options or Convertible Securities to
directors, officers, employees, consultants or service providers of the Corporation and its Subsidiaries pursuant to the terms of any employee
benefit or similar plans of the Corporation or any of its Subsidiaries, or (3) upon the issuance of Common Stock pursuant to the exercise of
Options outstanding as of the date hereof pursuant to the Corporation’s stock option plans.
5D. Effect on Conversion Price of Certain Events. For purposes of determining the adjusted Conversion Price under Section 5C hereof, the
following shall be applicable:
(i) Issuance of Options. If the Corporation should in any manner after the date hereof grant or sell any Options and the price per
share for which Common Stock is issuable upon the exercise of such Options, or upon conversion or exchange of any Convertible Securities
issuable upon exercise of such Options, is less than the Conversion Price then in effect as of the date of such grant or sale of Options, then the
total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total
maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to be outstanding and to have
been issued and sold by the Corporation at the time of the granting or sale of such Options for such price per share. For purposes of this
Section 5D(i) the “price per share for which Common Stock is issuable” shall be determined by dividing (a) the total amount, if any, received
or receivable by the Corporation as consideration for the granting or sale of such Options, plus the minimum aggregate amount of additional
consideration payable to the Corporation upon exercise of all such Options, plus in the case of such Options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the issuance or sale of such
Convertible Securities and the conversion or exchange thereof, by (b) the total maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options. No
further adjustment of the Conversion Price shall be made when Convertible Securities are actually issued upon the exercise of such Options or
when Common Stock is actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities.
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(ii) Issuance of Convertible Securities. If the Corporation should in any manner after the date hereof issue or sell any Convertible
Securities and the price per share for which Common Stock is issuable upon conversion or exchange thereof is less than the Conversion Price
then in effect as of the date of such issuance or sale of Convertible Securities, then the total maximum number of shares of Common Stock
issuable upon conversion or exchange of such Convertible Securities shall be deemed to be outstanding and to have been issued and sold by the
Corporation at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this Section 5D(ii),
the “price per share for which Common Stock is issuable” shall be determined by dividing (a) the total amount received or receivable by the
Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (b) the total maximum number of shares of
Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment of the Conversion Price
shall be made when Common Stock is actually issued upon the conversion or exchange of such Convertible Securities, and if any such issue or
sale of such Convertible Securities is made upon exercise of any Options for which adjustments of the Conversion Price had been or are to be
made pursuant to other provisions of this Section 5, no further adjustment of the Conversion Price shall be made by reason of such issue or
sale.
(iii) Change in Option Price or Conversion Rate. If the purchase price provided for any Options, the additional consideration, if any,
payable upon the conversion or exchange of any Convertible Securities or the rate at which any Convertible Securities are convertible into or
exchangeable for Common Stock changes at any time, the Conversion Price in effect at the time of such change shall be immediately adjusted
to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for
such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold. For
purposes of Section 5D, if the terms of any Option or Convertible Security are changed in the manner described in the immediately preceding
sentence, then such Option or Convertible Security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof
shall be deemed to have been issued as of the date of such change; provided that no such change shall at any time cause the Conversion Price
hereunder to be increased.
(iv) Treatment of Expired Options and Unexercised Convertible Securities. Upon the expiration of any Option or the termination of
any right to convert or exchange any Convertible Security without the exercise of any such Option or right, the Conversion Price then in effect
hereunder shall be adjusted immediately to the Conversion Price which would have been in effect at the time of such expiration or termination
had such Option or Convertible Security, to the extent outstanding immediately prior to such expiration or termination, never been issued;
provided that if such expiration or termination would result in an increase in the Conversion Price then in effect, such increase shall not be
effective until 15 days after written notice thereof has been given to all holders of the Convertible Preferred. For purposes of Section 5D, the
expiration or termination of any Option or Convertible Security which was outstanding as of the date hereof shall not cause the Conversion
Price hereunder to be adjusted unless, and only to the extent that, a change in the terms of such Option or Convertible Security caused it to be
deemed to have been issued after the date hereof.
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(v) Calculation of Consideration Received . If any Common Stock, Option or Convertible Security is issued or sold or deemed to
have been issued or sold for cash, marketable securities or cash equivalents, the consideration received therefor shall be deemed to be the
amount received by the Corporation therefor (before deducting any expenses, discounts or commissions paid or incurred in connection with
such issue or sale).
(vi) Integrated Transactions . In case any Option is issued in connection with the issue or sale of other securities of the Corporation,
together comprising one integrated transaction in which no specific consideration is allocated to such Option by the parties thereto, the Option
shall be deemed to have been issued for a consideration of $.01 or the excess of the consideration received for the other securities over the
Conversion Price then in effect, if greater.
(vii) Treasury Shares . The number of shares of Common Stock outstanding at any given time shall not include shares owned or held
by or for the account of the Corporation or any Subsidiary, and the disposition of any shares so owned or held to any Person other than the
Corporation or any Subsidiary shall be considered an issue or sale of Common Stock.
(viii) Record Date . If the Corporation takes a record of the holders of Common Stock for the purpose of entitling them (a) to receive
a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (b) to subscribe for or purchase Common
Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common
Stock deemed to have been issued or sold upon the declaration of such dividend or upon the making of such other distribution or the date of the
granting of such right of subscription or purchase, as the case may be, unless subsequently abandoned.
5E. Subdivision or Combination of Common Stock . If the Corporation at any time subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Conversion
Price in effect immediately prior to such subdivision shall be proportionately reduced, and if the Corporation at any time combines (by reverse
stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price
in effect immediately prior to such combination shall be proportionately increased.
5F. Corporate Change . Any recapitalization, reorganization, reclassification, consolidation, merger or sale of all or substantially all of the
Corporation’s assets, in each case which is effected in such a manner that the holders of Common Stock are entitled to receive (either directly
or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock, is referred to herein as a
“Corporate Change.” Prior to the consummation of any Corporate Change, the Corporation shall make appropriate provisions to insure that
each of the holders of Convertible Preferred shall thereafter have the right to acquire and receive, in lieu of or in addition to (as the case may
be) the shares of Common Stock immediately theretofore acquirable and receivable upon the conversion of such holder’s Convertible
Preferred, such shares of stock, securities or assets as such holder would have received in connection with such Corporate Change if such
holder had converted its Convertible Preferred immediately prior to such Corporate Change. In each such case, the Corporation shall also make
appropriate provisions to insure that the provisions of this Section 5 and Sections 6
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and 7 hereof shall thereafter be applicable to the Convertible Preferred (including, in the case of any such consolidation, merger or sale in
which the successor entity or purchasing entity is other than the Corporation, an immediate adjustment of the Conversion Price to the value for
the Common Stock reflected by the terms of such consolidation, merger or sale, and a corresponding immediate adjustment in the number of
shares of Conversion Stock acquirable and receivable upon conversion of Convertible Preferred, if the value so reflected is less than the
Conversion Price in effect immediately prior to such consolidation, merger or sale). The Corporation shall not effect any such consolidation,
merger or sale, unless prior to the consummation thereof, the successor entity (if other than the Corporation) resulting from consolidation or
merger or the entity purchasing such assets assumes by written instrument, the obligation to deliver to each such holder such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. The provisions of this Section 5F
shall not apply in the event of a conversion of the Convertible Preferred pursuant to Section 5A hereof prior to the consummation of the
Corporate Change.
5G. Certain Events. If any event occurs of the type contemplated by the provisions of this Section 5 but not expressly provided for by such
provisions, then the Board shall make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of Convertible
Preferred; provided that no such adjustment shall increase the Conversion Price as otherwise determined pursuant to this Section 5 or decrease
the number of shares of Conversion Stock issuable upon conversion of each share of Convertible Preferred.
5H. Conversion Procedure.
(i) At the time any conversion of Convertible Preferred pursuant to this Section 5 has been effected, the rights of the holder of the
Shares converted as a holder of Convertible Preferred shall cease and the Person or Persons in whose name or names any certificate or
certificates for shares of Conversion Stock are to be issued upon such conversion shall be deemed to have become the holder or holders of
record of the shares of Conversion Stock represented thereby.
(ii) As soon as possible after a conversion of Convertible Preferred pursuant to this Section 5 has been effected (but in any event
within five Business Days thereafter), the Corporation shall deliver or cause to be delivered to the record holder of the Shares converted:
(a) unless in book entry form, a certificate or certificates representing the number of shares of Conversion Stock issuable by reason of
such conversion in such name or names and such denomination or denominations as the converting holder has specified; and
(b) a certificate representing any Shares of Convertible Preferred which were represented by the certificate or certificates delivered to
the Corporation in connection with such conversion but which were not converted;
provided, however, that in the event of a conversion of the Convertible Preferred pursuant to Section 5A hereof, the items referred to in clauses
(a) and (b) above shall be delivered as soon as practicable (but in any event within five Business Days) after the certificates representing the
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Shares are actually surrendered for conversion during normal business hours at the principal office of the Corporation.
(iii) The issuance or delivery of certificates for shares of Common Stock upon conversion of Convertible Preferred shall be made
without charge to the holders of such Convertible Preferred for any issuance tax in respect thereof or other cost incurred by the Corporation in
connection with such conversion and the related issuance of shares of Conversion Stock; provided, however, that the Corporation shall not be
required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificate in a name
other than that of the holder of Shares converted.
(iv) The Corporation shall not close its books against the transfer of Convertible Preferred or of Conversion Stock issued or issuable
upon conversion of Convertible Preferred in any manner which interferes in any material respect with the timely conversion of Convertible
Preferred. The Corporation shall assist and cooperate with any holder of Shares required to make any governmental filings or obtain any
governmental approval prior to or in connection with any conversion of Shares hereunder (including, without limitation, making any filings
required to be made by the Corporation).
(v) The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for
the purpose of issuance upon the conversion of the Convertible Preferred, such number of shares of Common Stock issuable upon the
conversion of all outstanding Convertible Preferred. All shares of Common Stock which are so issuable shall be free of preemptive rights and,
when issued, be duly and validly issued, fully paid and nonassessable and free from all taxes (other than income taxes payable by the holder),
liens, charges and encumbrances created by, through or under the Corporation. The Corporation shall not take any action which would cause
the number of authorized but unissued shares of Common Stock to be less than the number of such shares required to be reserved hereunder for
issuance upon conversion of the Convertible Preferred.
(vi) The Corporation shall not be required to issue fractional shares of stock upon the conversion of the Convertible Preferred. As to
any final fraction of a share which the holder of one or more shares of Convertible Preferred would otherwise be entitled to receive upon
conversion, the Corporation shall, in lieu of issuing any fractional share, the fraction will be rounded up or down to the nearest whole number
of shares.
5I. Notices.
(i) Immediately upon any adjustment of the Conversion Price, the Corporation shall give written notice thereof to all holders of
Convertible Preferred, setting forth in reasonable detail and certifying the calculation and the effective date of such adjustment. In addition, the
Corporation shall give written notice to all holders of Convertible Preferred of any conversion of the Convertible Preferred pursuant to
Section 5 A hereof within five Business Days after the effective date of such conversion,
(ii) The Corporation shall give written notice to all holders of Convertible Preferred at least 15 days prior to the date on which the
Corporation closes its books or takes a
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record (a) with respect to any dividend or distribution upon Common Stock or (b) with respect to any pro rata subscription offer to holders of
Common Stock.
(iii) The Corporation shall also give written notice to the holders of Convertible Preferred at least 20 days prior to the date on which
any Corporate Change shall take place.
5J. Calculations . If the amount of any adjustment of the Conversion Price required pursuant to this Section 5 would be less than 1% of the
Conversion Price in effect at the time such adjustment is otherwise so required to be made, such amount shall be carried forward and an
adjustment with respect thereto made at the time of and together with any subsequent adjustment which, together with such amount and any
other amount or amounts so carried forward, shall aggregate at least 1% of such Conversion Price. All calculations under this Section 5 shall be
made to the nearest one-tenth of a cent ($.001).
5K. Waiver of Adjustment to Conversion Price . Notwithstanding anything herein to the contrary, any downward adjustment of the
Conversion Price may be waived, either prospectively or retroactively and either generally or in a particular instance, only by the consent or
vote of the holders of a majority of the outstanding shares of the Convertible Preferred, voting together as a single class. Any such waiver shall
bind all future holders of shares of the Convertible Preferred.
Section 6. Purchase Rights .
If at any time the Corporation grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or
other property pro rata to the record holders of any class of Common Stock (the “Purchase Rights”), then each holder of Convertible Preferred
shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the number of shares of Conversion Stock acquirable upon conversion of such holder’s Convertible Preferred
immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights (excluding, however, the effects
of Section 5D(i) or (ii)), or if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the
grant, issue or sale of such Purchase Rights.
Section 7. Record Holders . The Corporation shall deem and treat the record holder of any Convertible Preferred as the true and lawful
owner thereof for all purposes, and the Corporation shall be affected by any notice to the contrary.
Section 8. Definitions .
“ Business Day ” means any day other than a Saturday, Sunday or a day on which state or federally chartered banking institutions in New
York City, New York are not required to be opened.
“ Common Stock ” means, collectively, the Corporation’s Common Stock, par value $.01 per share (including any and all Conversion
Stock) and any capital stock of any class of the Corporation hereafter authorized which is not limited to a fixed sum or percentage of par or
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stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any Liquidation of the
Corporation.
“ Common Stock Deemed Outstanding ” means, at any given time, the number of shares of Common Stock actually outstanding at such
time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Sections 5D(i) and 5D(ii) hereof whether or not the
Options or Convertible Securities are actually exercisable at such time.
“ Conversion Price ” means the conversion price per share of Common Stock into which the Convertible Preferred is convertible, as such
conversion price may be adjusted pursuant to Sections 5A or 5C hereof.
“ Conversion Stock ” means shares of the Corporation’s Common Stock, provided that if there is a change such that the securities issuable
upon conversion of the Convertible Preferred are issued by an entity other than the Corporation or there is a change in the type or class of
securities so issuable, then the term “Conversion Stock” shall mean one share of the security issuable upon conversion of the Convertible
Preferred if such security is issuable in shares, or shall mean the smallest unit in which such security is issuable if such security is not issuable
in shares.
“ Convertible Securities ” means any stock or securities directly or indirectly convertible into or exchangeable for Common Stock.
“ Discount Amount ” means an amount determined by multiplying the IPO Price by a percentage equal to the difference between (a) 100%
and (b) the fraction, expressed as a percentage, the numerator of which is $300,000,000 and the denominator of which is the IPO Valuation
Amount; provided, however, that if the IPO Valuation amount is $300,000,000 or less, the Discount Amount shall be zero.
“ Exit Price ” means an amount determined by dividing (a) the total amount of the net proceeds to be received by the Corporation or its
stockholders, as the case may be, in connection with the Exit Transaction by (b) the total number of shares of Common Stock outstanding on a
fully-diluted basis and assuming the conversion in full of the Convertible Preferred at the then current Conversion Price immediately prior to
the closing of the Exit Transaction.
“ Exit Transaction ” means (i) the sale of all or substantially all of the assets of the Corporation on a consolidated basis to an unrelated
Person, (ii) a merger, reorganization or consolidation in which the holders of the Corporation’s outstanding voting power immediately prior to
such transaction do not own a majority of the outstanding voting power of the surviving or resulting entity immediately upon completion of
such transaction, (iii) the sale of all or a majority of the outstanding equity interests in the Corporation to an unrelated Person whether by share
exchange or otherwise or (iv) any other transaction or series of transactions in which, the owners of the Corporation’s outstanding voting power
prior to such transaction do not own at least a majority of the outstanding voting power of the successor entity immediately upon completion of
the transaction.
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“ IPO ” means an initial public offering of shares of Common Stock of the Corporation to the public in an underwritten offering pursuant to
a registration statement under the Securities Act or the securities laws of any other jurisdiction.
“ IPO Conversion Date ” means the date of the effectiveness of the IPO.
“ IPO Price ” means the initial public offering price per share, less any underwriting discount per share, of Common Stock sold in the IPO,
as reflected in the prospectus filed with the SEC on or immediately prior to the IPO Conversion Date.
“ IPO Valuation Amount ” means an amount determined by multiplying the IPO Price by the total number of shares of Common Stock
issued and outstanding as of the date of the execution and delivery of the underwriting agreement relating to the IPO, including the shares of
Common Stock issued in the IPO and assuming the conversion in full of the Convertible Preferred at the IPO Price minus the Discount
Amount.
“ Junior Securities ” means any capital stock or other equity securities of the Corporation other than the Convertible Preferred.
“ Liquidation Value ” of any Share as of any particular date shall be equal to $100.00.
“ Options ” means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities.
“ Person ” means any individual, corporation, association, partnership, joint venture, limited liability company, trust, estate, or other entity
or organization, other than the Corporation, any of its Subsidiaries, any employee benefit plan of the Corporation or any of its Subsidiaries, or
any entity holding shares of Common Stock for or pursuant to the terms of any such plan.
“ SEC ” means the Securities and Exchange Commission.
“ Securities Act ” means the Securities Act of 1933, as amended, or any successor statute thereof, together with the rules and regulations
promulgated thereunder.
“ Subsidiary ” means any corporation, partnership, limited liability company, joint venture or other entity of which the Corporation (either
alone or through or together with any other subsidiary) owns, directly or indirectly, fifty percent (50%) or more of the stock or other equity or
partnership interests.
Section 9. Amendment and Waiver.
No amendment, modification or waiver shall be binding or effective with respect to any provision of Sections 1 to 12 hereof without the
prior written consent of the holders of two-thirds of the Convertible Preferred outstanding at the time such action is taken.
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Section 10. Notices.
Except as otherwise expressly provided hereunder, all notices referred to herein shall be in writing and shall be delivered by first class mail
or by reputable overnight courier service, charges prepaid, and shall be deemed to have been given when so mailed or sent (i) to the
Corporation (attention: Secretary) at its principal executive offices and (ii) to any holder of the Convertible Preferred, at such holder’s address
as it appears in the stock records of the Corporation, or to such other address as the Corporation or holder, as the case may be, shall have
designated by notice similarly given.
Section 11. Acquired Shares.
Any Shares of Convertible Preferred purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and
canceled promptly after the acquisition thereof. All such Shares shall upon their cancellation become authorized but unissued shares of
preferred stock of the Corporation and may be re-issued as part of a new series of preferred stock to be created by resolution or resolutions of
the Board, subject to the conditions and restrictions on issuance set forth herein.
Section 12. Successors and Transferees.
The provisions applicable to Shares of Convertible Preferred shall bind and inure to the benefit of and be enforceable by the Corporation,
the respective successors to the Corporation, and by any record holder of Shares of Convertible Preferred.
* * * *
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IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designations to be signed and attested this 13 th day of January,
2012.
ARMSTRONG ENERGY, INC.
By: /s/ Martin D. Wilson
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Exhibit 3.6
NOTICE: THIS AGREEMENT CONTAINS AN ARBITRATION PROVISION
SURVANT MINING COMPANY, LLC
LIMITED LIABILITY COMPANY AGREEMENT
(THE OPERATING AGREEMENT )
THIS LIMITED LIABILITY COMPANY AGREEMENT, also called the “Operating Agreement” (collectively herein, the
“Agreement”) effective as of the __ day of December, 2011, is entered into by and among Cyprus Creek Land Resources, LLC (“Cyprus”)
and Armstrong Coal Company, Inc. (“Armstrong”).
WHEREAS, the Members (hereafter defined) desire to form a limited liability company under the laws of the State of Delaware to be
known as Survant Mining Company, LLC (the “Company”) for the purposes set out in this Agreement, and to carry on such other legally
permissible business and activities as the Company, in accordance with applicable laws and this Limited Liability Company Agreement, shall
determine from time to time;
WHEREAS, the Members desire to enter into this Limited Liability Company Agreement to govern the conduct of the business and affairs
of the Company and to set forth the understanding of the Members regarding all other matters concerning the Company which may be covered
in a Limited Liability Company Agreement;
NOW, THEREFORE, in consideration of mutual promises and covenants contained herein and other good and valuable consideration, the
receipt and legal sufficiency of which are hereby acknowledged, the parties, intending to be legally bound, do hereby agree as follows:
1. Certain Definitions.
When used herein, the following terms shall have the meanings set forth below:
1.1 “Act” means the Delaware Limited Liability Company Act, Title 6, Chapter 18 of the Delaware Code (as amended). All references
herein to specific sections of the Act shall be deemed to refer to the corresponding provisions of succeeding law.
1.2 “Affiliate” means: (i) any Person which, directly or indirectly, is in Control of, is Controlled by or is under common Control with the
party for whom an affiliate is being determined; or (ii) any Person who is a director or officer (or comparable position) of any Person described
in clause (i) above or of the party for whom an affiliate is being determined.
1.3 “Agreement” means this Limited Liability Company Agreement as the same may be amended and supplemented from time to time.
1.4 “Armstrong” means Armstrong Coal Company, Inc., a Delaware corporation.
1.5 “Available Cash” means all cash determined by the Managing Member to be available to the Company for distribution to the
Members after the payment of all current expenses and other liabilities then due, establishing reserves for capital improvements, working
capital needs, contingent liabilities and unforeseen contingencies, all determined reasonably and in good faith by the Managing Member.
1.6 “Board of Managers” has the meaning set forth in Section 7.1.
1.7 “Capital Expenditure” means all expenditures (excluding interest capitalized during construction) which must be capitalized under
generally accepted accounting principles (GAAP).
1.8 “Certificate” means the Certificate of Formation, and all amendments thereto, executed and filed pursuant to applicable laws and the
terms of this Agreement.
1.9 “Change of Control,” with respect to Armstrong, means any transfer or other action that results in (a) Armstrong ceasing to be
Controlled, directly or indirectly, by the Yorktown Parties unless as a result of an initial or secondary public offering of stock, (b) any Person,
other than the Yorktown Parties or Persons Controlled by the Yorktown Parties, acquiring a 50% or greater ownership interest, directly or
indirectly, in Armstrong, or (c) any private or public company or entity primarily engaged in the business of coal mining gaining Control,
directly or indirectly, over Armstrong or over Yorktown Parties that have Control over Armstrong. “Change of Control,” with respect to a
Member other than Armstrong, means any transfer or other action that results in such Member ceasing to be Controlled, directly or indirectly,
by the same Persons or an Affiliate of the Persons who Controlled such Member as of the date of such Member’s admission to the Company.
1.10 “Closing” means the execution of the Operating Agreement, Management Agreement, Sales Representation Agreement and the
contributions of initial capital as set forth in Milestone I of Exhibit A hereto by Cyprus and Armstrong,
1.11 “Closing Date” means the date set for the Closing.
1.12 “Code” means the Internal Revenue Code of 1986, as amended. All references herein to specific sections of the Code shall be
deemed to refer also to the corresponding provisions of succeeding law.
1.13 “Company” means Survant Mining Company, LLC, a Delaware limited liability company,
1.14 “Company Minimum Gain” has the same meaning as the phrase “Partnership minimum gain” as set forth in treasury regulation §
1,704-2(d),
1.15 “Consideration Period” has the meaning set forth in Section 8.3(a).
1.16 “Control” of a Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management
and policies of such Person, whether through the ownership of equity interests, by contract or otherwise and either alone or in conjunction with
others.
1.17 “Cyprus” means Cyprus Creek Land Resources, LLC, a Delaware limited liability company,
1.18 “Deficit Capital Account” means with respect to any Member, the deficit balance, if any, in such Member’s capital account as of the
end of the taxable year, after giving effect to the following adjustments:
(a) credit to such capital account that amount which such Member is obligated to restore under Section 1.704-1 (b)(2)(ii)(c) of the
treasury regulations, as well as any addition
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thereto pursuant to the next to last sentence of treasury regulation §§1.704-2(g)(l) and (i)(5), after taking into account thereunder any
changes during such year in Partnership (Company) Minimum Gain (as determined in accordance with treasury regulation § 1.704-2(d)
and in the minimum gain attributable to any Partner (Member) for nonrecourse debt (as determined under treasury regulation
§l,704-2(i)(3); and
(b) debit to such capital account items described in treasury regulation §§1.704-l(b)(2)(ii)(d)(4), (5) and (6).
The definition of Deficit Capital Account is intended to comply with the provisions of treasury regulations §§1.704-l(b)(2)(ii)(d) and
1,704-2, and will be interpreted consistently with those provisions.
1.19 “Designated Representative” has the meaning set forth in Section 6.8(d).
1.20 “Distributional Interest” has the meaning set forth in Section 8.1,
1.21 “Fair Value” has the meaning set forth in Section 8.7.
1.22 “Fiscal Year” means the Company’s fiscal year which shall correspond to the calendar year, except that (i) the Company’s first
fiscal year shall commence on the date of the filing of the Certificate and (ii) such term shall also include any period for which the Company is
required to allocate net profits, net losses and other items of Company income, gain, loss or deduction pursuant to this Agreement or the Code.
1.23 “Foreclosure Assignment” has the meaning set forth in Section 8.7.
1.24 “Indemnitee” shall mean (i) any Manager, (ii) any Managing Member, (iii) any Member, or (iv) any officer, director, employee,
agent, stockholder, member or partner of the Company, or a Member.
1.25 “Lender” has the meaning set forth in Section 8.1.
1.26 “Lender Interest Holder” has the meaning set forth in Section 8.7.
1.27 “Lien” means any mortgage, deed of trust, security agreement, pledge, hypothecation, assignment, deposit arrangement, lien
(statutory or otherwise), security interest, financing statement, overriding royalty agreement or preferential arrangement of any kind or nature
whatsoever, including any conditional sale or other title retention agreement,
1.28 “Major Decisions” shall mean those acts and decisions described in the subsections of Section 7.4.
1.29 “Managing Member” shall have the meaning set forth in Section 7.2.
1.30 “Manager” and “Managers” shall have the meanings set forth in Section 7.1.
1.31 “Member Interest” shall include any and all rights of a Member under this Agreement, the Act and other applicable law, including
without limitation all Distributional Rights, economic rights, voting and consent rights, notice rights, contract rights and management rights.
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1.32 “Member Loan” means any loan to the Company by a Member.
1.33 “Member Nonrecourse Debt Minimum Gain” has the same meaning as the phrase “Company nonrecourse debt minimum gain” as
set forth in treasury regulation §1.704-2(i).
1.34 “Member Nonrecourse Deduction” has the same meaning as the phrase “Survant nonrecourse deduction” as set forth in treasury
regulation §1.704-2(i).
1.35 “Member Nonrecourse Loan” means a loan made to, or credit arrangement for the benefit of, the Company by a Member or by any
person related to a Member (as defined in treasury regulation § 1,752-4(b)) which by its terms exculpates the Members from personal liability
on the debt, but under which such Member or related person bears the ultimate economic risk of loss within the meaning of treasury regulation
§1.752-2.
1.36 “Member” means any Person who becomes a Member in the Company as provided herein, initially Cyprus and Armstrong.
1.37 “Non-Managing Member” has the meaning set forth in Section 6.6(e).
1.38 “Offer Price” has the meaning set forth in Section 8.7.
1.39 “Percentage Interest” means 51% for Armstrong and 49% for Cyprus, unless adjusted in accordance with Section 3.3.
1.40 “Person” means any individual, limited liability company, limited liability partnership, partnership, corporation, trust or other
person or entity.
1.41 “Profit Distribution Share” shall mean 50% for each Member without regard to each Member’s Percentage Interest; provided,
however, that if the Members’ Percentage Interests are ever adjusted pursuant to the provisions of Section 3.3, then, starting as of the date of
such adjustment, the “Profit Distribution Share” for each Member shall be equal to the Percentage Interest of each Member.
1.42 “Project” means the development of the Kentucky #8 seam of coal reserves identified on the map attached hereto as Exhibit B,
located in Muhlenberg County, Kentucky.
1.43 “Project Budget” means the pro forma revenue and expense statement for the Project approved by the Board of Managers in
accordance with Section 7.4.
1.44 “Right of First Offer” has the meaning set forth in Section 8.7.
1.45 “Sale Period” has the meaning set forth in Section 8.7,
1.46 “Subsidiary” means any Person, more than 50% of the voting securities of which, is owned (whether directly or indirectly through
one or more Subsidiaries) by the Company.
1.47 “Triggering Event” shall mean the occurrence of any of the following: (a) Armstrong resigns as the Managing Member,
(b) Armstrong is removed from the Managing Member position by the Board of Managers acting upon the majority consent of all of the
Managers, (c) Armstrong ceases to be a Member, (d) Armstrong files for bankruptcy, (e) the Management Agreement, referenced in
Section 7.1, is terminated pursuant to its terms and conditions, (f) a Change of Control with respect to Armstrong occurs, (g)
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the willful engaging by the Managing Member or its principals in gross misconduct materially or demonstrably injurious to the Company,
(h) the conviction of the Managing Member or its principals of a felony involving fraudulent or dishonest conduct, or (i) the occurrence of a
Foreclosure Assignment pursuant to Section 8.7,
1.48 “Yorktown Parties” shall mean Yorktown Energy Partners VI, L.P., Yorktown Energy Partners VII, L.P., Yorktown Energy
Partners VIII, L.P. and their Affiliates.
1.49 Other Definitions . Unless otherwise provided in this Agreement, any other term used in this Agreement which is elsewhere defined
in this Agreement shall have the same meaning as such term is respectively given by this Agreement. The definitions in this section shall apply
equally to both the singular and plural forms of the terms defined.
2. Organization .
2.1 Formation . The Members hereby agree to form the Company and to associate themselves as Members of the Company. Accordingly,
commensurate with the execution of this Agreement, the Members of the Company shall adopt the Certificate that was filed with the Office of
the Delaware Secretary of State.
2.2 Registered Office and Agent The initial registered office of the Company in Delaware shall be located at The Corporation Trust
Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801. The Company’s primary business office shall be at
407 Brown Road, Madisonville, KY 42431, or such other location as may hereafter be determined by the Members. The Company’s registered
agent for service of process in Delaware shall be The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington,
Delaware 19801.
2.3 Foreign Qualifications . Prior to the Company’s conducting business in any jurisdiction other than Delaware, the Members shall
cause the Company to comply, to the extent procedures are available and those matters are reasonably within the control of the Members, with
all requirements necessary to qualify the Company as a foreign limited liability company in that jurisdiction. At the request of the Managing
Member, each Member shall execute, acknowledge, swear to, and deliver all certificates and other instruments conforming with this Agreement
that are necessary or appropriate to qualify, continue, and terminate the Company as a foreign limited liability company in all such other
jurisdictions in which the Company may conduct business.
2.4 Limited Liability Company . The Members intend that the Company not be a partnership (including, without limitation, a limited
partnership) or joint venture, and that no Member be a partner or joint venturer of any other Member, for any purposes other than federal and
state tax purposes, and this Agreement may not be construed to suggest otherwise.
2.5 Term. The existence of the Company shall be perpetual, unless terminated or dissolved as set forth herein,
2.6 Annual Reporting. Beginning with the first full calendar year following the year in which the Company is organized, the Company
shall prepare and file with the Delaware Secretary of State an annual report as required by the Act or Delaware law.
3. Capital Contributions, Member Loans, and Related Matters .
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3.1 Scheduled Capital. Contributions . At Closing, each Member shall make its initial capital contribution to the Company of $30,000.00
in cash and the Members shall, on the milestone dates set forth on Exhibit A attached hereto (the “Contribution Schedule”), make their
respective additional contributions of property as indicated on the Contribution Schedule (collectively, the “Scheduled Capita! Contributions”),
Notwithstanding any provision of this Agreement, neither Member is making any representation or warranty concerning the condition or
quality of its properties being contributed hereunder, and neither Member shall be determined to have failed to remit its capital contribution or
be liable to the Company or the other Member based on any subsequent determination that any portion of the Member’s capital contribution
consisting of owned or leased real property is unable to be used, developed or mined for any reason or is not used, mined and/or developed for
any reason or the Member’s title to any such property is found to be defective or the estimated tonnages of any coal reserves are determined to
be inaccurate or due to any aspect of the condition, fitness or serviceability of any of the Equipment, Buildings, or other facilities described in
Exhibit A hereto. All contributions, including but not limited to the surface properties, coal reserves, mining facilities, buildings and equipment
described in Exhibit A and more particularly described in Exhibit D hereto, shall be contributed to Company free and clear of all liens and
encumbrances, Each Member hereby represents and warrants to the other Member, that prior to entering into this Operating Agreement it has
obtained all necessary consents, commitments and authorizations from any party holding current security interests in the properties that will be
contributed to the Company pursuant to this Section 3.1 .Each Member shall make its contributions substantially in the same form of the
conveyancing documents attached hereto and made a part hereof as Exhibit D.
3.2 Additional Capital Contributions: Loans . Each Member acknowledges that, in addition to the foregoing, additional capital
contributions will be required for the continued development and operation of the Company and each Member agrees to make the additional
capital contributions in the amounts and at the times indicated on the Project Budget or the Contribution Schedule, as well as any additional
capital contributions unanimously agreed to by the Board of Managers in a timely fashion. Any additional capital contributions to the Company
shall be made in proportion to each Member’s Percentage Interest. In the event the Managing Member reasonably determines that additional
cash is necessary in order to fund the Company’s operations in the ordinary course of business or to fund the cash needs in accordance with the
approved Project Budget, but the Members do not unanimously agree on the amount of an additional capital contribution, the Managing
Member shall have the right (but not the obligation), following reasonable notice to the other Members, to make a loan to the Company, and
the terms of Section 3.3 applicable to the priority and repayment of Member Loans shall apply.
3.3 Non-Compliance . In the event a Member (for the purposes of this Section 3.3 the “Non-Contributing Member”) fails to remit (i) its
Scheduled Capital Contributions pursuant to Section 3.1, or (ii) its portion of any additional capital contribution unanimously agreed to by the
Board of Managers, when due and such non-compliance is not cured within ten (10) days after written notice is delivered to the Non-
Contributing Member by the other Member requesting that such funds be remitted to the Company, the other Member (for the purposes of this
Section 3.3 the “Contributing Member”) may make the capital contribution or loan owed by the Non-Contributing Member and elect to treat
such amount as an additional capita! contribution or as a Member Loan to the Company. Such election must be set forth in a written notice
delivered to the Non-Contributing Member within thirty (30) days after the funds are contributed to the Company by the Contributing Member,
on behalf of the Non-Contributing Member. If the written notice is not delivered within the thirty (30) day time period, the additional funds
contributed to the Company shall be deemed a Member Loan by the Contributing Member to the Company. If the Contributing Member elects
to treat the contribution as an additional capital contribution and provides written notice of election to the Non- Contributing Member, then the
Percentage Interest of each Member shall be adjusted to reflect the percentage that each Member’s total capital contributions bear to the total of
all capital contributions made to the Company. If such funds are classified as a Member Loan, the loan shall accrue interest at the prime rate
posted
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by the lending institution at which the Company has its primary operating account, plus two (2) percentage points. AH Member Loans, whether
made under this section, Section 3.2, or otherwise, shall be a priority and no distributions to the Members shall be made until such loan is
repaid without the written consent of the Member who made the Member Loan.
3.4 Withdrawal of Capital . The Members shall only be entitled to withdraw or to receive distributions of capital in accordance with the
terms and conditions of this Agreement.
3.5 Capital Accounts . A single capital account shall be maintained for each Member in accordance with the capital accounting rules of
section 704(b) of the Code and the tax regulations thereunder (including treasury regulation 1.704(b)(2)(iv)), The capital account of each
Member shall be credited with the fair market value of such Member’s capita! contributions, such Member’s distributive share of profits,
income or gain, and the amount of any Company liabilities assumed by such Member or which are secured by any property distributed to such
Member. The capital account of each Member shall be debited with the amount of cash and the value of any property distributed to such
Member pursuant to any provision of this Agreement, such Member’s distributive share of losses and expense, and the amount of any liabilities
of such Member assumed by the Company or which are secured by any property contributed by such Member to the Company.
3.6 Revaluation of Capital Accounts . The capital accounts of the Members shall be adjusted to reflect revaluation of Company assets in
all cases required by treasury regulation § 1.704-l(b) and in all optional circumstances to the extent allowed by treasury regulation §
1.704-l(b)(2)(iv)(f) unless the Board of Managers determines that such revaluation would not be beneficial or fair under the circumstances. If
there is a revaluation under this Section 3.6, then the Company shall make special allocations consistent with the principles of Section 704(c) of
the Code. In determining such allocations, the Company shall use the traditional method with curative allocations described in treasury
regulation § 1,704~3(c) for any Contributed Asset.
4. Allocations .
4.1 Allocation of Profit Loss. Income, Gain. Deduction, and Credit . Subject to Section 4.2, profits and losses of the Company and, items
of taxable income, gain, loss, deduction and credit, shall be apportioned among the Members in accordance with each Member’s Profit
Distribution Share.
4.2 Tax Allocations Contributed Property . With respect to any asset contributed by a Member to the Company (“Contributed Asset”)
that has a tax basis different from its agreed upon fair market value on the date of the contribution, the Company shall make the special
allocations required by Section 704(c) of the Code, These special allocations apply solely for Federal, state, and local income tax purposes.
They shall not affect or be taken into account in computing a Member’s capital account, or share of profits, losses, or distributions pursuant to
any provision of this Agreement. In making these special allocations, the Company shall use the traditional method with curative allocations
described in treasury regulation § 1.704-3(c) for any Contributed Asset.
4.3 754 Election and Other Tax Elections . In the event of a distribution of property to a Member, or a transfer of any interest in the
Company permitted under the Act or this Agreement, the Company, upon written request of the transferor or transferee, shall file a timely
election under this section 754 of the Code and the regulations thereunder to adjust the basis of the Company’s assets under section 734(b) or
743(b) of the Code and a corresponding election under the applicable provisions of state and local law, and the Person ??? request shall pay all
costs incurred by the Company in connection therewith, including reasonable ??? accountants’ fees. Other tax elections and elections relating to
Taxes not specifically governed ??? provision of this Agreement shall be made as agreed by the Board of Managers.
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5. Distributions.
5.1 Distribution to Members . On or before the last business day of each calendar quarter, the Company may make distributions of cash
or cash equivalents to the Members based upon the Available Cash of the Company. The Managing Member shall first determine the amount of
Available Cash of the Company available for distribution, and then the Board of Managers shall determine the aggregate amount of
distributions which may be made to the Members and the Members shall share in such total distributions in accordance with each Member’s
Profit Distribution Share.
5.2 Distributions in Kind . Except as may be provided in this Agreement or an amendment to this Agreement, no Member, regardless of
the nature of the Member’s contribution to capital, may demand or receive a distribution from the Company in any form other than cash or cash
equivalents.
5.3 Limitation on Distributions . No distribution shall be made by the Company if after giving effect to the distribution; (a) the Company
would not be able to pay its debts as they become due in the usual course of business; or (b) the assets of the Company would be less than the
sum of its liabilities plus, the amount that would be needed, if the Company were to be dissolved at the time of the distribution, to satisfy the
preferential rights of other Members upon dissolution which are superior to the rights of the Member receiving the distribution.
6. Members .
6.1 Representations and Warranties . Each Member hereby represents and warrants to the Company and each other Member that: (a) it is
duly organized, validly existing and in good standing under the laws of its formation and is duly qualified and in good standing in the
jurisdiction of its principal place of business; (b) it has full power and authority to execute and agree to this Agreement and to perform its
obligations hereunder; (c) it has duly executed and delivered this Agreement; and (d) its authorization, execution, delivery, and performance of
this Agreement does not conflict with any other agreement or arrangement to which that Member is a party or by which it is bound.
6.2 Additional Members . It is not intended that additional Members will be admitted into the Company. Nonetheless, if the Members
unanimously agree, additional Members may be admitted on such terms and conditions as the Members may determine at the time of
admission,
6.3 Prohibited Transfers . No Member may transfer all or any part of such Member’s Percentage Interests if such transfer will (a) violate
in any material respect any applicable federal or state securities laws or regulations, or subject the Company to registration as an investment
company or election as a “business development company” under the Investment Company Act of 1940; (b) require any Member or any
Affiliate of a Member to register as an investment adviser under the Investment Advisers Act of 1940; (c) effect a termination of the Company
under Section 708 of the Code; or (d) cause the Company to be treated as an association taxable as a corporation for federal income tax
purposes.
6.4 Information . The Members acknowledge that from time to time, they may receive information from or regarding the Company in the
nature of trade secrets or that otherwise is confidential, the release of which may be damaging to the Company or Persons with which it does
business. Each Member shall hold in strict confidence any information it receives regarding the Company that is identified as being
confidential (and if that information is provided in writing, that is so marked) and may not disclose it to any Person other than another Member,
except for disclosures (i) compelled by law (but the Member must notify the other Members, as appropriate, promptly of any request for that
information, before disclosing it, if
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practicable), (ii) to advisers or representatives of the Member or Persons to which that Member’s interest may be disposed as permitted by this
Agreement, but only if the recipients have agreed to be bound by the provisions of this Section, or (iii) of information that Member also has
received from a source independent of the Company that the Member reasonably believes obtained that information without breach of any
obligation of confidentially. The Members acknowledge that breach of the provisions of this Section may cause irreparable injury to the
Company for which monetary damages are inadequate, difficult to compute, or both. The Members agree that the provisions of this section may
be enforced by specific performance,
6.5 Liabilities to Third Parties; Indemnification . Except as otherwise expressly agreed in writing, no Member shall be liable for the
debts, obligations or liabilities of the Company, including under a judgment decree or order of a court; provided, however, that notwithstanding
any other provision of this Agreement, each Member shall indemnify and hold harmless the Company and the other Member from and against
any claim, loss, damage, liability, or reasonable expense (including reasonable attorneys’ fees, court costs, and costs of investigation and
appeal) actually incurred by the Company or the other Member by reason of, or arising from, the operations, business, or affairs of, or any
action taken or failure to act, of or by the other Member or its Affiliates prior to formation of this Company. The parties acknowledge that a
claim has been filed against the Armstrong Parties in US District Court, Western District of Kentucky, Civil Action No. 4:11 cv 114, alleging
the existence of an existing overriding royalty that is alleged to apply to #8 seam coal to be mined by the Company, and the parties agree in the
event that such claims are adjudged to apply to any #8 seam coal mined by the Company (but only with respect to #8 seam coal mined by the
Company), the Company shall not be entitled to be indemnified or held harmless by Armstrong relating to such obligations.
6.6 Fiduciary Duties .
(a) Duty of Loyalty . Each Member’s, Manager’s and Managing Member’s duty of loyalty to the Company and the other Members is
limited to account to the Company and to hold as trustee for the Company any property, profit or benefit derived by the Member, Manager
or Managing Member in the conduct or winding up of the Company’s business. A Member, Manager or Managing Member does not violate
the duty of loyalty by engaging in a competing business or pursuing other business opportunities, even if the business opportunity could
have been pursued by the Company.
(b) Duty of Care . Each Member’s, Manager’s and Managing Member’s duty of care to the Company and the other Members in the
conduct of and winding up of the Company’s business is limited to refraining from engaging in gross negligence, reckless conduct,
intentional misconduct, or a knowing violation of law,
(c) Good Faith and__Fair_Dealing . Each Member, Manager and Managing Member shall discharge its duties and exercise any of its
rights consistently with the obligation of good faith and fair dealing which it owes to the Company and the other Members, A Member,
Manager or Managing Member does not violate a duty of good faith or fair dealing to the Company merely because the Member’s,
Manager’s or Managing Member’s conduct furthers the Member’s, Manager’s or Managing Member’s, as the case may be, own interest.
Further, a Member, Manager, or Managing Member does not violate the duty of good faith and fair dealing by engaging in a competing
business or pursing other business opportunities, even if the business opportunity could have been pursued by the Company; provided,
however, that each Member, Manager and Managing Member shall not engage in a competing business involving any coal reserves
described in the Rogers #8 Lease of Kentucky #8 Reserves identified on Exhibit B hereto without the express written consent of the other
Member.
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(d) Indemnification of Members, Managers and Managing Member . To the fullest extent allowed by law, the Members, Managers, and
Managing Member shall be indemnified and held harmless by the Company for any liability resulting from any act performed or omission
made by them in good faith on behalf of the Company, except for acts or omissions of gross negligence, willful misconduct, intentional
misconduct, or a knowing violation of the law. Notwithstanding anything contained in this Agreement to the contrary, no Member, Manager
or Managing Member, nor any officer, director, employee, agent, stockholder, member or partner of any Member or the Managing Member
shall be liable, responsible, or accountable in monetary damages to the Company or any Member by reason of, or arising from, the
operations, business, or affairs of, or any action taken or failure to act on behalf of, the Company, except to the extent that any of the
foregoing is primarily caused by any acts or omissions of gross negligence, willful misconduct, intentional misconduct, or knowing violation
of the law of such Person; provided, however, that the rights of either Member with respect to the buy-sell triggers set forth in Section 8.3
shall not be limited to or conditioned upon acts or omissions of gross negligence, willful misconduct, intentional misconduct, or knowing
violation of the law.
(e) Duty of Care for Managing Member . The Managing Member shall perform its duties hereunder, including but not limited to those
expressly stated in Section 7.6, in good faith, using reasonable good faith efforts and with reasonable diligence. In the event the other
Member (“Non-Managing Member”) determines that the Managing Member is not performing its duties hereunder consistent with the
standards set forth in this Section 6.6(e), the Non-Managing Member may deliver written notice of such determination to the Managing
Member, which notice shall set forth in reasonable detail the basis for the Non-Managing Member’s determination that the Managing
Member is not performing its duties hereunder consistent with the standards set forth in this Section 6.6(e). If, after sixty (60) days after
delivery of the foregoing notice, the Non-Managing Member reasonably determines that the Managing Member continues to not perform its
duties hereunder consistent with the standards set forth in this Section 6.6(e), the Non-Managing Member may exercise the buy-sell option
set forth in Section 8.3 hereof.
6.7 Alternate Dispute Resolution . If a dispute, controversy or claim (whether based upon contract, tort, statute, common law or
otherwise) (collectively a “Dispute”) arises from or relates directly or indirectly to the subject matter hereof, and if the Dispute cannot be
settled through direct discussions, the parties shall first endeavor to resolve the Dispute by participating in a mediation administered by the
American Arbitration Association (“AAA”) under its Commercial Mediation Rules before resorting to arbitration. Thereafter, any unresolved
Dispute shall be settled by binding arbitration administered by the AAA in accordance with its Commercial Arbitration Rules and judgment on
the award rendered by the arbitrator, after the review rights set forth below have been exhausted, may be entered in any court having
jurisdiction. Any arbitration proceeding shall be conducted in St. Louis, Missouri on an expedited basis before a neutral arbitrator (or multiple
arbitrators if called for by the Commercial Arbitration Rules), Each arbitrator shall be selected in the manner determined by the AAA. Upon the
request of either party, the arbitrator’s award shall include findings of fact and conclusions of law provided that such findings may be in
summary form. Either party may seek review of the arbitrator’s award before an arbitrations review panel comprised of three arbitrators
qualified in the same manner as the initial arbitrator(s) (as set forth above) by submitting a written request to the AAA. The right of review
shall be deemed waived unless requested in writing within ten (10) days of the receipt of the initial arbitrator’s award. The arbitration review
panel shall be entitled to review all findings of fact and conclusions of law in whatever manner it deems appropriate and may modify the award
of the initial arbitrator(s) in its discretion. The prevailing party in any arbitration proceeding shall be entitled to
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an award of all reasonable out of pocket costs and expenses (including attorneys’ and arbitrators tees) related to the entire arbitration
proceeding (including review if applicable). Upon request of either party, the arbitrator(s) may require that the subject arbitration proceedings
be kept confidential and no party shall disclose or permit the disclosure of any information produced or disclosed in the arbitration proceedings
until the award is final. A party shall not be prevented from seeking temporary injunctive relief before a court of competent jurisdiction in an
emergency situation, but responsibility for resolution of the Dispute shall be appropriately transferred to the arbitrator(s) upon appointment in
accordance with the provisions hereof.
6.8 Meetings of Members .
(a) Meetings . The Members will have an annual meeting as may be established by the Managing Member. The Members will have such
special meetings as are called in accordance with the provisions of this Agreement. Any annual or special meeting of the Members is to be
held at such place as may be designated by the Managing Member or in a waiver of notice executed by all Members, If there is a failure to
designate a place for any such meeting, the same is to be held at the principal place of business of the Company. The annual meeting of the
Members is to be held each year within sixty (60) days of the beginning of the Fiscal Year for the transaction of such other business as may
come before the meeting. Special meetings of the Members may be called at any time by the Managing Member or by Members possessing
not less than one-third of the Percentage Interests and are to be held on such dates and at such times as are set forth in the notice calling the
meeting.
(b) Quorum . A majority of ail the Percentage Interests represented in person or by proxy at such meeting constitutes a quorum of
Members for all purposes. Less than such quorum has the right to adjourn the meeting to a specified date not longer than ninety (90) days
after such adjournment, with notice of such adjournment to Members to be given in the manner for special meetings of the Members. Except
where the affirmative vote of all of the Members or unanimous agreement of the Members is required herein, the act of a majority
(computed with reference to Percentage Interests) of the Members present at any duly called meeting at which a quorum of Members is
present is the act of the Members.
(c) Notice of Meetings . Written or printed notice of each meeting of Members stating the place, day and hour of the meeting and, in the
case of special meetings, the purpose or purposes for which the meeting is called must be delivered or given: (i) in the case of regular
meetings, not less than ten (10) nor more than forty (40) days before the date of the meeting; and (ii) in the case of special meetings, not less
than five (5) Business Days nor more than thirty (30) days before the date of the meeting; in each case either personally or by mail. Notice
of an annual meeting of the Members is to be given by the Company, Notice of a special meeting of the Members is to be given by the
Company or the Member calling the meeting. Any notice required by this Section may be waived by the Members by signing a waiver of
notice before or after the time of such meeting and such waiver is equivalent to the giving of such notice.
(d) Designated Representative(s) . Each Member shall designate in writing to the Company and the other Members the names of up to
two (2) officers, directors, partner’s, members, employees or other affiliates of the Member who are to serve as the “Designated
Representatives” of the Member at all meetings and in all votes, consents and approvals of the Members required pursuant to this
Agreement. The designated individual(s) shall be the official Designated Representative(s) of the designating Member. One of such
Designated Representatives shall be the primary voting representative of the Member and the other (if
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any) shall be the alternative voting representative. Both Designated Representatives of a Member may attend meetings of the Members, but
only one (1) Designated Representative shall cast the Member’s official vote on any matter. The initial Designated Representatives of the
entity Members are as follow:
Cyprus T.L. Bethel
Vice President, Cyprus
Tom Benner
Vice President Operations Underground,
Peabody Midwest Group
Armstrong Kenneth Allen
Vice President Operations,
Armstrong
Martin Wilson
President,
Armstrong
If neither Designated Representative of a Member is able to attend a particular meeting of the Members, such Member may designate in
writing another officer, director, partner, member, employee or affiliate of the Member to have voting privileges for that specific meeting. A
Member may change either or both of its Designated Representatives at any time by giving written notice thereof to the Company and the
other Members.
(e) Informal Action by Members . Any action required by this Agreement to be taken at a meeting of the Members, or any action which
may be taken at a meeting of the Members, may be taken without a meeting if all of the Members sign written consents that set forth the
action so taken. Such consents have the same force and effect as a unanimous vote of the Members at a meeting duly held. The Company is
to file such consents with the minutes of the meetings of the Members.
(f) Tele-Participation in Meetings . Members may participate in a meeting of the Members by means of a conference telephone or similar
communications equipment whereby all individuals participating in the meeting can hear each other. Participation in a meeting in this
manner constitutes presence in person at the meeting.
7. Management of the Company .
7.1 Board of Managers . The management of the Company is vested in a Board of Managers consisting initially of four (4) individuals
acting as Managers (individually a “Manager” and collectively the “Managers”) of the Company, two (2) selected by Armstrong (or its
successor or permitted assign) and the other two (2) selected by Cyprus (or its successor or permitted assign). Initially, Armstrong selects
Kenneth Allen, Vice President of Operations of Armstrong and Martin Wilson, President of Armstrong as its representatives on the Board of
Managers and Cyprus selects T. L. Bethel, Vice President of Cyprus and Tom Benner, Vice President Operations Underground, Peabody
Midwest Group as its representatives on the Board of Managers. Except as provided herein, the decisions of the Board of Managers shall be
binding upon
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the Company and may be relied upon by other persons or entities. A Manager may at any time be changed or removed and replaced by the
Member which has appointed such Manager, but not by any other Member. In the event that Armstrong or Cyprus (or such party’s successor or
permitted assign) ceases to be a Member, the Managers appointed by such Member shall be removed at such time and replaced by the
affirmative vote of all of the Members. Except as set forth in Section 3.2 and Section 7.12(e), the Board of Managers shall act solely upon the
majority consent of all of the Managers, which requires an affirmative vote of at least three (3) of the four (4) Managers, including the
affirmative vote of at least one (1) Manager appointed by each of Armstrong and Cyprus, and each Manager shall have one (1) vote. No
Manager shall be required to devote all of such Manager’s time or business efforts to the affairs of the Company but shall devote so much of
such Manager’s time and attention to the Company as is reasonably necessary and advisable to manage the affairs of the Company to the best
advantage of the Company. The Managing Member is hereby authorized to execute, in such capacity, all documents and agreements that do not
require consent of the Board of Managers, For documents and agreements that require such consent, the Board of Managers may, in connection
with its approval thereof, authorize the Managing Member and/or all or less than all of the Managers to execute any and all documents
necessary or convenient to carry out those actions approved by a majority of the Managers, If the Board of Managers approves executing a
document or agreement without specifically authorizing signers, then the Managing Member and each of the Managers, acting individually,
may execute such document or agreement on behalf of the Company. The Company shall enter into a Management Agreement (the
“Management Agreement”) which shall initially engage Armstrong to be the manager of the Company’s day-to-day operations and the
development of the Project, in accordance with the terms and conditions contained in the Management Agreement and this Agreement.
Pursuant to the terms of this Agreement Armstrong shall serve as the Managing Member until the occurrence of a Triggering Event or is
removed by the Board of Managers, at which time Cyprus shall have the authority, in its sole discretion, to assume the position of Managing
Member without consent or action from any other Member or the Board of Managers and shall also have the authority, in its sole discretion, to
assume the position of manager under the Management Agreement, both elections being entirely independent from the other.
7.2 Authority and Duties of the Managing Member . Except for Major Decisions, the Managing Member shall have authority over and
control and management of the day-to-day affairs of the Company, including, without limitation, the authority to carry out the duties set forth
in Section 7,6, below. The Managing Member shall be appointed by the Board of Managers and may be removed by the Board of Managers,
with or without cause. The initial Managing Member shall be Armstrong. Armstrong shall remain the Managing Member until the occurrence
of a Triggering Event or removed by the Board of Managers acting upon the majority consent of all of the Managers, Without limiting the
foregoing, the Managing Member shall have all of the following specific rights and powers to implement the business and affairs of the
Company:
(a) Execute and deliver contracts and other agreements necessary to conduct the efficient and safe day to day operations of the Project
and to facilitate the development of the Project and in the ordinary course of business;
(b) Retain or employ and coordinate the services (both on site and off site) of employees, independent contractors, supervisors,
accountants, attorneys and other persons necessary or appropriate to carry out the business and purposes of the Company, subject to the
provisions of Section 7,4(d);
(c) Pay all debts and other obligations of the Company, to the extent that funds of the Company are available therefor;
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(d) Execute for and on behalf of the Company, and with respect to the Project, all such applications for permits and licenses as the
Managing Member deems necessary and advisable;
(e) Perform all ministerial acts and duties relating to the payment of all indebtedness, taxes, and assessments due or to become due
with regard to the Project, and to give and receive notices, reports, and other communications arising out of or in connection with the
ownership, indebtedness, or maintenance of the Project; and
(f) Take such other actions or execute such other documents or agreements on behalf of the Company that do not expressly require the
consent of the Board of Managers or the Members hereunder.
7.3 Delegation of Duties . The Managing Member may delegate such authority and duties as the Managing Member deems advisable,
excluding any authority or duty which the Act requires to be exercised by the Members or which is a Major Decision. Any delegation pursuant
to this Section may be revoked at any time by the Managing Member,
7.4 Major Decisions . Notwithstanding Sections 7,2 and 7.6, the Managing Member, on behalf of the Company, may not enter into or
conduct any of the following transactions (“Major Decisions”) without the majority consent of the Board of Managers:
(a) admit a Person as a Member except as provided in this Agreement;
(b) change the status of the Company from one in which management of the Company is vested in managers to one in which
management of the Company is vested in the members and vice versa;
(c) assign the Company’s property in trust for creditors or on the assignee’s promise to pay the Debts of the Company;
(d) select, retain or employ any attorneys or legal advisors to institute or defend any claims, litigation or other legal proceeding
brought by or brought on behalf of or against the Company, in which the amount in controversy exceeds $250,000.00;
(e) institute or settle any litigation, arbitration or other legal proceeding by or on behalf of the Company, or confess a judgment against
the Company, in which the amount in controversy exceeds $250,000.00, except that the Managing Member, without consent of the Board
of Managers, may negotiate and settle disputes on behalf of the Company with the Mine Safety and Health Administration (MSHA), with
authority to commit the Company to pay any associated fines, costs or other liabilities in an aggregate amount of $1,000,000.00 in any
given Fiscal Year;
(f) sell, convey, lease, assign, exchange or otherwise dispose of any real property or any combination thereof or any other material
asset of the Company with a fair market value in excess of $250,000.00 in the aggregate during any Fiscal Year without consent of the
Board of Managers, provided, however, that the Managing Member shall have the authority to sell, transfer, dispose, abandon or lease
any movable equipment in the ordinary course of business which are no longer necessary or required in the conduct of the Company’s
business;
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(g) borrow money in the name of the Company in excess of $250,000.00 in the aggregate during any Fiscal Year which is not included
within the approved Project Budget for that Fiscal Year or issue evidences of indebtedness of the Company, or refinance, recast, modify
or extend the same, or secure the same by mortgage, deed of trust, pledge or other Lien;
(h) commit to make, or make, any expenditure (including Capital Expenditures) in excess of $250,000.00 in the aggregate during any
Fiscal Year which is not included within the approved Project Budget for that Fiscal Year;
(i) acquire by purchase, lease or otherwise, any real property in excess of $250,000.00 in the aggregate during any Fiscal Year which
is not included within the approved Project Budget for that Fiscal Year or make any investment in securities or any ownership or
controlling interests in any corporation, partnership, limited partnership, limited liability company or other Person;
(j) possess any property of the Company, or assign the rights of the Company in specific property, for other than a Company purpose;
(k) approve the Project Budget for each Fiscal Year and any amendments thereto;
(1) cause the Company to enter into one or more transactions with a Member (other than in its capacity as a Member) or an Affiliate of
a Member except as otherwise specifically permitted hereunder and in the Management Agreement;
(m) change the name of the Company at any time;
(n) form, organize, acquire, sell, dispose of, reorganize or liquidate a Subsidiary;
(o) to make any loan or advance to other Persons in excess of $10,000.00 to any such Person (including Members and Affiliates of
Members) or in excess of $50,000.00 in the aggregate during any Fiscal Year, other than (i) trade credit extended on usual and customary
terms in the ordinary course of business; and (ii) investments of Company cash in certificates of deposit, treasuries, high-grade
commercial paper or similar investment products;
(p) enter into any modification of the Management Agreement or. Sales Representation Agreement; or
(q) enter into or modify any lease or agreement between the Company and the Managing Member or any of its Affiliates except to the
extent permitted under the Management Agreement.
7.5 Actions Requiring Unanimous Approval of Members . Notwithstanding Sections 7.1, 7.2, 7.4 and 7,6, neither the Company, the
Managers, the Managing Member nor any other Member may, without the unanimous consent of all the Members, do any of the following:
(a) any act materially in contravention of this Agreement;
(b) amend this Agreement or the Certificate;
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(c) approve a merger or consolidation of the Company with another Person;
(d) modify, compromise or release the amount and character of the Scheduled Capital Contributions which a Member is to make or
promises to make hereunder;
(e) any act which would make it impossible to carry on the ordinary business of the Company;
(f) to dissolve or wind up the Company, except as otherwise expressly provided in this Agreement; or
(g) any and all elections required or permitted to be made by the Company under the Code.
7.6 Managing Member’s Duties . The Managing Member shall be responsible for the good faith performance of the following functions
in a commercially reasonable manner consistent with practices found in the development of properties similar to the Project:
(a) Protect and preserve the title and interest of the Company with respect to the Project and other assets now or hereafter owned by
the Company;
(b) Pay from the funds of the Company in a business-like manner all taxes, assessments and other obligations associated with the
Project;
(c) Prepare and implement the Project Budget as modified from time to time in accordance with the terms of this Agreement;
(d) Report to the Managers on a quarterly basis regarding the status of the development of the Project and compliance with the Project
Budget for that Fiscal Year;
(e) Negotiate, enter into and supervise the performance of contracts covering all aspects of development of the Project; provided
however, that the Sales Representation Agreement shall control the conduct of the parties regarding the sale and marketing of coal from
the Project and the Management Agreement shall control the conduct of the parties regarding the day to day management and
development of the Project;
(f) Keep all books and accounts and other records required by the Company, including detailed information regarding all expenditures,
preserve and store in a safe place all such books and records for at least a seven (7) year period after termination of each fiscal year; and
permit the Members, or any person designated by any Member, with reasonable advance notice and at reasonable times to examine or
audit the books, records and accounts relating to the Company, including but not limited to the assets of the business of the Company’s
contractual obligations and forecast for performance by the Company;
(g) Cause an annual financial statement to be prepared by a firm of certified public accountants of recognized standing, which
financial statements shall be audited if required by any Member;
(h) Pay from funds of the Company all obligations of the Company;
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(i) Maintain all funds of the Company in financial institutions of recognized credit standing or in certificates of deposit, treasuries,
high-grade commercial paper or similar products;
(j) Supervise all matters coming within the terms of this Agreement, including direct observation, inspection and supervision of the
development of the Project and production of coal therefrom in a safe and efficient manner;
(k) Develop, manage and operate the Project in a commercially reasonable and safe manner, which includes but is not limited to 1)
submitting the appropriate applications for encroachment permits to mine the Kentucky #8 seam of coal under (i) state and federal
highways, including the Wendell Ford Parkway (f/k/a Western Kentucky Parkway), and (ii) the Paducah and Louisville Railway, and 2)
obtaining satisfactory opinions of title on all coal tracts prior to entering upon or mining upon such tracts;
(1) Acquire appropriate insurance for the Company and the Project in amounts determined by the Managing Member in consultation
with the Board of Managers;
(m) Supervise the management of the Project and the production of coal therefrom;
(n) No later than one hundred twenty (120) days prior to the end of the Fiscal Year, the Managing Member shall start the budgetary
process for the next Fiscal Year and no later than ninety (90) days prior to the end of the Fiscal Year shall prepare and deliver to the
Members and Managers the projected annual Project Budget of the Company which itemizes projected sources of revenue and anticipated
expense items for the next Fiscal Year;
(o) No later than ninety (90) days after the end of the Fiscal Year, the Managing Member shall prepare a business report (“Annual
Business Report”) of the past Fiscal Year, The Annual Business Report shall be delivered to the Members to advise and inform each
Member of the current status of the Project. The Annual Business Report shall include: (i) description of activities taken place during the
past Fiscal Year; (ii) an annual income statement; (iii) a marketing plan for the next Fiscal Year; (iv) a coal production schedule; and
(v) any other information that the Members reasonably request be included in the Annual Business Report;
(p) The Managing Member shall cause all required Federal, state and local income, franchise, property and other tax returns of the
Company, including information returns, to be timely filed with the appropriate office of the relevant taxing jurisdiction or agency. With
respect to the Federal and state income tax returns of the Company, the Company shall submit to each Member drafts of the proposed
returns as soon as possible, but in no event later than March 15 of each year, to permit review and approval of such returns by each
Member prior to filing. All expenses incurred in connection with such tax returns and information returns, as well as for the Annual
Business Report referred to in Section 7.7(o) hereof, shall be expenses of the Company;
(q) No later than one hundred eighty (180) days after formation of the Company, the Managing Member shall cause all tracts being
subdivided by the “New Division Line”, or subdivided for any other reason, to be surveyed and to obtain a legal description and survey
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plat of said tracts. The survey plat shall be recorded and the legal description used in the Special Warranty Deed from Armstrong to the
Company; and
(r) In general, supervise the business and affairs of the Company for the benefit of the Members.
7.7 Exclusion Areas . Notwithstanding any other provision of this Agreement, the Company may not mine or enter upon any portion of
the Kentucky #8 seam of coal situated within the “No Mining Boundary” depicted on the map attached hereto and incorporated herein by
reference as Exhibit C (herein referred to as the “Exclusion Areas”) without the prior written consent of Cyprus granting the Company the right
to mine or enter upon all or any portion of the Exclusion Areas. The granting of any such consent shall be within the sole discretion of Cyprus
and its refusal to provide any such consent shall not constitute a failure by Cyprus to remit its initial capital contribution or otherwise constitute
a material act in contravention of this Agreement. The Company shall subordinate its interests in the coal reserves located within the Exclusion
Areas upon request of the surface owner or its lessee of those areas. In the event Cyprus, in its sole discretion, grants consent to lift the
prohibition against mining within the Exclusion Areas, the Company shall have the first right to mine the Kentucky #8 seam of coal situated
within the No Mining Boundary.
7.8 Development and Due Diligence Expenses . Each party shall bear its own costs and expenses for developing the Project and its own
due diligence activities until this Agreement is executed.
7.9 Conflicts of Interest . The pursuit of other ventures and activities by the Members, Managers and Managing Member are hereby
consented to by the Members and shall not be deemed wrongful or improper. No Member, Manager or Managing Member shall be obligated to
present any particular investment opportunity to the Company, even if such opportunity is of a character which, if presented to the Company,
could be taken by the Company. The Company may enter into agreements with a Member, or an affiliate of a Member, to provide other
services to the Company; provided such agreement must be at competitive rates and terms and, if applicable, approved by the Board of
Managers in accordance with Section 7.4.
7.10 Indemnification .
(a) Indemnities and Indemnifiable Claims. The Company shall indemnify and hold harmless any Indemnitee, from and against any claim,
loss, damage, liability, or reasonable expense (including reasonable attorneys’ fees, court costs, and costs of investigation and appeal) actually
incurred by any such Indemnitee by reason of, or arising from, the operations, business, or affairs of, or any action taken or failure to act on
behalf of, the Company, except to the extent any of the foregoing (A) is determined by final, nonappealable order of a court of competent
jurisdiction (or by any other means approved by the Board of Managers) to have been primarily caused by any fraud, breach of fiduciary duties
established under this Agreement, gross negligence or willful misconduct of such person or (B) is actually incurred as a result of any claim
(other than a claim for indemnification under this Agreement) asserted by the Indemnitee as plaintiff against the Company; provided that if (for
purposes of clause (A) immediately above) the fraud, breach of fiduciary duties established under this Agreement, gross negligence or willful
misconduct of any person claiming indemnification shall consist of a conviction of or plea of no contest to a felony, then such person shall not
be entitled to indemnification unless it is determined, by final, nonappealable order of a court of competent jurisdiction (or by any other means
approved by the Board of Managers), that indemnification should be granted in whole or part.
(b) Advancement of Expenses, Unless a determination has been made (by final,
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nonappealable order of a court of competent jurisdiction or by any other means approved by the Board of Managers) that indemnification is not
required, the Company shall, upon the request of any Indemnitee and except for any claim of the type described in clause (B) of Section 7.10(a)
of this Agreement, advance or promptly reimburse such Indemnitee’s reasonable costs of investigation, litigation, or appeal, including
reasonable attorneys’ fees; provided that the affected Indemnitee shall, as a condition of such Indemnitee’s right to receive such advances and
reimbursements, undertake in writing to promptly repay the Company for all such advancements or reimbursements if a court of competent
jurisdiction determines, by final, nonappealable order, that such Indemnitee is not then entitled to indemnification under this Section 7.10. The
written undertaking described in the immediately preceding sentence to repay the amount paid or reimbursed to an Indemnitee by the Company
must be an unlimited general obligation of the Indemnitee but need not be secured and it may be accepted without reference to financial ability
to make repayment,
7.11 Tax Matters Partner . Armstrong shall be designated, as the tax matters partner of the Company pursuant to §623 l(a)(7) of the
Code, Any Member designated as tax matters partner shall take such action as may be necessary to cause each other Member to become a
notice partner within the meaning of §6223 of the Code. The Company shall indemnify the tax matters partner of the Company from and
against any and all judgments, penalties (including excise and similar taxes and punitive damages), fines, settlements and reasonable expenses,
(including without limitation attorneys fees) actually incurred by such Member in performing its duties as the tax matters partner of the
Company; provided that the Company shall not be liable to any Person acting as the tax matters partner of the Company for any portion of such
judgments, penalties, fines, settlements or reasonable expenses resulting from such persons gross negligence or willful misconduct.
7.12 Meetings of the Board of Managers .
(a) Meetings . The Board of Managers will have an annual meeting and such quarterly meetings as may be established by the
Company. The Board of Managers will have such special meetings as are called in accordance with the provisions of this Agreement,
Any annual, quarterly or special meeting of the Board of Managers is to be held at such place as may be designated by the Company or in
a waiver of notice executed by all Managers. If there is a failure to designate a place for any such meeting, the same is to be held at the
principal place of business of the Company. The annual and quarterly meetings of the Board of Managers is to be held each year within
sixty (60) days prior to the beginning of the Fiscal Year, but in no event prior to the time the Managing Member delivers the projected
annual Project Budget of the Company to the Managers and the Members pursuant to Section 7.7(n), for the establishment of the Project
Budget and the transaction of such other business as may come before the meeting. Special meetings of the Board of Managers may be
called at any time by the Company or by a Manager and are to be held on such dates and at such times as are set forth in the notice calling
the meeting.
(b) Quorum . A Manager appointed by Cyprus and a Manager appointed by Armstrong attending such meeting constitutes a quorum of
Managers for all purposes, and no quorum shall exist unless a Manager appointed by both Cyprus and Armstrong shall be in attendance.
(c) Notice of Meetings . Written or printed notice of each meeting of the Board of Managers stating the place, day and hour of the
meeting and, in the case of special meetings, the purpose or purposes for which the meeting is called must be delivered or given: (i) in the
case of regular meetings, not less than ten (10) nor more than forty (40) days before the date of the meeting; and (ii) in the case of special
meetings, not less than five (5) Business Days nor more than thirty (30) days before the date of the meeting; in each case either
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personally or by mail. Notice of an annual meeting of the Board of Managers is to be given by the Company. Notice of a special meeting
of the Board of Managers is to be given by the Company or the Manager calling the meeting. Any notice required by this Section may be
waived by the Managers by signing a waiver of notice before or after the time of such meeting and such waiver is equivalent to the giving
of such notice.
(d) Proxies . A Manager may vote at any meeting either in person or by proxy executed in writing by the Manager or its duly
authorized attorney in fact. Such proxy must be filed with the Company before or at the time of the meeting. No proxy is valid after
11 months from the date of execution unless otherwise provided in the proxy.
(e) Informal Action by Managers . Any action required by this Agreement to be taken at a meeting of the Board of Managers, or any
action which may be taken at a meeting of the Board of Managers, may be taken without a meeting if all of the Managers sign written
consents that set forth the action so taken. Such consents have the same force and effect as a unanimous vote of the Managers at a
meeting duly held. The Company is to file such consents with the minutes of the meetings of the Board of Managers.
(f) Tele-Participation in Meetings . Managers may participate in a meeting of the Board of Managers by means of a conference
telephone or similar communications equipment whereby all individuals participating in the meeting can hear each other. Participation in
a meeting in this manner constitutes presence in person at the meeting.
8. Transfers of Interests; Admission .
8.1 Transfer Restrictions . Except as otherwise set forth in this Section 8, no Member may sell, assign, transfer, pledge, hypothecate or
otherwise dispose of its Member Interest unless unanimously approved by the Members, including, without limitation, a Member’s
distributional interest as described in §18-702 of the Act (“Distributional Interest”). Any transfer of a Member’s interest in violation of this
Agreement shall be void and of no effect; provided, however, that Armstrong shall be permitted to pledge its Distributional Interest only to
PNC Bank or the successor agent of the existing PNC credit facility or successor primary lender to Armstrong (“Lender”). Notwithstanding the
foregoing [imitations, the parties acknowledge and agree that, under the limited circumstances set forth in Section 8.7, the Lender shall have
the right to sell and transfer all of Armstrong’s Member Interest (not limited to its Distributional Interest) upon compliance with the provisions
of Section 8.7,
8.2 Right of First Refusal . If a Member receives a bona fide offer (“Offer”) which the Member (“Selling Member”) proposes to accept,
whether or not solicited, to sell or otherwise dispose of its entire Member Interest in the Company, then the Selling Member shall furnish to the
non-selling Member written notice of the receipt of the Offer together with the principal terms and conditions of the sale, including the
minimum price (“Sale Price”) at which such interest is proposed to be sold, and a statement as to the identity of the real party in interest making
the Offer. The non-selling Member, shall then have the right to purchase the Member Interest (“Offered Interest”) proposed to be sold by the
Selling Member upon and subject to the terms and conditions as set forth in this Section 8.2. This Section 8.2 shall not apply to any sale
pursuant to the procedures of Section 8.7.
(a) The price at which the Offered Interest may be purchased shall be the price contained in the Offer. If the price contained in the
Offer shall consist (in whole or in part) of consideration other than cash, payable at the closing thereof or at a later date, the cash
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equivalent fair market value of such other consideration shall be included in the price at which the Offered Interest may be so purchased.
(b) The non-selling Member shall have sixty (60) days after receipt of the notice to elect to purchase the Offered Interest. The
purchase transaction (unless otherwise agreed to with third-party purchasers) shall be consummated at a closing to be held at the principal
executive offices of the Company, or at such other location as may be agreed by the parties, within sixty(60) days following the date of
the non-selling Member’s election to purchase the Offered Interest. At the closing, unless otherwise stipulated in the Offer, the
non-selling Member shall deliver to the Selling Member the full purchase price against delivery of an instrument appropriately
transferring the Offered Interest sold thereby.
(c) If the non-selling Member does not elect to purchase the Offered Interest, then the Selling Member may accept the Offer and,
pursuant thereto, sell the Offered Interest and, notwithstanding anything to the contrary contained herein (including, without limitation,
Section 8.5 hereof), upon such sale of the Offered Interest and the execution by the transferee of this Agreement, the transferee shall
become a Member of the Company. However, if the Selling Member does not sell the Offered Interest pursuant to the Offer within ninety
(90) days after the termination (by passage of time or otherwise) of the rights of first refusal created under this Section 8.2, the Selling
Member may not thereafter transfer the Offered Interest, without again complying with the provisions of this Section 8.2.
8.3 Buy-Sell Option . Except under circumstances where the procedures set forth in Section 8.7 applies following a Foreclosure
Assignment (as defined below), upon the occurrence of any of the following events, each Member shall have the right of purchase and sale
provided by this Section 8.3 to be exercised by a Member (“Electing Member”) by delivering a written notice (“Election Notice”) to the other
Member (“Notice Member”):
(a) a Member or the Managing Member seeks in good faith for approval for an action that requires approval of the Board of Managers
or the Members pursuant to Section 3.2, Section 6.2, Section 7.4(g), or Section 7.5, and the Board of Managers or the Members, as
applicable, reach a full and final deadlock on whether to approve the requested action after attempting in good faith to negotiate a
mutually agreed outcome;
(b) the Notice Member, acting as a Managing Member or Member, or any Manager appointed by the Notice Member takes any action
or transaction described in Section 7.4 or 7.5 without the consent of the Board of Managers or Members, as applicable;
(c) the Notice Member has breached the Representations and Warranties in Section 6.1;
(d) the Notice Member has breached Section 6.3;
(e) the Notice Member has breached its duties and obligations set forth in Section 6.6(a),(b) or (c);
(f) a Member other than the Managing Member elects to exercise this provision pursuant to the provisions set forth in Section 6.6(e);
(g) a Change of Control with respect to either Member occurs; or
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(h) the voluntary election of either Member at any time on or after January 1, 2020.
Such Election Notice shall state a dollar amount equal to the value placed by the Electing Member on all of the issued and outstanding
membership interests in the Company, calculated on a pari passu basis taking into consideration the relative equity interest of the Electing
Member, and shall constitute an irrevocable offer by the Electing Member either to purchase all, but not less than all, of the Member Interest
in the Company of the Notice Member from the Notice Member, or to sell all, but not less than all, of the Electing Member’s Member
Interest in the Company to the Notice Member. The purchase price at which the Member Interest of any Member is purchased and sold
under this Section 8.3 shall be the value for all of the interests in the Company, as stated in the Election Notice, multiplied by the selling
Member’s Percentage Interest in the Company.
(i) For a period of time not exceeding sixty (60) days from the receipt of the Election Notice by the Notice Member (“Consideration
Period), the Notice Member shall have the right to elect to purchase all of the Electing Member’s Member Interest in the Company by
providing written notice (“Purchase Notice”) to the Electing Member of the Notice Member’s intent to purchase the Electing Member’s
Member Interest. If the Notice Member does not provide the Purchase Notice to the Electing Member within the above referenced sixty
(60) day time period, the Notice Member shall become obligated to sell its Member Interest in the Company to the Electing Member.
(ii) The closing of the purchase and sale shall occur within sixty (60) days from the earlier of the expiration of the Consideration
Period, or the date the Electing Member receives a Purchase Notice from the Notice Member. In either event, at the closing of the
purchase and sale transaction described in this Section 8.3, the purchase price must be paid in cash (either by certified check or by wire
transfer), unless otherwise agreed upon by the Electing Member and the Notice Member.
(iii) At the closing on the sale of a Member’s Member Interest pursuant to this Section 8.3, there shall be a final accounting among the
Members with respect to all amounts due them from the Company. With respect to the indebtedness and obligations for which any
Member is responsible, the purchasing Member shall, as a condition to closing (but said condition may be waived in writing by the
selling Member), cause the repayment of such indebtedness. The Members agree, upon request of any other Member, to execute such
certificates or other documents and perform such other acts as may be reasonably requested by such requesting Member from time to time
in connection with such sale.
8.4 Completion of Sale . If a Member becomes obligated to sell its Member Interest in the Company pursuant to Sections 8.2 or 8.3 of
this Agreement, each Member covenants and agrees that it will take such actions and execute such instruments of transfer and other documents
as reasonably requested by the other Member to further evidence and complete the sale of the Member’s Member Interest, Additionally, as a
condition precedent to the consummation of the sale of the Percentage Interest, a purchasing Member must arrange for the complete release of
all guarantees provided by the selling Member as security for indebtedness of the Company.
8.5 Admissions . All transfers of an interest in the Company by a Member shall entitle the transferee only the rights afforded a transferee
of a Distributional Interest pursuant to § 18-702 of the Act except as otherwise expressly provided herein. These rights are the rights to receive
allocations and
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distributions to which the transferring Member would otherwise have been entitled, but shall not allow the transferee any additional rights, nor
shall the transferee become a Member of the Company upon such transfer. The transferee shall only become a Member of the Company by
receiving the written consent of all Members of the Company and executing this Agreement. The consent of the Members to admit any
transferee of a distributional interest into the Company shall be given in the sole and absolute discretion of each Member.
8.6 Distributions and Allocations in Respect to Transferred Interests . If any Member’s interest is sold, assigned or transferred, or any
Person is otherwise admitted as a Member during any Fiscal Year in compliance with the provisions of this Agreement, net profits, net losses,
each item thereof, and all other items attributable to such interest for such Fiscal Year shall be allocated among the Members by taking into
account their varying interests during such Fiscal Year in accordance with Code §706(d). Unless otherwise required by the applicable treasury
regulations, such sale, assignment, transfer or admission shall be deemed to have occurred at the end of the calendar month during which such
event shall have actually occurred, and such allocations shall be determined and made pursuant to a pro forma closing of the books of the
Company as of the end of such month. With respect to a transferred Member’s interest or any interest therein, all distributions on or before the
deemed date of such transfer shall be made to the transferor and all distributions thereafter shall be made to the transferee. The Company shall
not incur any liability for making allocations and distributions in accordance with this provision.
8.7 Right of First Offer and Sale Procedure Following Foreclosure by Armstrong’s Lender . The procedures of this Section 8.7 shall
apply only in the event Armstrong’s interest has been assigned to Lender or its designee (“Lender Interest Holder”) upon the exercise of
Lender’s default remedies pursuant to the pledge referenced in Section 8.1 (such event being referred to as a “Foreclosure Assignment”), it
being understood that any such Lender Interest Holder’s are limited to that of the holder of a Distributional Interest and the Lender or its
designee or assignee may acquire all rights and attributes of Armstrong’s Membership Interest in the Company only pursuant to the procedures
of this Section 8.7.
(a) If, at any time, the Lender Interest Holder proposes to initiate a sale of Armstrong’s Member Interest to a third party, it shall provide written
notice of such intention to Cyprus (“Election Notice”), and Cyprus shall have a right of first offer to purchase Lender Interest Holder’s
Percentage Interest for a price equal to the Fair Value for all the Member Interests in the Company multiplied by the Lender Interest Holder’s
Percentage Interest in the Company (the “Offer Price”),
(b) As used herein, “Fair Value” shall mean the fair market value of the entire Company, as determined by the following process. The parties
shall have a period of 60 days following the date of the Election Notice in which to agree on the Fair Value of the Company, which period may
be extended by mutual consent, which consent shall not be unreasonably withheld. If they are unable to so agree during such 60-day period (as
such period may be extended by mutual consent), then the parties shall submit in writing to the other a list of three neutral and impartial mining
valuation consultants. The first name that matches on both lists shall be retained to determine the Fair Value of the Company. If there are no
matches on the lists, the parties shall submit new lists of three names within two business days, and this process shall continue until an
appraiser is selected. The selected appraiser shall have a period of sixty (60) days (which 60-day period shall be extended if the appraiser
believes it is necessary to complete its appraisal) in which to render the appraisal and provide each of the parties with a copy, which appraisal
shall be final and binding upon all the parties. All parties agree to give the appraiser full access to the mining operations, mine management and
all requested financial, business and operational information that the appraiser may reasonably request.
(c) The period beginning on the date on which the Fair Value is determined (whether by mutual agreement or by appraisal) and lasting for
180 days thereafter shall constitute the “Sale Period.” For the first thirty (30) days of the Sale Period, Cyprus shall have the option to elect to
purchase all of the Lender Interest
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Holder’s Percentage Interest for the Offer Price (the “Right of First Offer”). If Cyprus does not deliver notice of its election to purchase within
such 30-day period, Lender Interest Holder shall have the right to sell Lender Interest Holder’s Percentage Interest to any other Person, so long
as the total purchase price is not less than 90% of the Offer Price; however, if, during the Sale Period, Lender Interest Holder notifies Cyprus in
writing of a proposed sale of Lender Interest Holder’s Percentage Interest for a total purchase price less than 90% of the Offer Price, which
notice (the “ROFR Notice”) shall include a description of the principal terms and conditions of the sale, then Cyprus shall have the right to
elect to purchase the interest at the price identified in the ROFR, which election shall be delivered within 60 days of the date of its receipt of the
ROFR Notice, and if Cyprus shall fail to timely deliver written notice of its election to purchase, then Lender Interest Holder may sell its
Percentage Interest on the price and on the terms set forth in the ROFR Notice, so long as such sale is completed within 120 days after the date
of Cyprus’ receipt of the ROFR Notice. Any sale by Lender Interest Holder that conforms with the provisions of this Section 8.7 shall be
effective to vest in the purchaser all Member Interest rights relating to the Percentage Interest sold, and such purchaser shall automatically
become a Member of the Company upon such transfer upon such the purchaser executing an agreement agreeing to be bound by the terms of
this Agreement. If, however, Lender Interest Holder does not consummate the sale during the Sale Period (or, as applicable, within 120 days
from the date of Cyprus’ receipt of the ROFR Notice), then the Right of First Offer shall apply to any subsequent sale by Lender Interest
Holder.
(d) If Cyprus elects to exercise the Right of First Offer or its rights upon receipt of an ROFR Notice, the closing of the sale shall occur within
60 days of the start of the Sale Period. Each of Cyprus and Lender Interest Holder covenants and agrees that it will take such actions and
execute such instruments of transfer and other documents as reasonably requested by the other to further evidence and complete the sale of the
Lender Interest Holder’s Percentage Interest. The provisions of Section 8.6 shall apply to the interest being transferred. The purchase price
shall be paid in cash unless the parties mutually agree otherwise, and the Lender Interest Holder’s interest shall be free and clear of any liens
and encumbrances.
9. Dissolution Acts . The Company shall only be dissolved upon the occurrence of any one of the following events: (i) the completion of
the term of the Company as set forth in the Certificate; (ii) written consent of all Members upon exhaustion of the economically mineable coal
reserves from the Project; (iii) the sale of all or substantially all of the assets of the Company; (iv) written consent of all Members, or (v) as
required by Section 10 below. Except as otherwise agreed to herein below in Section 10, upon dissolution, the Company shall liquidate and
distribute its assets in the following priority:
9.1 First, to pay all debts owed by the Company to non-Members;
9.2 Second, to pay any outstanding Member Loans;
9.3 Third, to each Member in accordance with the positive balance of Member’s capital account; and
9.4 Fourth, to the Members in proportion to each Member’s Percentage Interest.
10. Withdrawal and Disassociation . Except as otherwise agreed to herein below in this Section 10, no Member shall be allowed to
withdraw or disassociate from the Company. Any attempted disassociation or withdrawal by a Member shall be null and void and not
recognized by the Company, If an event disassociation occurs for any reason whatsoever, the Company shall not dissolve and the Member
causing the disassociation, if any, shall be liable to the Company for such wrongful disassociation. In no event shall the disassociated Member
be entitled to have its Percentage Interest purchased by the Company. Notwithstanding any provision of this Agreement, if the Company has
not established commercially viable mining operations in the Kentucky #8 seam of coal by January 5,2016, then either Member shall have the
right to provide the other
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Member with notice of withdrawal from the Company (“Notice of Withdrawal”). Neither Member shall have the right to provide Notice of
Withdrawal from the Company prior to January 5, 2016. In the event either Member provides Notice of Withdrawal under this Section due to
the Company’s failure to establish commercially viable mining operations in the Kentucky #8 seam of coal by January 5, 2016, the Company
shall liquidate all assets of the Company, other than the assets contributed pursuant to the Contribution Schedule identified in Exhibit A hereto
and pay all debts or other amounts owed by the Company to: (i) non-Members; then to (ii) pay any outstanding Member Loans; then to (iii) the
Members is accordance with the positive balance of their the Member’s capital account; then to (iv) the Members in proportion to each
Member’s Percentage Interest. After all amounts identified in subsections (i) through (iii) of the preceding sentence have been paid in full, the
Company will distribute the remaining assets identified on Exhibit A hereto to the Member who originally contributed such assets as part of
that Member’s Initial Capital Contribution. In the event the Company is unable to satisfy its debts after liquidating all assets other than those
identified in Exhibit A hereto, then all remaining assets will be subject to the liquidation and distribution of assets pursuant to Section 9 of this
Agreement unless otherwise unanimously agreed to by the Members. Armstrong covenants and agrees that it will not interfere or compete with
Cyprus’ primary rights to renegotiate or seek an extension to the Rogers #8 Lease during the Non-interference Period (as defined below).
Notwithstanding any disassociation hereunder or stated herein in this Section 10, Armstrong hereby covenants and agrees for itself, its
successors and assigns and its and their Affiliates, and any successor owner of any ownership interest in the assets that were contributed by
Armstrong under Section 3 hereof, including without limitation, the successors in title to the 1,977 acres of surface lands, that it and they will
not, during the Noninterference Period (as defined below), seek to or obtain a lease from the Rogers of any coal reserves described in the
Rogers #8 Lease of Kentucky #8 Reserves identified on Exhibit A hereto, or accept the assignment of any sublease of the such coal reserves, or
take any action which could ultimately lead to the non-development or delayed development of the Cyprus owned Kentucky #8 Reserves either
separately, jointly or in conjunction with the Rogers Kentucky #8 Reserves. This covenant and agreement shall survive the disassociation and
termination of this Agreement and shall be deemed a covenant running with said land for a period of five (5) years from the date of withdrawal
and disassociation or from the date the Company is otherwise dissolved (the “Non-Interference Period”).
11. Management of Workforce . Managing Member shall have the right, power and obligation to exercise any control over the hiring or
supervision of the workforce of the Company, necessary to manage the Company, including, but not limited to, any employment benefits or
other terms and conditions of employment for the employees of the Company, Cyprus shall take no part in, and shall have no right, power or
obligation with respect to, any matter relating to the hiring of miners; provided, however, that Armstrong shall not hire miners previously
terminated by Armstrong without first receiving consent from the Board of Managers. The Managing Member shall provide written notification
to the Board of Managers of the lateral transfer miners from Armstrong’s other operations to the Company within thirty (30) days of such
transfer.
12. Applicant Violator System . Each Member represents and warrants that such member, its officers, shareholders, members,
subsidiaries, affiliates and any other entity that can be attributed to it under the “ownership and control” regulations issued by the office of
Surface Mining (collectively, “Member Entities”) are not currently permit blocked under the Surface Mining Control and Reclamation Act of
1977 (“SMCRA”). No Member will allow to exist any violation of SMCRA or any comparable state law at any operation of a Member Entity
that would cause any other Member or its Member Entities to be permit blocked. Any Member Entity which becomes permit blocked under
SMCRA or any comparable state law shall provide written notice of such event to the other Members within five (5) days and shall take any
and all actions necessary for the removal of such permit block within twenty (20) days’ provided, however, that if the permit block does not
then or thereafter adversely affect the other Member(s) (by permit block or otherwise), the permit blocked entity may contest the permit block
in good faith and by appropriate legal proceedings, provided further, however, that if the permit block does adversely affect the other Members
(by permit block or
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otherwise), the non-permit blocked Member(s) may (i) undertake to remove the condition causing the permit block, at the permit blocked
Member’s expense or (ii) purchase such permit blocked Member’s interest in the Company at the fair market value of such permit blocked
Member’s interest.
13. Relationship with Company .
13.1 Promotion of Company . Subject to Section 7.9 above, each Member shall use reasonable efforts to promote the activities of the
Company and to ensure its success.
13.2 Information . Subject to any applicable restriction of law, all Members shall be fully and currently informed of the activities of the
Company. To the extent that there are any applicable laws or regulations which would have the effect of limiting the right of a Member to be so
informed, the other Members) shall use all reasonable efforts to obtain waivers thereof in favor of the Company and the member so limited and,
failing the obtaining of such waivers, the Members shall make such arrangements as shall be practicable to preserve the Company the benefits
of the contacts or projects to which such secrecy agreements or laws or regulations relate. Each Member shall not, except as required by law
and except for disclosure to its officers, directors, employees, shareholders, members, partners, attorneys, accountants, and Affiliates (who shall
be bound by the confidentiality provisions of this Agreement), divulge to any person any confidential or proprietary information concerning the
business of the Company, including, without limitation, the terms of this Agreement.
14. Miscellaneous Matters .
14.1 Offset . Whenever the Company is to pay any sum to any Member, any amounts that the Member owes the Company may be
deducted from that sum before payment.
14.2 Captions . Section and paragraph titles or captions contained in this Agreement are inserted only as a matter of convenience and for
reference and in no way define, limit extend or describe the scope of this Agreement or the intent of any provision hereof.
14.3 Variation in Pronouns . All pronouns and any variation thereof shall be deemed to refer to the masculine, feminine, neuter, singular
or plural, as the identity of the person or persons.
14.4 Governing Law; Severability . This Agreement is governed by and shall be construed in accordance with the law of the State of
Delaware. If any provision of this Agreement or the application thereof to any Person or circumstance is held invalid or unenforceable to any
extent, the remainder of this Agreement and the application of that provision to other Persons or circumstances is not affected thereby and that
provision shall be enforced to the greatest extent permitted by law.
14.5 Validity . In the event that any provision of this Agreement shall be held to be invalid, the same shall not affect in any respect
whatsoever the validity of the remainder of this Agreement.
14.6 Benefit . Except as herein otherwise provided to the contrary, this Agreement shall be binding upon and inure to the benefit of the
Members, their heirs, personal representatives, successors and assigns.
14.7 Notice . Any notice or communication required or permitted to be given by any provision of this Agreement shall be in writing and
shall be deemed to have been given and received by the person to whom directed (a) when personally delivered, (b) when sent by telefacsimile,
telecopier or similar transmission, at the number of the recipient set forth herein, followed with mailing by regular United States
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mail, (c) one (1) business day after deposited for overnight delivery with an overnight courier such as Federal Express, Airborne, United Postal
Service or other overnight courier service, or (d) three (3) business days after deposited in the U. S. mail, sent by certified mail, postage
prepaid, return receipt requested, and such notices are addressed to the person to which directed at the address or facsimile number of which
such person has notified the Company and all of the Members. The initial addresses and facsimile numbers of the parties are reflected on the
signature page of this Agreement.
14.8 Further Assurances . In connection with this Agreement and the transactions contemplated hereby, each Member shall execute and
deliver any additional documents and instruments and perform any additional acts that may be necessary or appropriate to effectuate and
perform the provisions of this Agreement.
14.9 Entire Agreement/Amendment . This Agreement embodies the entire agreement and understanding of the Members relating to the
subject matter hereof and supersedes all prior representations, agreements and understandings, oral or written, relating to such subject matter.
This Agreement may be amended only by a written instrument executed by all the Members.
14.10 Waiver and Consent . No consent or waiver, express or implied, by a Member to or of any breach or default by the other Member
in the performance of its obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in
the performance of such other Member of the same or any other obligation of such member hereunder.
14.11 Legal Fees . Except as otherwise provided herein, all legal and other costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby are to be paid by the Member incurring such costs and expenses. In the event the
Company or any Member brings suit to construe or enforce the terms hereof, or raises this Agreement as a defense in a suit brought by the
Company or another Member, the prevailing Person is entitled to recover its attorneys’ fees and expenses.
14.12 Waiver of Dissolution under the Act . Any dissolution of the Company shall occur only as provided herein, and each Member
hereby waives and renounces its rights, if any, under the Act to seek a court decree of dissolution, to seek the appointment of a liquidator of the
Company, and to seek a partition of the Company property.
14.13 Relationship of the Members . The relationship between the Members shall be limited to the performance of the transactions
contemplated by this Agreement and by the Formation Agreement and in accordance with their terms. Nothing herein shall be construed to
authorize a Member to act as general agent for the other Member(s).
14.14 Agreement in Counterparts . This Agreement may be executed in as many counterparts as may be deemed necessary and
convenient. Each counterpart when so executed shall be deemed an original, but all counterparts shall constitute one and the same instrument.
[remainder of page blank; signature page follows]
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The Members execute this Agreement effective as of the date first above written.
Members:
Cyprus Creek Land Resources, LLC
By: /s/ T. L. Bethel
Name: T. L. Bethel
Its: VP
Official 701 Market Street
Address:
St. Louis, MO 83101
Attention: President
Facsimile No: (314) 342-7697
Armstrong Coal Company, Inc.
By: /s/ Martin D. Wilson
Name: Martin D. Wilson
Its: President
Official 407 Brown Road
Address:
Madisonville, KY 42431
Attention: President
Facsimile No: (270) 821-4245
Company:
Survant Mining Company, LLC
By: /s/ Martin D. Wilson
Name: Martin D. Wilson
Its: Managing Member
Official 407 Brown Road
Address:
Madisonville, KY 42431
Attention: Vice President
Facsimile No.: (270) 821-4245
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Exhibit ‘A’
Contribution Schedule
Scheduled Capital Contributions:
I. Milestone 1. Initial Capital (Permitting Phase)
Milestone 1 will occur upon the execution of the Operating Agreement of the Company, the Management Agreement and Sales Representation
Agreement. Following the occurrence of Milestone 1, the Company will work to obtain permits for the slope site, the airshaft site, the other
surface operations, and the #8 reserves being contributed by Cyprus.
Contributions:
-Armstrong contributes $30,000 in cash
-Cyprus contributes $30,000 in cash
-Each Member grants rights of entry as necessary to facilitate permitting
II. Milestone 2
Milestone 2 will occur upon the completion of permitting as determined by the Board of Managers (projected to occur in August 2012).
Following the occurrence of Milestone 2, the Company will begin work on slope construction and airshaft construction.
Contributions:
-Members to contribute, in proportion to each Member’s Percentage Interest, cash sufficient to complete construction of the mine, including
slope, airshafts, coal handling equipment, power drops, communication, rock dust, etc.
-Members to contribute, in proportion to each Member’s Percentage Interest, cash sufficient for down payments on mining equipment, as
determined by the Board of Managers.
-Armstrong to contribute surface property, equipment, buildings and facilities as follows:
Contribution by Armstrong and/or its Affiliates by deed to the Company of the surface properties (approximately 1977 acres) and
improvements (Parkway prep plant) as described on Schedule 1 attached hereto and made a part hereof. PNC Mortgages and financing
statements affecting those properties will be released. See Exhibit D for form of deed.
Grant and/or assignment by Armstrong and/or its Affiliates of access and unlimited usage of all waterlines and unlimited withdrawal rights
from the any impoundment, reservoir or body of water associated therewith, including but not limited to the Overland Slurry/Water
Supply,Lines servicing the Project, with rights of ingress and egress over any surface properties of Armstrong and/or its Affiliates for the
purpose of maintaining, reconstructing, modifying or otherwise servicing the waterlines and any impoundment, reservoir or body of water
associated therewith, together with the right to permit such facilities.
Conveyance and sublease of all equipment from Armstrong’s Parkway #9 operations, which shall include all substantially all of the owned and
leased equipment that is primarily used in connection with Armstrong’s Parkway #9 operations (supporting both surface and underground
operations) on Milestone 2 (“Equipment”). At the time of conveyance and sublease of all Equipment, Armstrong shall prepare complete
exhibits to be
- 29 -
attached as exhibits to the Bill of Sale and Sublease attached hereto in Exhibit D, All owned Equipment shall be by bill of sale. Conveyance of
leased Equipment shall be by means of a sublease whereby the Company will receive the benefit of use of such equipment and the residual
interest (if any) in the equipment upon satisfaction of the underlying lease obligations (without mark-up or additional rental owed to
Armstrong). The Company will provide Armstrong the first-priority, rent-free right to possess and use all of the Equipment pursuant to a Use
Agreement consistent with the terms stated herein and the further terms set forth on Exhibit D. Armstrong shall be responsible to pay all
underlying lease obligations for so long as any leased Equipment is being used in Armstrong’s Parkway #9 operations. Pursuant to the Use
Agreement, Armstrong shall be responsible to pay all operating costs associated with or arising from operation of Parkway prep plant and
Equipment, including but not limited to any utilities and maintenance costs, until such time as the Company begins mining the #8 seam of coal.
When the Company begins mining the #8 seam, the Company and Armstrong shall prorate the operation costs of the Parkway prep plant and
related Equipment, excluding Equipment dedicated solely to the #9 mining operations, based on their production from both seams. As
Armstrong depletes the #9 seam reserves at Parkway and ceases using particular items of Equipment, the Use Agreement shall terminate as to
such items, and possession will be delivered to the Company.
Contribution by Armstrong and/or its Affiliates of rights to the Gibraltar Haulroad and Access Road pursuant to a Non-Exclusive Haulroad
Easement Agreement.
-Cyprus to contribute reserves and property rights as follows:
Contribution to the Company by Cyprus and/or its Affiliates of all Kentucky #8 coal reserves located within the Comprehensive Mining Area,
now or hereafter owned or leased by Cyprus or its Affiliates, by the Lease and Sublease Agreement described on Exhibit D, all such leased and
subleased interests being contributed free from and not subject to any obligations of royalty interests, overriding royalty interests, premiums or
rentals to any Person, except for the royalty obligations due to any original Lessor of the subleased interests. Company will reimburse Cyprus
for advance royalties paid in 2012 for leased Rogers #8 coal reserves. 1
Contribution by Cyprus and/or its Affiliates of rights to the Gibraltar Haulroad and Access Road pursuant to Non-Exclusive Haulroad
Easement Agreements.
III. Milestone 3
Milestone 3 occurs upon the completion of mine construction as determined by the Board of Managers (projected to occur in August 2013).
Contributions:
-Members to contribute, in proportion to each Member’s Percentage Interest, cash sufficient to acquire a full underground unit of
equipment as determined by the Board of Managers, which is projected to include two JOY 1415 continuous miners, four BH10 battery
haulers, two Fletcher double boom roof bolters, one BF17 JOY feeder, two scoops, two 14 place mantrips, three tow man rides, power
distribution equipment, coal handling equipment (headers, etc.) and any other equipment or supplies necessary to operate one split air
supersection.
IV. Milestone 4
1 Upon completion of permitting Cyprus shall acquire a new #8 coal lease from the Rogers to extend the existing 1993 lease and will
subsequently sublease those leasehold interests to the Company.
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Milestone 4 occurs following the completion of mine construction and prior to mining as determined by the Board of Managers (projected to
occur in August 2013). Following the occurrence of Milestone 4, the Company will begin mining the #8 seam.
Contributions:
-Members to contribute, in proportion to each Member’s Percentage Interest, cash sufficient to upgrade the Parkway preparation plant to
allow for processing of additional tonnage as determined by the Board of Managers. Cost of operation of the preparation plant will be shared on
a prorata basis by Armstrong and Survant as long as Armstrong continues to operate in the #9 seam.
VI. TV A Contract. To the extent any coal is sold by the Company under Armstrong’s existing contract with Tennessee Valley Authority, TVA
Contract No, 40685, Armstrong shall remit to the Company the net proceeds attributable to the sale of such coal, without mark-up or additional
costs or charges to the Company pursuant to a pass-through agreement acceptable to the Board of Managers. The Sales Representation
Agreement requires payment for all coal mined removed and sold by the Company, including any coal passed through Armstrong contracts.
Notwithstanding any provision of this Agreement, neither Member is making any representation or warranty concerning the condition or
quality of its properties being contributed hereunder, and neither Member shall be determined to have failed to remit its capital contributions or
be liable to the Company or the other Member based on any subsequent determination that any portion of the Member’s capital contributions
consisting of owned or leased real property is unable to be used, developed or mined for any reason or is not used, mined and/or developed for
any reason or the Member’s title to any such property is found to be defective or the estimated tonnages of any coal reserves provided for
herein are determined to be inaccurate or due to any aspect of the condition, fitness or serviceability of any of the Equipment, Buildings, or
other facilities described herein. The Members agree that certain surface properties (being those tracts subdivided by the “New Division Line”)
to be contributed to the Company by Armstrong will be surveyed to effectively subdivide the tracts and that neither Member will be entitled to
seek adjustment of their respective Percentage Interests in the Company or otherwise be liable to the Company or the other Member by reason
of any determination of any deviation between the representations contained in the lease and the surveyed acreage of those surface properties.
- 31 -
EXHIBIT B
COMPREHENSIVE MINING AREA
- 32 -
EXHIBIT C
EXCLUSION AREAS
- 33 -
EXHIBIT D
TO
OPERATING AGREEMENT
Forms of Contribution Conveyancing Documents
1. Coal Mining Lease and Sublease — CCLR & Survant — Owned #8 Coal, Leased 1993 and 2013 Rogers #8 Coal, and Leased Duncan #8
Coal.
2. Memorandum of Coal Mining Lease and Sublease — CCLR & Survant — Owned #8 Coal, Leased 1993 and 2013 Rogers #8 Coal, and
Lease Duncan #8 Coal.
3. Rogers Consent to Sublease 1993 #8 Leased Coal.
4. Rogers Consent to Sublease 2013 #8 Leased Coal.
5. Duncan Consent to Sublease Portions of #8 Coal.
6. Non-Exclusive Haulroad & Access Easement — CCLC & Survant — Under review by Armstrong. To be mutually agreed by the parties
within 30 days of the date of the Operating Agreement.
7. Non-Exclusive Haulroad Easement — CCLC & Survant — Under review by Armstrong. To be mutually agreed by the parties within
30 days of the date of the Operating Agreement.
8. Non-Exclusive Haulroad Easement — CCLC & Survant — Under review by Armstrong. To be mutually agreed by the parties within
30 days of the date of the Operating Agreement.
9. Quitclaim Deed — WMD and WLC — 39.45% interest 4,782 acres of Owned Gibraltar Surface.
10. Quitclaim Deed — WMD and WLC — 39.45% interest in 661.54 acres of Owned Parkway Surface.
11. Special Warranty Deed — WLC and Survant — 100% Interest in 1,977 acres of Owned Surface with deed-in provisions (1,628 acres from
Gibraltar; 349 acres from Parkway).
12. Rogers Partial Release of Right of First Refusal to Purchase — Rogers, WLC, Survant.
13. Non-Exclusive Haulroad Easement (Gibraltar HR and Access Road — WLC, Armstrong, Survant — Under review by Armstrong. To be
mutually agreed by the parties within 30 days of
- 34 -
the date of the Operating Agreement.
14. Bill of Sale — Armstrong Owned Equipment — Armstrong & Survant.
15. Equipment Sublease — Armstrong Leased Equipment — Armstrong & Survant.
16. Use Agreement — To be drafted post-closing and mutually agreed by the parties within 30 days of the date of the Operating Agreement,
which agreement will contain the following basic terms:
- Armstrong shall have the first-priority, rent-free right to possess and use all of the Equipment as needed in its #9 seam mining
operations.
-Armstrong shall have no obligation to pay rent or use fees for the Equipment.
-Armstrong shall insure and maintain the Equipment at its cost until possession is delivered to Survant.
-Armstrong shall pay operating costs.
-Armstrong shall indemnify Survant for any liabilities and claims related to Armstrong’s use of the Equipment.
-As Armstrong depletes the #9 seam reserves at Parkway and ceases using particular items of Equipment, the Use Agreement shall
terminate as to such items, and possession will be delivered to the Company.
- 35 -
Exhibit 4.2
EXTENSION OF AGREEMENT TO ENTER INTO
VOTING AND STOCKHOLDERS’ AGREEMENT
This EXTENSION OF AGREEMENT TO ENTER INTO VOTING AND STOCKHOLDERS’ AGREEMENT (this “Agreement”), is made
and entered into as of February 1, 2012, by and among Armstrong Energy, Inc., a Delaware corporation (the “Company”), Yorktown Energy
Partners VI, L.P., a Delaware limited partnership (“Yorktown VI”), Yorktown Energy Partners VII, L.P., a Delaware limited partnership
(“Yorktown VII”), and Yorktown Energy Partners VIII, L.P., a Delaware limited partnership (together with Yorktown VI and Yorktown VII,
“Yorktown”).
WITNESSETH:
WHEREAS, the parties hereto are parties to that certain Agreement to Enter into Voting and Stockholders’ Agreement dated as of
October 13, 2011 (the “Original Agreement”);
WHEREAS, any capitalized term used herein and not otherwise defined shall have the meaning assigned to such term in the Original
Agreement;
WHEREAS, the Company has failed to complete the Initial Public Offering on or before the IPO Deadline; and
WHEREAS, pursuant to the authority expressly granted to the Company and Yorktown by the provisions of Section 1 of the Original
Agreement, the Company and Yorktown desire to extend the IPO Deadline to May 1, 2012.
NOW, THEREFORE, in consideration of the premises and the mutual terms, covenants and conditions contained herein, the parties hereto
hereby agree as follows:
AGREEMENT:
1. IPO Deadline. The IPO Deadline is hereby extended to May 1, 2012.
2. Miscellaneous.
(a) Except as hereby expressly modified, all terms of the Original Agreement shall remain in full force and effect. In the event of any
conflict between the provisions of the Original Agreement and the provisions of this Agreement, the provisions of this Agreement shall
control.
(b) This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their successors and assigns.
(c) This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware (without regard to
principles of conflict of laws).
(d) This Agreement may be executed in any number of counterparts, each of which shall be an original and all of which shall together
constitute one and the same agreement.
[Signature Pages Follow.]
2
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written.
ARMSTRONG ENERGY, INC.
By: /s/ Martin D. Wilson
Martin D. Wilson, President
YORKTOWN ENERGY PARTNERS VI, L.P.
By: Yorktown VI Company LP, its general partner
By: Yorktown VI Associates LLC, its general partner
By: /s/
Name:
Title:
YORKTOWN ENERGY PARTNERS VII, L.P.
By: Yorktown VII Company LP, its general partner
By: Yorktown VII Associates LLC, its general partner
By: /s/
Name:
Title:
[Signature Page to Extension of Agreement to Enter into Voting and Stockholders’ Agreement]
YORKTOWN ENERGY PARTNERS VIII, L.P.
By: Yorktown VIII Company LP, its general partner
By: Yorktown VIII Associates LLC, its general partner
By: /s/
Name:
Title:
[Signature Page to Extension of Agreement to Enter into Voting and Stockholders’ Agreement]
Exhibit 10.8
TENNESSEE VALLEY AUTHORITY
COAL ACQUISITION & SUPPLY
1101 Market Street, MR 2A
Chattanooga, Tennessee 37402-2801
CONTRACT SUPPLEMENT
TO: Delta Coal LLC Supplement No. 1
95 White Bridge Road Date July 29, 2008
Nashville Tn 37205 Group No. 612
Contract No. 40668
Plant Various
Name of Mine Big Run
Attention Mr. Tate Rich
This confirms the agreement reached with TVA and Tate Rich to amend the contract as follows:
Section 1.0 shall be deleted in its entirety and replaced with the following:
1.0 CONTRACT TERM
The “Base Term” of this contract is 5.5 years (July 1, 2008 — December 31, 2013) and provides for Base Term price renegotiations
effective on the 30th month anniversary (January 1, 2011) of the Delivery Commencement Date. The “Reopener Term” of this contract
is 5.0 years (January 1, 2014 — December 31, 2018). The Base Term and the Reopener Term are subject to the terms and conditions
provided below.
(A) The Delivery Commencement Date shall be July 1, 2008, and deliveries shall continue for ten and one-half (10 1/2) years from said
Delivery Commencement Date unless terminated earlier by agreement or as otherwise provided herein.
(B) Either party may elect to commence Base Term price renegotiations by providing written notice nine (9) months prior to the 30th
month anniversary of the Delivery Commencement Date for the purpose of renegotiating the price of coal to be provided for the
remainder of the Base Term of this contract (i.e., January 1, 2011 — December 31, 2013) or for the sole purpose of terminating
deliveries. The party desiring to commence such renegotiations shall give the other party written notice at least nine (9) months prior to
the 30th month anniversary date. Nothing herein is intended to require a party who has commenced renegotiations hereunder to continue
such renegotiations if, for any reason, such party determines it is not in its interests to do so. If the Base Term price renegotiation
provision has been exercised, this contract will terminate on the said 30th month anniversary date unless TVA and the Contractor have
mutually agreed in writing six (6) months prior to the said anniversary date to continue this contract. Neither party shall be under any
obligation or liability to continue this contract
beyond said termination or have any liability for refusing to do so, if either party desires to terminate deliveries in accordance herewith. If
neither party elects to commence such Base Term price renegotiations, this contract shall continue in effect for the Base Term.
(C) If the parties agree to continue this contract beyond the 30th month anniversary of its Delivery Commencement Date as the result of
renegotiations as provided in (B) above or if neither party elects to commence such Base Term price renegotiations and this contract
continues in effect for the Base Term, then this contract may be reopened by either party nine (9) months prior to the 66th month
anniversary of the Delivery Commencement Date for the purpose of renegotiating Reopener Term price and other terms and conditions or
for the sole purpose of terminating deliveries at the conclusion of the Base Term (December 31, 2013) of this contract. The party desiring to
exercise such reopener shall give the other party written notice at least nine (9) months prior to the 66th month anniversary date and may,
but shall not be required to, specify the purpose of such reopening. Nothing herein is intended to require a party who has commenced
renegotiations hereunder to continue such renegotiations if, for any reason, such party determines it is not in its interests to do so. If the
reopener provision has been exercised, this contract will terminate on the said 66th month anniversary date (January 1, 2014) unless TVA
and the Contractor have mutually agreed in writing six (6) months prior to the said anniversary date to continue this contract. Neither party
shall be under any obligation or liability to continue this contract beyond said termination or have any liability for refusing to do so, if either
party desires to terminate deliveries in accordance herewith.
Section 9.0 Quality and Specifications
Section 9.1 shall be amended as follows:
Delete: Ash (As Received) 9.0% Not more than 11.0%
Add: Ash (As Received) 10.0% Not more than 12.0%
Section 10.0 CONTRACT PRICE ADJUSTMENTS AND COST REIMBURSEMENTS
Section 10.0 shall be amended as follows:
Section 10.5: TVA agrees to waive all notice provisions under this Section 10.0 with respect to Contractor requests for reimbursement under
subsection 10.2.1 (i) for any cost reimbursement request submitted with respect to coal provided to TVA during the first Contract Year only
(July 1, 2008 through December 31, 2008) provided, however, (1) any such cost reimbursement request for the first Contract Year must be
received by TVA prior to the end of the first Contract Year (December 31, 2008), and (2) such waiver of notice does not in any way diminish
TVA’s audit or other rights under this Section 10 or any other provisions of this agreement. Any such cost reimbursement requests for the first
Contract Year that are received after December 31, 2008 will not be considered by TVA for any purpose. The provisions of this Section 10.5
will apply to, and only to, coal provided to TVA during the period July 1, 2008 through December 31, 2008 and not to any other coal provided
under contract 40668.
All other terms and conditions of the Contract remain unchanged.
Please complete the acceptance below and return a signed copy of this contract supplement to this office. You should retain the other signed
copy for your files.
In the event Contractor fails to execute this Supplement in the acceptance space provided below or fails to return such executed Supplement to
TVA, shipment of coal to TVA following the date of Contractor’s receipt of this Supplement shall constitute an acceptance by Contractor of all
the terms and conditions of this Supplement, unless within five (5) business days of the date of receipt of this Supplement, Contractor notifies
TVA, both orally and in writing that this Supplement is not accepted.
Accepted Armstrong Coal Co. TENNESSEE VALLEY AUTHORITY
Company
By /s/ Martin D. Wilson /s/ Eddie Spicer
Signature Eddie Spicer
Fuel Contract Administrator
President /s/
Title Contract Support Specialist
8/18/08 /s/
Date Manager of Coal Supply
Exhibit 10.9
TENNESSEE VALLEY AUTHORITY
COAL ACQUISITION & SUPPLY
1101 Market Street, MR 2A
Chattanooga, Tennessee 37402-2801
CONTRACT SUPPLEMENT
TO: Delta Coal LLC Supplement No. 2
95 White Bridge Road Date July 29, 2008
Nashville Tn 37205 Group No. 612
Contract No. 40668
Plant Various
Name of Mine Big Run
Attention Mr. Tate Rich
This confirms the agreement reached with TVA and Tate Rich to amend the contract as follows:
3.0 SCHEDULING
3.4 By mutual agreement Contractor may at various times ship coal via Truck at TVA’s request.
7.0 SAMPLING AND ANALYSIS
7.04 TVA sampling and analysis (Section 7.1 of the contract) will be used for CQAR calculations for payment purposes for all coal shipped
via Truck from McHenry, KY, Armstrong Coal Mine to Destination Paradise Fossil Plant.
16.0 WEIGHTS
16.7 TVA weights will govern for payment for coal loaded via Truck from McHenry, KY, Armstrong Coal Mine to Destination Paradise
Fossil Plant.
All other terms and conditions of the Contract remain unchanged.
Please complete the acceptance below and return a signed copy of this contract supplement to this office. You should retain the other signed
copy for your files.
In the event Contractor fails to execute this Supplement in the acceptance space provided below or fails to return such executed Supplement to
TVA, shipment of coal to TVA following the date of Contractor’s receipt of this Supplement shall constitute an acceptance by Contractor of all
the terms and conditions of this Supplement, unless within five (5) business days of the date of receipt of this Supplement, Contractor notifies
TVA, both orally and in writing that this Supplement is not accepted.
Accepted Armstrong Coal Co. TENNESSEE VALLEY AUTHORITY
Company
By /s/ Martin D. Wilson /s/ Eddie Spicer
Signature Eddie Spicer
Fuel Contract Administrator
President /s/
Title Contract Support Specialist
8/18/08 /s/
Date Manager of Coal Supply
Exhibit 10.10
TENNESSEE VALLEY AUTHORITY
COAL ACQUISITION & SUPPLY
1101 Market Street, MR 2A
Chattanooga, Tennessee 37402-2801
CONTRACT SUPPLEMENT
TO: Delta Coal LLC Supplement No. 3
95 White Bridge Road Date November 12, 2008
Nashville Tn 37205 Group No. 612
Contract No. 40668
Plant Various
Name of Mine Big Run
Attention Mr. Tate Rich
This confirms the agreement reached between the parties relative to freeze proofing.
1. Unless TVA notifies contractor otherwise, anytime the temperature at contractor’s loading facility is below 27 degrees Fahrenheit during
the loading process, contractor will apply approximately 2 pints of a TVA Approved Freeze Proof Agent to each ton of coal being loaded
into railcars for shipment to TVA. The exception to this rule applies in the event a cooling period is moving into the area in 48 hours,
dropping the temperature for an extended period of time.
2. The cost to TVA for coal treated will be $2.00 per gallon, $.50 per 2 pint application.
3. The cost to TVA for applying side release will be $1.52 per gallon, $.19 per 1 pint application (Based on TVA notification to apply side
release on a as requested basis).
4. Contractor will invoice separately for the cost applying the Freeze Proof Agent to the coal treated. Each shipment treated must state being
treated on each Train Manifest. Each Invoice for treatment will have the appropriate shipment ID’s.
5. Contractor will send all invoices to
Eddie Spicer
Tennessee Valley Authority
1101 Market Street (MR 2A)
Chattanooga, Tennessee 37402
All other terms and conditions of the Contract remain unchanged.
Please complete the acceptance below and return a signed copy of this contract supplement to this office. You should retain the other signed
copy for your files.
In the event Contractor fails to execute this Supplement in the acceptance space provided below or fails to return such executed Supplement to
TVA, shipment of coal to TVA following the date of Contractor’s receipt of this Supplement shall constitute an acceptance by Contractor of all
the terms and conditions of this Supplement, unless within five (5) business days of the date of receipt of this Supplement, Contractor notifies
TVA, both orally and in writing that this Supplement is not accepted.
Accepted Armstrong Coal Co. TENNESSEE VALLEY AUTHORITY
Company
By /s/ Martin D. Wilson /s/ Eddie Spicer
Signature Eddie Spicer
Fuel Contract Administrator
President /s/
Title Contract Support Specialist
11/24/08 /s/
Date Manager of Coal Supply
Exhibit 10.11
TENNESSEE VALLEY AUTHORITY
COAL ACQUISITION & SUPPLY
1101 Market Street, MR 2A
Chattanooga, Tennessee 37402-2801
CONTRACT SUPPLEMENT
TO: Armstrong Coal Company Inc Supplement No. 4
7701 Forsyth Boulevard 10th Floor Date December 11, 2008
St. Louis MO 63105 Group No. 612
Contract No. 40668
Plant Various
Name of Mine Big Run
Attention Mr. Martin Wilson
Per the Contract Section 10.1 the Base Price will be adjusted by 2.75% January 1, 2009. The new base price shall be $30.753 per ton
cc: Tate Rich, President
Delta Coals,LLC
95 White Bridge Road #404
Nashville Tennessee 37205
Tennessee Valley Authority
By /s/ Eddie Spicer
Eddie Spicer
Fuel Contract Administrator
/s/
Contract Support Specialist
/s/
Manager of Coal Supply
Date 1-7-09
Exhibit 10.12
TENNESSEE VALLEY AUTHORITY
COAL ACQUISITION & SUPPLY
1101 Market Street, MR 2A
Chattanooga, Tennessee 37402-2801
CONTRACT SUPPLEMENT
TO: Armstrong Coal Company Inc Supplement No. 5
7701 Forsyth Boulevard 10th Floor Date February 12, 2009
St. Louis MO 63105 Group No. 612
Contract No. 40668
Plant Various
Name of Mine Big Run
Attention Mr. Martin Wilson
The following excess cost is for light loaded cars on the train listed below that was shipped to Widows Creek Fossil Plant on August 3, 2008:
Contract $28,538.72 TCN# 196025
Train V23924 40668
TOTAL $ 28,538.72
Our Accounts Payable Department will make the necessary adjustment to your account.
Tennessee Valley Authority
By /s/ Eddie Spicer
Eddie Spicer
Fuel Contract Administrator
/s/
Contract Support Specialist
/s/
Manager of Coal Supply
Date 3-11-09
cc: Tate Rich, President
Delta Coals, LLC
95 White Bridge Road #404
Nashville Tennessee 37205
Exhibit 10.13
Tennessee Valley Authority
Coal Acquisition & Supply
1101 Market Street, MR 2A
Chattanooga, Tennessee 37402-2801
CONTRACT SUPPLEMENT
TO: Armstrong Coal Company, Inc. Supplement No. 6
7701 Forsyth Boulevard — 10th Floor Date October 9, 2009
St. Louis, Missouri 63105 Group-Contract No. 612-40668
Plant Various
Name of Mine Various
Attention: Mr. Martin Wilson
This confirms the October 1, 2009, agreement reached between both parties relative to freeze proofing deliveries under the subject contracts.
As agreed, the freeze proofing products that will be applied to TVA’s shipments will be FreeFlowFC-100 for body feed application and
FreeFlowSR-300 for side car release application. Both products are manufactured by AKJ Industries, and will be applied to coal loaded for
TVA’s fossil plants as follows:
1. Unless TVA notifies contractor otherwise, anytime the temperature at contractor’s loading facility is below 27 degrees Fahrenheit during
the loading process, contractor will apply approximately 2 pints of FreeFlowFC-100 to each ton of coal being loaded into railcars at
Contractor’s facilities. This amount may be adjusted by mutual agreement of the parties to reduce the risk of frozen coal being delivered to
TVA’s plants. The exception to this rule applies in the event a cooling period is moving into the area in 48 hours, dropping the
temperature for an extended period of time.
2. The cost to TVA for applying FreeFlowFC-100 will be $2.00 per gallon or $.50 per 2 pint application.
3. The cost to TVA for applying the side care release application, FreeFlowSr-300, upon TVA’s request, will be $2.80 per gallon or $.35 per
1 pint application.
4. Contractor will invoice separately for the cost of applying FreeFlowFC-100 and FreeFlow SR-300. Each invoice and all correspondence
relating to the application of the freeze conditioning substance(s) should clearly reflect the Contract number, Traffic Control Number, and
the cost of such treatment. Invoices for freeze conditioning should be sent to the attention of Connie Gazaway at Tennessee Valley
Authority, 1101 Market Street, MR 2A, Chattanooga, Tennessee 37402-2801.
Please complete the acceptance below and return the copy of this contract supplement to this office. You should retain the original for
your file.
In the event Contractor fails to execute this Supplement in the acceptance space provided below or fails to return such executed
Supplement to TVA, shipment of coal to TVA following the date of Contractor’s receipt of this Supplement shall constitute an acceptance
by Contractor of all the terms and conditions of this Supplement, unless within five (5) business days of the date of receipt of this
Supplement, Contractor notifies TVA, both orally and in writing that this Supplement is not accepted.
Accepted Armstrong Coal Co. TENNESSEE VALLEY AUTHORITY
Company
By /s/ Martin D. Wilson /s/ Connie S. Gazaway
Signature Connie S. Gazaway
Fuel Transportation Specialist
President /s/
Title Contract Support Specialist
11/5/09 /s/
Date Manager of Coal Supply
Exhibit 10.14
TENNESSEE VALLEY AUTHORITY
COAL ACQUISITION & SUPPLY
1101 Market Street, MR 2A
Chattanooga, Tennessee 37402-2801
CONTRACT SUPPLEMENT
TO: Armstrong Coal Company, Inc. Supplement No. 7
7733 Forsyth Boulevard, Suite 1625 Date December 29, 2009
St. Louis, Missouri 63105 Group No. 612
Contract No. 40668
Plant Various
Name of Mine Big Run
Attention: Mr. Tate Rich
This confirms the agreement reached between Ben Jones, TVA, and Tate Rich, Delta Coals, LLC, on behalf of Armstrong Coal Company, Inc.,
(“Contractor”) to amend Contract 612-40668 (the “Contract”) as set forth below. Coal provided prior to January 1, 2010, will be governed by
the terms of the Contract, as amended by Supplements 1-6 and Section 5 of this Supplement 7, and coal delivered on or after January 1, 2010,
will be governed by the terms of the Contract as amended by Supplements 1-6 and this Supplement 7.
Section 1. Contract Term
Section 1.0 Contract Term of the Contract (as previously modified by Supplement 1) is hereby deleted in its entirety and replaced with the
following:
The “Base Term” of this Contract is 4.5 years (July 1, 2008 — December 31, 2012) and provides for a total reopener effective January 1,
2013. The “Reopener Term” of this Contract is 6.0 years (January 1, 2013 — December 31, 2018). The Base Term and the Reopener Term
are subject to the terms and conditions provided below.
(A) The Delivery Commencement Date shall be July 1, 2008, and deliveries shall continue for ten and one-half (10 1/2) years from said
Delivery Commencement Date unless terminated earlier by agreement or as otherwise provided herein.
(B) Either party may elect to commence Reopener Term negotiations by providing written notice to the other party no later than April 1,
2012, for the purpose of renegotiating the price and other terms and conditions with respect to coal to be provided from January 1, 2013, for
any period of time up to December 31, 2018, or for the sole purpose of terminating deliveries on January 1, 2013. Nothing herein is intended
to require a party who has commenced negotiations
1
hereunder to continue such negotiations, if, for any reason, such party determines it is not in its interests to do so. If this negotiation
provision has been exercised, this Contract will terminate on December 31, 2012, unless TVA and the Contractor have mutually agreed in
writing no later than July 1, 2012, to continue this Contract. Neither party shall be under any obligation or liability to continue this Contract
beyond said termination of December 31, 2012, or have any liability for refusing to do so, if either party desires to terminate deliveries in
accordance herewith.
(C) If the parties agree to continue this Contract beyond December 31, 2012, as the result of negotiations as provided in (B) above then this
Contract may be reopened by either party by providing written notice to the other party no later than April 1, 2014, for the purpose of
negotiating price and other terms and conditions for coal to be provided from January 1, 2015, for any period of time up to December 31,
2018, or for the sole purpose of terminating deliveries on December 31, 2014. Nothing herein is intended to require a party who has
commenced negotiations hereunder to continue such negotiations, if, for any reason, such party determines it is not in its interests to do so. If
this reopener provision has been exercised, the Contract will terminate on December 31, 2014, unless TVA and the Contractor have
mutually agreed in writing no later than July 1, 2014, to continue this Contract through December 31, 2018, or until such earlier expiration
date as the parties may mutually agree. Neither party shall be under any obligation or liability to continue this Contract beyond
December 31, 2014, or have any liability for refusing to do so, if either party desires to terminate deliveries in accordance herewith.
Section 2. Quantity
Section 2.1.1 Quantity of the Contract is hereby deleted in its entirety and replaced with the following:
2.1.1. Subject to TVA’s right to reduce or increase quantities to be delivered, as hereinafter provided, the quantity of coal to be sold and
purchased hereunder during each Contract Year shall be as follows:
Contract Year Base Tonnage
2008 500,000
2009 1,000,000
2010 1,000,000
2011 1,000,000
2012 2,000,000
2013 2,000,000
2014-2018 2,000,000
Note: Except as otherwise provided below, all annual tonnages will be delivered in fifty-two (52) equal deliveries or as directed by the Contract
Administrator.
2
Section 3. Price
Section 6.0 Price of the Contract is hereby revised as follows.
Subsection 6.1. is deleted in its entirety and replaced with the following new section:
6.1 Effective for all shipments beginning January 1, 2010, TVA shall pay Contractor $39.48 F.O.B. railcar at Midway, Kentucky, (hereinafter
referred to as the “Base Price”) for each net ton of coal purchased and delivered under this Contract. Thereafter the Base Price shall be adjusted
the first day of each Contract Year as provided in Section 10.1 (as adjusted annually, hereinafter referred to as “the then current Base Price”)
and otherwise as provided in Section 8.
Note: The price of coal delivered in calendar year 2010, 2011, and 2012 shall be as shown below.
Revised
Price per
ton per
Calendar Section
Year Base Price 10.1
2010 $ 39.48 N/A
2011 $ 39.48 $ 40.57
2012 $ 39.48 $ 41.68
Section 4. Variations, Delays, and Interruptions in Deliveries
Section 4.0 Variations, Delays, and Interruptions in Deliveries of the Contract is hereby revised as follows.
Subsection 4.2 is deleted in its entirety and replaced with the following new section:
4.2 Subject to the conditions hereinafter stated, neither party shall be liable to the other for failure to deliver or accept delivery of coal as
provided for in this contract if such failure was due to supervening causes not due to its own negligence, and which cannot reasonably be
overcome by the exercise of due diligence. Such causes shall include by way of illustration, but not limitation: acts of God or of the public
enemy; insurrection; riots; strikes; nuclear disaster; partial or total outages of coal-fired units; floods; accidents; major breakdown of equipment
or facilities (including, but not limited to, emergency outages of equipment or facilities to make repairs to avoid breakdowns thereof or damage
thereto), such equipment and facilities to include, but not limited to, power generation, unloading, stock-out and preparation plant equipment;
fires; industry-wide carrier delays or shortages of carriers’ equipment; embargoes; orders of acts of civil or military authority; or industry-wide
shortages of materials and supplies. Nor shall TVA be obligated to accept delivery of coal hereunder to the extent that such causes
3
wholly or partially prevent the unloading, stockpiling, preparing, or burning of coal at a Destination or Receiving Plant that is receiving coal at
the time the cause occurs, in which case TVA shall have no obligation to consign deliveries to another destination or plant; provided, however,
that if there is more than one Destination or Receiving Plant for this contract at the time such cause occurs, TVA shall be excused from taking
delivery of only such coal as would have been received at the Destination or Receiving Plant experiencing such cause. Nor shall refusal of
either party to settle a strike on terms other than it considers satisfactory preclude the strike from being considered an excusable cause. In the
event of force majeure asserted by Contractor, TVA shall have the right, but not the obligation, to require Contractor to make up any tonnage
not delivered in accordance with this Section. In the event of force majeure asserted by TVA, Contractor shall have the right, but not the
obligation, to require TVA to make up any tonnage not accepted in accordance with this Section. Any make up tonnage under this provision
shall be rescheduled by mutual agreement between the parties. Written notice of a party’s intent to exercise its right to require the other party to
make up tonnage not delivered or accepted in accordance with this section, in order to be effective, must be received by the other party within
90 days of the date of the first coal delivery following the complete cessation of the force majeure. The Base Price for make up tonnage
rescheduled hereunder shall be the then current Base Price at the time of delivery. The Base Price for any tonnage delivered under this
provision, after the expiration of the Contract Term shall be the Base Price of the final Contract Year, escalated by three percent (3.0%).
Subsection 4.6 is deleted in its entirety and replaced with the following new section:
4.6 TVA, by providing at least thirty (30) days’ prior written notice to Contractor, shall have the right to refuse any shipments otherwise
scheduled for delivery to a Destination or Receiving Plant during maintenance periods at such Destination or Receiving Plant. Either party shall
have the right, but not the obligation, to make up any tonnage not delivered in accordance with this Section.
Written notice of a party’s intent to exercise its right to require the other party to make up such deliveries, in order to be effective, must be
received by the other party within 90 days of the commencement of such maintenance period and such deliveries shall be rescheduled for
delivery as may be mutually agreed. The Base Price for make up tonnage rescheduled hereunder shall be the then current Base Price at the time
of delivery. The Base Price for any make up tonnage delivered after the expiration of the Contract Term shall be the Base Price of the final
Contract Year escalated by three percent (3.0%).
Section 5. Law Change :
A. With respect to any and all governmental imposition and law change assessment costs and expenses arising or incurred prior to January 1,
2010, including, but not limited to, any and all costs and expenses associated with the Mine Improvement and New Emergency Response Act
of 2006, (“MINER Act”) and/or any Federal or State
4
statutes, rules, regulations, directives, or mandates implemented, promulgated, issued, enacted, or revised prior to or on December 31, 2009
(individually and collectively a “Law Change”), the following payment is agreed to as the final and complete settlement and resolution of the
price to be paid by TVA, under the Contract, for any and all MINER Act expenses, claims, or costs and/or Law Change expenses, claims, or
costs. TVA will pay Contractor a lump-sum payment of $500,000 to settle and resolve any and all MINER Act and/or Law Change claims,
costs, and expenses which were or could have been claimed under Section 10 of the Contract and/or which arose or were incurred with respect
to or in connection with the Contract on or prior to December 31, 2009.
Upon payment of this $500,000, TVA and Contractor acknowledge and agree that TVA has paid in full any and all amounts that are owed or
that may be owed to Contractor pursuant to Section 10 or any other provisions of the Contract respect to any and all coal delivered to TVA
prior to or on December 31, 2009, and for the avoidance of all doubt, no further payment will be made by TVA to Contractor on account of or
in connection with such coal, except for the payment of the Base Price and/or any adjustments which may be due the parties as a result of the
actual quality of the coal delivered.
B. TVA and Contractor further agree that, effective with respect to coal deliveries on or after January 1, 2010, pursuant to the Contract,
Section 10.2.1 (Law Change Assessment Costs) of the Contract shall not apply to costs arising on account of or associated with any Federal or
State statute (including the MINER Act), regulation, ordinance, rule or other mandate or final judgment, order, or decree of a judicial or
regulatory body or agency that is enacted, amended, revised, issued, promulgated, decreed, published, or established at any time prior to or on
January 1, 2010. For the avoidance of all doubt, TVA and Contractor acknowledge and agree that the prices established pursuant to Section 3
of this Supplement include payment for the entire cost of Contractor’s compliance with any and all existing laws, regulations, mandates,
ordinances, decrees, rules, and orders that are described in the immediately preceding sentence.
C. The first four (4) lines of Section 10.2.1 on page 15 of the Contract and the first three (3) lines of Section 10.2.1 (i) on page 16 of the
Contract are hereby deleted in their entirety and replaced with the following:
10.2.1 Law Change Assessment Costs. In the event of the issuance, enactment, promulgation, or amendment, on or after January 1, 2010, of a
Federal or State statute, regulation, ordinance, rule or other mandate, or of a final judgment, order, or decree of a judicial or regulatory body or
agency:
(i) relating specifically to coal mine safety, rescue, or emergency response, or
Section 6. Correction of Typographical Error:
5
The first sentence of Section 20 of the Contract is amended by deleting the phrase “no sooner than July 1, 2111” and replacing it with “no
sooner than July 1, 2011.”
All other terms and conditions of the Contract remain unchanged.
Please complete the acceptance below and return a signed copy of this contract supplement to this office. You should retain the other signed
copy for your files.
In the event Contractor fails to execute this Supplement in the acceptance space provided below or fails to return such executed Supplement to
TVA, shipment of coal to TVA following the date of Contractor’s receipt of this Supplement shall constitute an acceptance by Contractor of all
the terms and conditions of this Supplement, unless within five (5) business days of the date of receipt of this Supplement, Contractor notifies
TVA, both orally and in writing that this Supplement is not accepted.
Accepted Armstrong Coal Co. TENNESSEE VALLEY AUTHORITY
Company
By /s/ Martin D. Wilson /s/ Connie S. Gazaway
Signature Connie S. Gazaway
Fuel Transportation Specialist
President /s/
Title Contract Support Specialist
2/3/10 /s/
Date Manager of Coal Supply
6
Exhibit 10.15
Tennessee Valley Authority
Coal Supply & Origination
1101 Market Street, MR 2A
Chattanooga, Tennessee 37402-2801
CONTRACT SUPPLEMENT
TO: Armstrong Coal Company, Inc. Supplement No. 8
7701 Forsyth Boulevard — 10th Floor Date May 25, 2011
St. Louis, Missouri 63105 Group-Contract No. 612-40668
Plant Widows Creek
Attention: Mr. Martin Wilson
This confirms the May 25, 2011 agreement reached between Amy Sitton of TVA and Mickey Fitzhugh of Armstrong Coal Company.
Train W505 was loaded on May 24, 2011, under Traffic Control Number 196190 with coal which reflected a total moisture content of
12.60 percent compared with the REJECT SPECIFICATION, contained in Section 9.0 of the Contract, of 12.00 percent for that component of
the analysis. As agreed, TVA will accept this trainload of coal in consideration of a $2.50 per ton reduction in price. Also, the analysis results
obtained on this shipment will be included in the quarterly quality adjustment calculations required under Section 8.0, Adjustment for Quality .
TVA’s Accounts Payable organization will deduct $26,669.81 from Contractor’s account.
All other terms and conditions of the contract remain unchanged.
Please complete the acceptance below and return the copy of this contract supplement to this office. You should retain the original for your file.
In the event Contractor fails to execute this Supplement in the acceptance space provided below or fails to return such executed Supplement to
TVA, shipment of coal to TVA following the date of Contractor’s receipt of this Supplement shall constitute an acceptance by Contractor of all
the terms and conditions of this Supplement, unless within five (5) business days of the date of receipt of this Supplement, Contractor notifies
TVA, both orally and in writing that this Supplement is not accepted.
Accepted Armstrong Coal Co. Tennessee Valley Authority
(Company)
By /s/ Martin D. Wilson By /s/ Connie S. Gazaway
Connie S. Gazaway
Senior Fuel Transportation Specialist
Title President /s/
Manager, Coal Acquisition
Date 6/2/11
TVA RESTRICTED INFORMATION
Exhibit 10.16
Tennessee Valley Authority
Coal Supply & Origination
1101 Market Street, MR 2A
Chattanooga, Tennessee 37402-2801
CONTRACT SUPPLEMENT
TO: Armstrong Coal Company, Inc. Supplement No. 9
7733 Forsyth Boulevard — Suite 1625 Date August 9, 2011
St. Louis, Missouri 63105 Group-Contract No. 612-40668
Plant Widows Creek
Attention: Mr. Martin Wilson
This confirms my July 28, 2011, agreement with Kenny Allen, representing Armstrong Coal Company, Inc. (“Armstrong”).
1. Effective August 1, 2011, Armstrong’s Parkway Underground Mine (“Parkway Mine”) shall become one of the Approved Source
Mines under Section 5.1 of Group-Contract No. 612-40668 (the “Contract”) for the remaining Contract delivery term.
2. During the period August 1, 2011, through December 31, 2011, Armstrong shall have the option to deliver up to 75,000 tons of coal
from its Parkway Mine. Armstrong shall provide TVA written notice of the amount of coal it elects to deliver from the Parkway Mine
during the Contract Year 2011.
3. All 5.0# SO2 coal delivered from the Parkway Mine shall conform to the quality specifications set forth in Section 9.0 of the
Contract.
4. The Base Price for coal delivered from the Parkway Mine shall be the 2011 Base Price of $40.57 per Supplement No. 7 of the
Contract. The price of the coal delivered from the Parkway Mine shall be subject to adjustment pursuant to Section 10 of the Contract.
5. The price of the coal will not be increased by $0.20 per ton to cover the cost for the sampling and weighing requirement to provide
these services.
6. TVA shall make price adjustments to cover Armstrong’s cost for the truck transportation of the coal from Armstrong’s Parkway Mine
to Armstrong’s Midway Train load out. The truck transportation rate will be $3.00 per ton for delivery Monday through Saturday.
7. Invoices for truck transportation costs shall be submitted by Armstrong to TVA’s Contract Administrator by the tenth day of each
month for the previous month with backup documentation, satisfactory to TVA, to support the claim. Payment of these invoices shall
be handled as additional payments and will not be included in the price of coal.
8. Coal delivered from the Parkway Mine under this Contract, will apply against the 2011 Annual Contract Tonnage delivery
requirement of 1.0 million tons.
All other conditions of the Contract remain unchanged and in full force and effect.
Please complete the acceptance below and return the duplicate original of this contract supplement to this office. You should keep the original
for your file.
In the event Contractor fails to execute this Supplement in the acceptance space provided below or fails to return such executed Supplement to
TVA, shipment of coal to TVA following the date of Contractor’s receipt of this Supplement shall constitute an acceptance by Contractor of all
the terms and conditions of this Supplement, unless within five (5) business days of the date of receipt of this Supplement, Contractor notifies
TVA, both orally and in writing that this Supplement is not accepted.
TVA RESTRICTED INFORMATION
Accepted Armstrong Coal Co. Tennessee Valley Authority
(Company)
B /s/ Martin D. Wilson By /s/ Connie S. Gazaway
y
Connie S. Gazaway
Asset Management Specialist (Senior)
Title President /s/
Manager, Coal Acquisition
Date 8/15/11
TVA RESTRICTED INFORMATION
Exhibit 10.34
EMPLOYMENT AGREEMENT
This Employment Agreement (“Agreement”) is entered into this 1st day of December 2011, by and between Armstrong Energy, Inc.
(“Employer”), 7733 Forsyth Boulevard, Suite 1625, St. Louis, Missouri 63105 and Brian G. Landry (“Landry”), 937 Sheffield Forest Ct.
Wildwood, Mo. 63021.
In consideration of the mutual covenants and promises contained herein, and other good and valuable consideration, the adequacy and
receipt of which are hereby acknowledged, Employer and Landry hereby agree as follows.
1. Duties and Position. Landry shall be employed as the Vice President of Information Technology of Employer and shall report to
Employer’s President. Landry shall have such duties as are customarily performed by persons serving in similar capacities in other businesses
similar to Employer’s business. Landry shall devote his full working time, attention, and best efforts to performing all reasonably assigned
responsibilities. Landry shall not, while employed by Employer, engage in any other business or employment without the prior written approval
of Employer’s President or Board of Directors (the “Board”). Notwithstanding the foregoing, nothing herein is intended or shall be construed as
preventing Landry from engaging in such civic, charitable, or political activities as do not interfere with the performance of Landry’s duties
hereunder.
2. Term of Employment.
2.1 On-Going Term. Landry’s employment under this agreement shall be for one year commencing on the date set forth above. However,
the term of Landry’s employment under this Agreement shall automatically extend for additional one (1) year terms until such time, if any, as
Employer or Landry give written notice to the other that such automatic extension shall cease, the same of which shall be given with no less
than sixty (60) days notice prior to the expiration of the then current term.
2.2 Exemption. Notwithstanding the foregoing, Landry’s employment hereunder may be earlier terminated in accordance with the terms
of Section 6 of this Agreement.
3. Compensation.
3.1 Base Salary Compensation. Employer shall pay Landry an initial annual base salary of One Hundred Eighty Thousand Dollars
($180,000.00) (the “Salary Compensation”), which Employer’s President or Board may elect to adjust, in their sole discretion and without any
requirement that they do so, on each anniversary of the date first written above. Landry’s Salary Compensation shall be payable in equal
periodic installments according to Employer’s customary payroll practices, but no less frequently than bi-monthly. During the term of his
employment as defined herein, Landry shall also be entitled to an annual
target bonus of 35% of the then annual salary. Such bonus shall be based upon the achievement of performance criteria established by the
Company and to be awarded at the discretion of the Company’s President or Board of Directors.
3.2 Withholding. All payments under this Section 3 shall be less such amounts as are required to be withheld by law or as otherwise
authorized by Landry in writing.
4. Benefits.
Landry shall be eligible to participate in such benefits as may be authorized and adopted from time to time by the Board for Employer
employees including, without limitation, any pension plan, profit-sharing plan, or other qualified retirement plan and any group insurance plan.
Employer shall reimburse Landry for normal and reasonable business expenses incurred in performance of his responsibilities as determined in
the sole discretion of Employer. During each calendar year Landry shall be entitled to the vacation as Employer employees would be entitled to
under Employer’s standard vacation policy. Employer may furnish such other benefits to Landry as it shall determine, from time to time, within
its discretion, to be in the best interests of Employer and Landry. Nothing herein is intended or shall be construed as precluding Employer from
modifying or discontinuing any benefit plan, policy or program.
5. Termination of Employment. Landry’s employment with Employer under this Agreement shall terminate:
5.1 Cause. For “Cause” immediately upon notice from Employer to Landry. As used herein, “Cause” shall mean:
A. Landry’s failure substantially to perform his duties hereunder in a manner satisfactory to Employer, as determined in good faith by
Employer, provided that Employer has given Landry written notice of the action(s) or omission(s) which are claimed to constitute such
failure and Landry does not fully remedy such failure within ten (10) calendar days after receipt of the written notice;
B. Landry has engaged in gross misconduct, dishonest, disloyal, illegal or unethical conduct, or any other conduct which has or could
reasonably have a detrimental impact on Employer or its reputation, all facts to be determined in good faith by Employer;
C. Landry has acted in a dishonest or disloyal manner, or breached any fiduciary duty to Employer, that, in either case, results or was
intended to result in personal profit to Landry at the expense of Employer or any of its customers;
D. Landry has been convicted of, pleads guilty, or enters a nolo plea, Alford plea or plea or no contest to any felony.
E. Landry has one or more physical or mental impairments which have substantially impaired his ability to perform the essential
functions of his job under
2
this Agreement. Any dispute as to whether Landry has been so impaired shall be determined by Employer in consultation with a
physician appointed by Employer;
F. Landry’s death;
G. Any breach by Landry of his obligations under Sections 7-11 or 13 of this Agreement; or
H. Landry resigns under circumstances where a termination for “Cause” was impending or could have reasonably been foreseen.
5.2 Change in Control. Upon the occurrence of a “Change in Control,” provided Landry’s employment with Employer or an acquiring
entity is terminated, other than for Cause, within twelve (12) months of an event constituting a Change in Control. As used herein, “Change in
Control” means:
A. any purchase or other acquisition by an individual or group of person(s) (including entity(ies)) acting in concert, which results in
persons who are shareholders of Employer as of the date first written above no longer being the legal and beneficial owners of fifty-one
percent (51%) or more of the outstanding equity in Employer, excluding any affiliates, parents, subsidiaries or related parties of
Employer;
B. consummation of a reorganization, merger, recapitalization, consolidation, or any other transaction, in each case with respect to
which persons who were shareholders of Employer as of the date first written above do not, immediately thereafter, legally and
beneficially own fifty-one percent (51%) or more of the equity in the newly-organized, merged, recapitalized, consolidated, or other
resulting entity; or
C. the sale of all or substantially all of the assets of Employer in a transaction approved by the Board.
5.3 Without Cause. Upon notice from Employer to Landry.
5.4 For Good Reason. For “Good Reason” immediately upon written notice from Landry to Employer’s Board of Directors or at such
later time as such notice may specify, which date shall not be more than fourteen (14) calendar days after the date on which Employer is
deemed to receive such notice. As used herein, “Good Reason” shall mean a material demotion or reduction, without Landry’s consent, in
Landry’s duties.
5.5 Miscellaneous. Employer may pay Landry in lieu of having him work during all or part of any notice period under this Section 5.
Following any notice of termination, Landry shall fully cooperate with Employer in all matters relating to the winding up of his pending work
on behalf of Employer and the orderly transfer of any such pending work to such others as may be designated by Employer. To that end
Employer shall be entitled to such full- time or part-time services of Landry as Employer may reasonably require during all or any part of the
period from the time of giving any such notice until the effective date of such termination.
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6. Separation Package
6.1 Cause. In the event Employer terminates Landry’s employment for Cause, Landry shall not be entitled to any compensation or
benefits beyond his termination date.
6.2 Without Cause; For Good Reason. In the event Employer terminates Landry’s employment without Cause, or Landry terminates his
employment for Good Reason, Employer shall:
A. continue, for twelve (12) months following such termination, Landry’s Salary Compensation at the same rate as such Salary
Compensation was set hereunder on the day prior to Landry’s termination, plus pay any accrued but unpaid Bonus as of the date of such
termination;
B. pay, for twelve (12) months, the premiums for Landry and his dependents to continue group health insurance under such group
policy(ies), if any, on the same terms as Employer provides to Employer employees, provided such payments may cease earlier than
twelve (12) months following termination if:
(i) the applicable group policy does not permit continuation coverage beyond the maximum time periods established by
applicable law for continuation coverage, in which case payments shall cease when the applicable maximum period is reached for each
covered individual; or
(ii) Landry and/or any covered dependent(s) advise Employer that Landry and/or any covered dependent(s) have obtained other
satisfactory group health coverage in which case coverage shall cease only for such individuals who have obtained such other group
coverage; and
(iii) Employer ceases to provide any group health policy to any employees.
6.3 Change in Control. In the event of a termination under Section 5.2, Employer shall provide Landry with the benefits on the terms
described in Section 6.2(B) for twelve (12) months following termination. In addition, Employer shall, promptly following such termination,
pay Landry a lump sum payment equal to one (1) times Landry’s Salary Compensation at the time of his termination plus one (1) year’s bonus
in an amount equal to 1/2 of Landry’s then existing Salary Compensation. To the extent Landry has received any restricted stock or similar
inventive awards from the Company, such awards shall vest in accordance with the terms of the agreement(s) pursuant to which they were
awarded and nothing in this Agreement shall be deemed to modify or amend the terms of those awards.
6.4 Miscellaneous. Any payments under this Section 6 shall be subject to such deductions as may be required by law. In addition, in the
event Landry violates any of the terms of Section 7 or 9-11 of this Agreement, as determined in good faith by Employer, any payments and
benefits otherwise due under this Section 6 shall immediately cease and Landry shall be required to repay to Employer any amounts already
paid to him under this Section 6. Any payments under this agreement associated with termination of employment are conditional
4
upon Landry’s execution of an appropriate release of all future claims against Employer or its successors.
7. Confidential Information and Relationships. Landry acknowledges and agrees that, in the course of his employment with Employer,
he has and will continue to come into possession of technical, financial and/or business information pertaining to Employer which is not
published or readily available to the public, including, but not limited to: financing opportunities; market research and analyses; customer
contact information, specifications, needs and histories; contract terms; sales figures, reports and projections; marketing concepts and plans;
cost and pricing information; plans for future developments including product and market expansion; and lists of and other information
pertaining to and/or received from customers, suppliers and/or employees (“Confidential Information”). Landry also acknowledges and agrees
that he has received training regarding Employer’s business and shall have contact with Employer’s customers and suppliers. Such contacts
will enable Landry to establish and maintain, at Employer’s expense, favorable relationships and goodwill with such person/entities, and to
influence with whom such persons/entities do business. Landry acknowledges that Confidential Information and such relationships and
goodwill are important to and will greatly affect the success of Employer. Landry agrees that during employment with Employer and at all
times thereafter, regardless of how, when and why employment may end, he shall hold in the strictest confidence, and shall not disclose,
duplicate and/or use for himself or any other person or entity any Confidential Information without the prior written consent of Employer, or
unless required to do so in order to perform his responsibilities while employed by Employer. Landry also agrees that at all times during his
employment with Employer, he shall comply with all of Employer’s policies and procedures relating to the protection and confidentiality of
Confidential Information.
8. No Other Contract. Landry warrants that he is not bound by any other agreement, oral or written, which would limit or preclude him
from performing any responsibility reasonably assigned by Employer hereunder. Landry also agrees not to disclose to Employer or seek to
induce Employer to use, any confidential information, material or trade secret belonging to any other person or entity.
9. Work Product. Any and all designs, plans, inventions, products, improvements, programs, specifications, methods, reports, notebooks,
databases, notes, analyses, memoranda, files, correspondence, rolodexes, and other embodiments of work conceived, made, discovered and/or
produced by Landry during his employment by Employer, either solely or jointly with others: (A) in the course of performing any duties for
Employer, (B) which are based, in whole or part, upon Confidential Information, the supplies, facilities or business, financial or technical
information of Employer, or (C) which relate to the business of Employer (“Work Product”), shall be the sole property of Employer or its
designee and available to Employer or its designee at all times. Landry agrees promptly to disclose and hereby assigns in perpetuity to
Employer or its designee, without royalty or other additional consideration, any and all of his rights to any and all Work Product. Landry
further agrees that during his employment by Employer and after that employment ends, regardless of how, when and why, he shall, upon
request from the Chairman of the Board or his designee: (i) execute any and all applications for copyright, patent, trademark or other
intellectual or proprietary right relating to Work Product which may be prepared for his
5
signature, (ii) assign to Employer or its designee any and all such applications, copyrights, patents, trademarks or other intellectual or
proprietary rights relating thereto, and (iii) assist Employer or its designee, as Employer or its designee deems necessary, in order for Employer
or its designee to apply for, defend or enforce any copyright, patent, trademark or other intellectual or proprietary right or otherwise protect its
interests in Work Product. Employer or its designee shall pay all expenses of preparing, filing and prosecuting any such application and of
obtaining such copyrights, patents, trademarks or other intellectual or proprietary right.
10. Return of Property. All documents, records, reports, lists, databases, software, analyses, notes and similar items relating to
Employer’s business that Landry has or may prepare or receive in the course of his employment are and shall remain Employer’s property. At
such times as Employer may request, and upon separation from employment with Employer, regardless of how, when and why employment
may end, Landry shall immediately deliver to Employer all Confidential Information, Work Product and other property of Employer in his
possession or control, including, but not limited to, all records, documents, notes and disks (including copies), containing, excerpting or
relating, in whole or in part, to Confidential Information.
11. Non-Competition . Landry recognizes that Employer will or has spent substantial money, time and effort to develop and maintain its
relationships with its customers, suppliers and employees, Employer is paying Landry to, among other things, develop and preserve business
information, methods of doing business and goodwill, and Employer has agreed to employ or continue employing Landry based on his
assurances and promises not to divert or misuse Employer’s Confidential Information, Work Product or goodwill or to put himself in a position
following employment with Employer in which the confidentiality of Confidential Information or Work Product might somehow be comprised.
Therefore, Landry agrees that while employed by Employer and for twelve (12) months following termination of that employment, regardless
of how, when or why employment may end, he shall not in any manner or in any capacity, directly or indirectly, for himself or any other person
or entity, actually or attempt:
A to acquire any interest in, be employed by or otherwise associated or affiliated with any person or entity which offers any product or
service which competes or operates in any coal producing region in which Employer or its affiliates, parent companies, subsidiary
companies or related entities also operate;
B. to solicit, interfere with, divert or take away from Employer any business with or from any person or entity who/that was a customer
or prospective customer of Employer:
(i) in the case of Landry’s on-going employment, during all or part of the twelve (12) months immediately preceding any dispute
under this Section 11; and
(ii) in the case of employment having ended, during all or part of the twelve (12) months preceding termination of Landry’s
employment.
6
A prospective customer shall mean any person/entity who/that, within the relevant period described in subsection (B)(i) and (ii) above,
was in negotiation with Employer or received a written proposal from Employer; or
C. to hire or solicit for work any employee of Employer or otherwise to induce any employee of Employer to leave employment with
Employer.
Landry further agrees that if he has any question regarding the scope of activities restricted by this Section 11, he shall submit the question in
writing to Employer. Landry also agrees to keep Employer advised of the identity of any employer (including, without limitation, any
contractors or consulting arrangements), his work location and general responsibilities during the twelve (12) month post-employment period
covered by this Section 11.
12. Securities. Notwithstanding the terms of Sections 1 and 11 above, nothing in this Agreement is intended or shall be construed as
limiting Landry’s right, as an investor, to hold or acquire the stock of any business that is registered on a national securities exchange or
regularly traded on a generally recognized over-the-counter market, so long as his interest in any such business does not exceed five percent
(5%) of the ownership of that business.
13. Remedies. The parties agree that the terms of Sections 7 and 9-11 of this Agreement are intended and shall be construed not as
personal services but as terms governing the ownership and use of property, including Confidential Information and goodwill. Landry agrees
that the covenants in Sections 7 and 9-11 of this Agreement are reasonable and necessary to protect the legitimate business interests of
Employer, that any violation by Landry of any such covenant would result in great damage and irreparable injury to Employer, and that his
experience, knowledge and skills are such that enforcement of Sections 7 and 9-11 by way of injunction would not cause him unreasonable
hardship or prevent him from earning a living. Landry further acknowledges and agrees that if he were to violate the terms of Section 11, the
unauthorized disclosure or use of Confidential Information, goodwill and/or Work Product would be inevitable. Landry, therefore, agrees that,
in the event of actual or threatened violation of any of the covenants in Sections 7 or 9-11 of this Agreement, in addition to whatever other legal
and/or equitable remedies allowed by law, Employer shall be entitled to enforce the terms of this Agreement by way of injunction and/or
specific performance. In addition, Landry and Employer agree that any dispute or controversy arising between/among them relating to this
Agreement shall be brought in the Missouri or federal court with jurisdiction in the County of St. Louis, State of Missouri (the “Courts”), and
that the Courts shall have exclusive jurisdiction over any such dispute or controversy. Furthermore, each of the parties hereby voluntarily
consents to the jurisdiction of the Courts and stipulates that the Courts are not an unreasonable forum within which to litigate any dispute or
controversy related to this Agreement. Landry further agrees that if there is any question as to the enforceability of any of the covenants in
Sections 7 or 9-11 of this Agreement, he shall not engage in any conduct inconsistent with or contrary to any such covenant until after the
question has been resolved by a final judgment of the Courts. In the event Employer has to consult with or retain any attorney to enforce the
terms of this Agreement, Landry agrees that he shall pay Employer for all costs, expenses and attorneys’ fees Employer incurs in enforcing this
Agreement, whether or not litigation is commenced.
14. Binding Effect.
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A. Landry may not sell, assign or transfer this Agreement or any of his rights, interests or obligations under this Agreement, in whole
or in part, by operation of law or otherwise.
B. Employer may sell, assign or transfer any of its rights and/or interests under Sections 7, 9-11 and 13-21 of this Agreement without
any additional consent of or notice to Landry. In such event, said Sections shall remain in full force after such sale, assignment or other
transfer, shall inure to the benefit of and may be enforced by (i) any successor, assignee, or transferee of all or any part of Employer’s
business as fully and completely as it would inure to the benefit of and it could be enforced by Employer if no such sale, assignment or
transfer had occurred, and (ii) Employer in the case of any sale, assignment or other transfer of a part, but not all, of the business.
C. Whether or not Employer assigns any of its rights and/or interests under Sections 7, 9-11 and 13-21 of this Agreement, the parties
intend and agree that any successor or transferee of all or part of Employer’s business shall be a third party beneficiary of the terms of
said Sections. The parties further intend and agree that, in the event of any sale, merger or other change in the ownership or structure of
Employer, in whole or in part, the resulting entity shall step into the place of Employer under Sections 7, 9-11 and 13-21 of this
Agreement, without any additional consent of or notice to Landry, as if the term “Employer” were defined in this Agreement to include
such person/entity. In addition, the parties agree that, in the event Employer sells, transfers or merges part, but not all, of its business, the
terms of Sections 7, 9-11 and 13-21 shall be enforceable by both Employer and the successor or transferee of part of Employer’s
business. As used herein, a “successor” or “transferee” includes any person/entity which, at any time, merges with, or purchases all or
substantially all of the stock or assets of Employer.
15. Severability/Interpretation . The parties acknowledge and agree that the terms of Sections 7, 9-11 and 13-21 are severable from the
remainder of this Agreement and supported by adequate consideration. In the event any one or more whole or partial provisions of this
Agreement shall be adjudicated to be invalid or unenforceable in any respect, the validity and enforceability of the remaining whole or partial
provisions shall not be affected, and such adjudication shall not affect the validity or enforceability of such whole or partial provision in any
other jurisdiction. The parties further agree that if any whole or partial restrictive covenant in this Agreement is deemed invalid or
unenforceable because overly broad in geographic scope, activity or time duration, this Agreement shall be interpreted as if such invalid or
unenforceable whole or partial provision were not contained herein; provided, however, if, under applicable law, such whole or partial
provision may be modified or interpreted so as to be enforceable, that provision shall be so modified or interpreted so as to be enforceable to
the maximum extent permitted by applicable law.
16. Preservation of Rights. Landry agrees that termination of his employment with Employer, regardless of how, when or why
employment may end, shall in no manner affect his promises contained in Sections 7, 9-11 and 13-21 of this Agreement. In order to preserve its
rights hereunder, Employer may advise any third party with whom Landry may consider,
8
establish or contract a relationship of the existence of this Agreement and its terms, and Employer shall have no liability for so acting.
17. Notice. Any written notice required under this Agreement shall be deemed given on the date of hand delivery, the calendar day
following the day sent by a next day. mail or delivery service, and two (2) calendar days following the date postmarked by U.S. mail, all
postage or delivery charges prepaid. Any such notice shall be given:
to Employer, addressed to its President at: 7733 Forsyth Suite 1625.
St. Louis, Mo. 63105
to Landry at: ____________
____________
or such other address as specified in notice given in accordance with the foregoing.
18. Entire Agreement. This Agreement contains the entire agreement between Landry and Employer and supersedes any prior oral or
written agreement between them pertaining to the subject matter of this Agreement. Each party warrants that, in entering into this Agreement, it
is not relying on any representation or promise other than those set forth in this Agreement. This Agreement may be modified only by a writing
signed by Landry and Employer.
19. Waiver of Breach. Failure of either party to exercise any right under this Agreement, in the event the other party breaches this
Agreement, shall not be construed as a waiver of such breach or prevent the non-breaching party from later enforcing strict compliance with the
terms of this Agreement. Waiver of any right by Employer hereunder must be in writing signed by Employer.
20. Choice of Law. The parties agree that this Agreement shall be governed and construed in accordance with the laws of the State of
Missouri without giving effect to any choice of law or conflict of law rule or principle that would cause application of the law of a jurisdiction
other than the State of Missouri.
21. Miscellaneous. The headings of each Section herein are for convenience only and shall have no significance in the interpretation of
this Agreement. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which
together will constitute but one instrument.
22. Acknowledgment. Landry acknowledges and agrees that, to the extent desired, he has discussed this Agreement with the advisors of
his choice, he has read, fully understands and intends to comply with all of the provisions of this Agreement, and he is voluntarily signing it
below.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
ARMSTRONG ENERGY, INC.
/s/ Martin D. Wilson
Martin D. Wilson, President
/s/Brian G. Landry
Brian G. Landry
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Exhibit 10.39
AMENDED OVERRIDING ROYALTY AGREEMENT
THIS AMENDED OVERRIDING ROYALTY AGREEMENT (this “Agreement”) is made and entered into as of the 3 rd day of December, 2008,
by and among WESTERN LAND COMPANY, LLC (“Western Land”), a Kentucky limited liability company, WESTERN DIAMOND, LLC
(“Western Diamond”), a Nevada limited liability company, CERALVO HOLDINGS, LLC (“Ceralvo”), a Delaware limited liability company,
ARMSTRONG MINING, INC . (“Armstrong Mining”), a Delaware corporation, ARMSTRONG COAL COMPANY, INC ., a Delaware corporation
(“Armstrong Coal”), ARMSTRONG LAND COMPANY, LLC (“Armstrong Land”), a Delaware limited liability company (together, with each of
the foregoing and their respective successors and assigns, the “Armstrong Parties”), and MR. KENNETH E. ALLEN (“Allen”), 6100 White
Plains Road, White Plains, Kentucky 42464 (collectively, the “Parties).
WHEREAS , on February 9, 2007, Armstrong Mining f/k/a Honeywood Mining, Inc., entered into an Overriding Royalty Agreement with
Allen, pursuant to which Allen was granted a royalty interest on certain real property pursuant to the terms and conditions stated therein; and
WHEREAS , on February 9, 2007, Armstrong Coal entered into an Overriding Royalty Agreement with Allen, pursuant to which Allen was
granted a royalty interest on certain real property pursuant to the terms and conditions stated therein; and
WHEREAS , the Parties desire to fully amend and restate the terms of each of the foregoing Overriding Royalty Agreements, and Ceralvo,
Western Diamond and Western Land desire to join in this Agreement upon such terms and conditions as set forth herein;
Now, THEREFORE , in accordance with the foregoing Recitals and in exchange for good and valuable consideration, the receipt and
sufficiency of which all of the parties to this Agreement hereby acknowledge, the parties hereby covenant and agree as follows:
1. WESTERN DIAMOND GRANT OF OVERRIDING ROYALTY . Western Diamond, together with its successors and assigns, hereby grants to
Allen and agrees to pay to Allen an overriding royalty (the “Western Diamond Royalty”) in the amount of Five Cents ($0.05) of all coal
hereafter mined or extracted and subsequently sold from all of the coal reserves and real property described in, and conveyed, demised or
otherwise granted in or under, the following deeds and instruments:
(i) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC and Beaver Dam Coal Company to
Western Diamond, LLC, dated September 19, 2006, of record in Deed Book 363, page 369, in the Office of the Ohio County Clerk;
(ii) The Partial Assignment of Coal Mining Lease from Central States Coal Reserves of Kentucky, LLC to Western Diamond, LLC dated
September 19, 2006, of record in Deed Book 363, page 428, in the Office of the Ohio County Clerk;
(iii) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC and Beaver Dam Coal Company to
Western Diamond, LLC, dated September 19, 2006, of record in Deed Book 363, page 414, in the Office of the Ohio County Clerk;
(iv) The Corporation Special Warranty Deed from Beaver Dam Coal Company to Western Diamond, LLC, dated September 19, 2006, of
record in Deed Book 363, page 393, in the Office of the Ohio County Clerk;
(v) The Corporation Special Warranty Deed from Beaver Dam Coal Company to Western Diamond, LLC, dated September 19, 2006, of
record in Deed Book 363, page 403, in the Office of the Ohio County Clerk;
(vi) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC to Western Diamond, LLC, dated
May 31, 2007, of record in Deed Book 528, page 284, in the Office of the Muhlenberg County Clerk, and the Deed of Confirmation between
Central States Coal Reserves of Kentucky, LLC, Western Diamond, LLC and Armstrong Coal Reserves, Inc., dated September 30, 2007, of
record in Deed Book 531, page 205, in the Office of the Muhlenberg County Clerk;
(vii) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC and Beaver Dam Coal Company to
Western Diamond, LLC, dated May 31, 2007, of record in Deed Book 368, page 17, in the Office of the Ohio County Clerk, and the Deed of
Correction between Central States Coal Reserves of Kentucky, LLC, Beaver Dam Coal Company, LLC and Western Diamond, LLC, of record
in Deed Book 369, page 759, in the Office of the Ohio County Clerk;
(viii) The Partial Assignment and Assumption of Mineral Leasehold Estate from Central States Coal Reserves of Kentucky, LLC to Western
Diamond, LLC, dated May 31, 2007, of record in Deed Book 528, page 320, in the Office of the Muhlenberg County Clerk; and
(ix) The Partial Assignment and Assumption of Mineral Leasehold Estate from Central States Coal Reserves of Kentucky, LLC to Western
Diamond, LLC, dated May 31, 2007, of record in Deed Book 528, page 330, in the Office of the Muhlenberg County Clerk.
2. WESTERN LAND GRANT OF OVERRIDING ROYALTY . Western Land, together with its successors and assigns, hereby grants to Allen
and agrees to pay to Allen an overriding royalty (the “Western Land Royalty”) in the amount of Five Cents ($0.05) per ton, of all coal hereafter
mined or extracted and subsequently sold from all of the coal reserves and real property described in, and conveyed, demised or otherwise
granted in or under, the following deeds and instruments:
(i) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC to Western Land Company, LLC, dated
December 12, 2006, of record in Deed Book 524, page 505, in the Office of the Muhlenberg County Clerk;
(ii) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC and Beaver Dam Coal Company to
Western Land Company, LLC, dated December 12, 2006, of record in Deed Book 365, page 36, in the Office of the Ohio County Clerk;
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(iii) The Partial Assignment and Assumption of Mineral Leasehold Estate from Central States Coal Reserves of Kentucky, LLC to Western
Land Company, LLC, dated November 20, 2006, of record in Deed Book 524, page 523, in the Office of the Muhlenberg County Clerk, as
amended and restated in Deed Book 527, page 186, in the Office of the Muhlenberg County Clerk;
(iv) The Partial Assignment and Assumption of Surface and Mineral Leasehold Estate from Central States Coal Reserves of Kentucky, LLC
to Western Land Company, LLC, dated November 20, 2006, of record in Deed Book 365, page 57, in the Office of the Muhlenberg County
Clerk;
(v) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC, Beaver Dam Coal Company, Ohio
County Coal Company, LLC and Grand Eagle Mining, Inc. to Western Land Company, LLC, dated March 30, 2007, of record in Deed Book
367, page 1, in the Office of the Ohio County Clerk;
(vi) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC to Western Land Company, LLC, dated
March 30, 2007, of record in Deed Book 527, page 118, in the Office of the Muhlenberg County Clerk, as corrected by Deed of Correction
dated September 30, 2007, of record in Deed Book 531, page 213, in the Office of the Muhlenberg County Clerk; and
(vii) The Partial Assignment and Assumption of Surface and Mineral Leasehold Estate from Central States Coal Reserves of Kentucky,
LLC to Western Land Company, LLC, dated March 30, 2007, of record in Deed Book 527, page 161, in the Office of the Muhlenberg County
Clerk.
3. CERALVO GRANT OF OVERRIDING ROYALTY . Ceralvo, together with its successors and assigns, hereby grants to Allen and agrees to
pay to Allen an overriding royalty (the “Ceralvo Royalty”) in the amount of Five Cents ($0.05) per ton, of all coal hereafter mined or extracted
and subsequently sold from all of the coal reserves and real property described in, and conveyed, demised or otherwise granted in or under, the
following deeds and instruments:
(i) The Corporation Special Warranty Deed from Cyprus Creek Land Resources, LLC and Cyprus Creek Land Company to Ceralvo
Holdings, LLC, dated March 31, 2008, of record in Deed Book 373, page 262, in the Office of the Ohio County Clerk;
(ii) The Memorandum of Assignment and Assumption of Mineral Leasehold Estate from Cyprus Creek Land Resources, LLC to Ceralvo
Holdings, LLC, dated March 31, 2008, of record in Deed Book 373, page 199, in the Office of the Ohio County Clerk; and
(iii) The Memorandum of Assignment and Assumption of Coal Lease Agreement from Cyprus Creek Land Resources, LLC to Ceralvo
Holdings, LLC, dated March 31, 2008, of record in Deed Book 373, page 210, in the Office of the Ohio County Clerk.
4. ARMSTRONG COAL GRANT OF OVERRIDING ROYALTY . Armstrong Coal, together with its successors and assigns, hereby grants to
Allen and agrees to pay to Allen an overriding
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royalty (the “Armstrong Coal Royalty”) (together with the Western Diamond Royalty, the Western Land Royalty, and the Ceralvo Royalty, the
“Overriding Royalty”) in the amount equal to Five Cents ($0.05) per ton, of all coal hereafter mined or extracted and subsequently sold from all
of the coal reserves and real property described in, and conveyed, demised or otherwise granted in or under, the following deeds and
instruments:
(i) The Deed from Delois Jane Geary, Mary Etta Hurst and Ronald Hurst to Armstrong Coal Company, Inc., dated March 19, 2008, of
record in Deed Book 373, page 514, in the Office of the Ohio County Clerk; and
(ii) The unrecorded Coal Mining Lease between Warren C. Roe, Josephine Roe, Joseph Michael Roe and Sara Kelly Roe, lessors, and
Armstrong Coal Company, Inc., lessee, dated March 7, 2008.
5. PAYMENT . Payment of the Overriding Royalty shall be paid to Allen on or before the 25th day of each calendar month on all coal mined
and produced from the subject properties which was sold during the preceding calendar month. All payments shall be paid by check payable to
Allen. Each payment of the Overriding Royalty hereunder shall be accompanied by a statement from the Armstrong Parties showing the
number of tons of coal mined and sold during the preceding calendar month (showing separately coal produced by the strip, surface, auger or
open pit method of mining and coal produced by any other method of mining) and the computation of the Overriding Royalty payable on such
coal so mined and sold during such calendar month. All payments due hereunder shall be mailed to Allen at the address listed herein or as
otherwise directed by Allen from time to time.
6. RECORDS . The Armstrong Parties shall keep records of truck scale weights, or river barge dead weight surveys, or railroad car weights,
whichever is applicable, together with accurate surveys and progress maps used in conjunction with accepted and recognized engineering
methods which shall be taken as the basis for payment of the Overriding Royalty.
7. TERM . The term of the Royalty shall commence as of February 9, 2007 and shall continue to the later of: (i) February 9, 2027 or
(ii) until such time as all of the mineable and saleable coal from the subject properties has been mined (the “Term”). Notwithstanding any
provision to the contrary, this Agreement will terminate immediately and without any further action by any party should Allen voluntarily
terminate his employment with Armstrong Coal prior to February 16,2010.
8. INDEMNIFICATION . The Armstrong Parties shall, at their own cost and expense, indemnify and hold, Allen and his assigns harmless of,
from and against, any and all claims damages, demands, expenses, fines, liabilities and taxes (of any character or nature whatsoever, regardless
of by whom imposed), and losses of every conceivable kind, character and nature whatsoever (including, but not limited to, claims for losses or
damages to any property or injury to or death of any person) asserted by or on behalf of any person arising out of, resulting from or in any way
connected with the mining of the coal on the subject properties or from this Agreement. The Armstrong Parties also covenant and agree at their
expense, to pay, and to indemnify and save Allen and his assigns harmless of, from and against, all costs, reasonable
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attorneys’ fees, expenses and liabilities incurred in any action or proceeding brought by reason of any such claim or demand.
9. OBLIGATIONS TO RUN WITH LAND . The Parties agree that the Overriding Royalty shall constitute an independent and enforceable
obligation that shall run with the land and shall be binding on the Armstrong Parties, their respective assigns and successors, and any
subsequent owner of the subject properties unless otherwise agreed to by Allen. The Parties further agree that Allen shall not encumber this
Agreement or the Overriding Royalty conveyed herein without written permission from all of the Parties. Furthermore, Armstrong Land hereby
guarantees to Allen the full, prompt and proper payment of the Overriding Royalty, this guaranty being one of payment and not of collection.
This guaranty shall not be in any way impaired or affected by the bankruptcy or other releaser of any of the other Armstrong Parties or of any
other party liable for the payment in full or in part of the Overriding Royalty.
10. NOTICES . All notices and other communications with respect to this Agreement shall be in writing and shall be deemed effectively
given when delivered personally or seventy-two (72) hours after mailing by certified mail, postage prepaid, to the following addresses of the
parties;
If to the Armstrong Parties:
Martin D. Wilson
7701 Forsyth Boulevard, 10th Floor
St. Louis, Missouri 63105
With Required Copy To:
Mason L. Miller
Miller + Wells, PLLC
300 East Main Street, Ste. 360
Lexington, Kentucky 40507
If to Allen:
Kenneth E. Allen
6100 White Plains Road
White Plains, Kentucky 42464
Each party may change its address by giving written notice of such change to the other party.
11. MISCELLANEOUS PROVISIONS.
11.1. EFFECTIVENESS . This Agreement shall become effective upon its execution and delivery by each Party.
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11.2. COMPLETE UNDERSTANDING . This Agreement represents the complete understanding between the Parties hereto with respect to
the subject matter hereof, and supersedes all prior negotiations, representations, guarantees, warranties, promises, statements, or agreements,
either written or oral, between the Parties hereto as to the same.
11.3. AMENDMENT . This Agreement may be amended only by an instrument executed and delivered by each Party.
11.4. WAIVER. No Party shall be deemed to have waived any right which it holds hereunder unless the waiver is made expressly and in
writing (and, without limiting the generality of the foregoing, no delay or omission by any party in exercising any such right shall be deemed a
waiver of its future exercise). No waiver shall be deemed a waiver as to any other instance or any other right.
11.5. RECORDING . The parties acknowledge and agree to record a memorandum of this Agreement in a form that shall provide notice of
the obligations created hereunder.
11.6 APPLICABLE LAW . This Agreement shall be governed by, and construed in accordance with, the laws of the Commonwealth of
Kentucky without regard to its conflict of law rules.
11.7 ASSIGNMENT . This Agreement shall be binding upon, and shall inure to the benefit of, the Parties hereto and their respective
executors, administrators, heirs, successors, and assigns, and shall be freely assignable by the Parties, in whole or in part.
11.8 SEVERABILITY . No determination by any court, governmental body, or otherwise that any provision of this Agreement or any
amendment hereof is invalid or unenforceable in any instance shall affect the validity or enforceability of (a) any other provision thereof, or
(b) that provision in any circumstance not controlled by the determination. Each such provision shall be valid and enforceable to the fullest
extent allowed by, and shall be construed wherever possible as being consistent with, applicable law.
11.9 FURTHER ASSURANCES . The Parties shall cooperate with each other and shall execute and deliver, or cause to be delivered, all
other instruments and shall take all other actions, as either Party hereto may reasonably request from time to time in order to effectuate the
provisions hereof.
11.10 COUNTERPARTS; FACSIMILE . This Agreement may be executed in counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same Agreement. This Agreement may be executed and delivered via facsimile, with a copy
sent to each Party.
11.11 AMENDMENT AND RESTATEMENT OF PRIOR OVERRIDING ROYALTY AGREEMENTS . This Agreement shall fully restate, amend
and replace, in their entirety, the Overriding Royalty Agreement dated February 9, 2007, by and between Armstrong Mining and
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Allen, and the Overriding Royalty Agreement dated February 9, 2007, by and between Armstrong Coal and Allen.
11.12. VESTING . Upon the earlier of the happening of either: (i) the involuntary termination of Allen’s employment with Armstrong or
(ii) February 16, 2010, all of Allen’s right, title and interest to the Overriding Royalty conveyed herein shall vest fully and immediately for the
entire duration of the Term.
IN WITNESS WHEREOF , the parties have executed this Agreement as of the date set forth above.
ARMSTRONG COAL COMPANY, INC.
By: /s/ Martin D. Wilson
Martin D. Wilson, President
ARMSTRONG MINING, INC.
By: /s/ Martin D. Wilson
Martin D. Wilson, President
WESTERN LAND COMPANY, LLC
By: /s/ Martin D. Wilson
Martin D. Wilson, Manager
WESTERN DIAMOND, LLC
By: /s/ Martin D. Wilson
Martin D. Wilson, Manager
CERALVO HOLDINGS, LLC
By: /s/ Martin D. Wilson
Martin D. Wilson, Manager
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ARMSTRONG LAND COMPANY, LLC
By: /s/ Martin D. Wilson
Martin D. Wilson, President
By: /s/ Kenneth E. Allen
MR. KENNETH E. ALLEN
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Exhibit 10.54
Execution Version
OPTION AMENDMENT, OPTION EXERCISE AND
MEMBERSHIP INTEREST PURCHASE AGREEMENT
This Option Amendment, Option Exercise and Membership Interest Purchase Agreement (the “Agreement”) is executed as of February 9,
2011 by and between Armstrong Land Company, LLC, a Delaware limited liability company (“Armstrong”) and each of the undersigned
companies set forth on the signature pages hereto (Armstrong, together with the undersigned companies herein collectively referred to as the
“Armstrong Entities”), and Elk Creek, L.P., a Delaware limited partnership (“Elk Creek”). Capitalized terms used herein and not otherwise
defined shall have those meanings ascribed to them in the Elk Creek Options (defined below).
RECITALS
WHEREAS, the Armstrong Entities have previously acquired coal reserves and other real property from certain affiliates and/or subsidiaries
of Peabody Energy Corp. (such entities now being affiliates and/or subsidiaries of Patriot Coal Corporation as a result of its spin-off from
Peabody Energy Corp.), which reserves are more particularly described on Exhibit A attached hereto (the “Subject Assets”) and, in partial
payment therefor, issued notes to the sellers (the “Patriot Notes”);
WHEREAS, the Patriot Notes are secured by, inter alia, mortgages on the Subject Assets in favor of the sellers;
WHEREAS, Elk Creek has heretofore advanced an aggregate principal amount of $44,100,000 plus accrued interest, including contingent
interest, to the Armstrong Entities as needed for the Armstrong Entities to service the indebtedness under the Patriot Notes pursuant to those
certain Promissory Notes dated November 30, 2009, March 31, 2010, May 26, 2010 and November 9, 2010 executed by the Armstrong Entities
in favor of Elk Creek (the “Elk Creek Notes”);
WHEREAS, in consideration for Elk Creek making the loans to the Armstrong Entities, the Armstrong Entities granted to Elk Creek a series
of options to acquire an undivided interest in the Subject Assets equal to a fraction, the numerator of which is the aggregate principal amount of
and accrued interest, including contingent interest, under the Elk Creek Notes, and the denominator of which is the aggregate amounts paid by
the Armstrong Entities to repay or repurchase and retire the Patriot Notes in full (the “Option Interest”), pursuant to those certain Option
Agreements dated as of November 30, 2009, March 31, 2010, May 26, 2010 and November 9, 2010 executed by the Armstrong Entities in
favor of Elk Creek (the “Elk Creek Options”);
WHEREAS, the Armstrong Entities have obtained third party bank financing arranged by PNC Bank, N.A., the proceeds of which have
been used to repay and retire the Patriot Notes in full (the “PNC Financing”);
WHEREAS, Elk Creek desires to exercise the Elk Creek Options (in the full amount of the Option Interest) and contemporaneously
herewith has delivered to the Armstrong Entities a notice of exercise designating the date hereof as the date of exercise of the Elk Creek
Options;
WHEREAS, Western Diamond LLC, a Nevada limited liability company (“Western Diamond”), and Western Land Company, LLC, a
Kentucky limited liability company (“Western Land”), have formed Western Mineral Development, LLC, a Delaware limited liability
company (“WMD”), and, upon the prior consent of Elk Creek as required under the terms of the Elk Creek Options, desire to provide for the
joint conveyance to WMD of (i) an undivided interest in the Subject Assets equal to the amount of the Option Interest, plus (ii) an undivided
interest in the Subject Assets, equal to a fraction, (A) the numerator of which is $17,000,000, and (B) the denominator of which is a dollar
amount the parties agree represents the aggregate fair market value of the Subject Assets (the “Purchased Interest” and, together with the
Option Interest, collectively referred to herein as the “Interest”);
WHEREAS, pursuant to that certain Coal Mining Sublease dated as of December 15, 2008 by and between Ceralvo Resources, LLC, as
Lessor, and Armstrong Coal Company, Inc., $12,000,000 aggregate amount in advance royalty payments payable to Ceralvo Resources, LLC
remain unpaid;
WHEREAS, in consideration for (i) the payment of the exercise price under the Elk Creek Options, plus (ii) $5,000,000 in cash, plus
(iii) the offset of unpaid advance royalty payments payable by Armstrong Coal Company, Inc., Elk Creek desires to acquire 100% of the
membership interests in WMD (the “Membership Interest”); and
WHEREAS, the parties desire to enter into this Agreement to provide for the exercise of the Elk Creek Options, as amended hereby, and the
purchase and sale of 100% of the Membership Interest.
NOW, THEREFORE, in consideration of the premises, the mutual covenants and agreements contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the Armstrong Entities and Elk Creek agree as follows:
AGREEMENT
1. Elk Creek Options . The parties hereby agree that for purposes of determining the Purchase Price and the Subject Assets that are the
subject of the Elk Creek Options, the aggregate amounts paid by the Armstrong Entities to repay and retire the Patriot Notes is $159,778,526.00
(the “Total Patriot Payoff”), and the aggregate principal amount of and accrued interest, including contingent interest, under the Elk Creek
Notes, is $52,427,508. The parties hereby agree that the Elk Creek Options are hereby exercisable to indirectly acquire, through the acquisition
of the Membership Interest, an undivided interest in the Subject Assets equal to the Option Interest, as further described herein. The parties
hereby agree that Elk Creek shall pay the Purchase Price under the Elk Creek Options by tendering the Elk Creek Notes. The Elk Creek
Options shall remain in full force and effect until the closing of the transactions
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contemplated hereby. In the event of any inconsistency between the terms of this Agreement and the terms of the Elk Creek Options, the terms
of this Agreement shall control in all respects.
2. Purchase and Sale of Purchased Interest . Upon payment of by Elk Creek of $5,000,000 in cash, plus the offset of $12,000,000 in unpaid
advance royalty payments payable by Armstrong Coal Company, Inc. to Ceralvo Resources, LLC, Western Diamond and Western Land hereby
jointly agree to indirectly convey to Elk Creek, an undivided interest in the Subject Assets equal to the Purchased Interest, as further described
herein. The parties hereby agree that for purposes of determining the Subject Assets that are subject of the Purchased Interest the aggregate fair
market value of the Subject Assets is $255,797,388.
3. Closing of Exercise of Elk Creek Options and Purchase and Sale of Membership Interests . The consummation of the closing of the
exercise of the Elk Creek Options as described in Section 1 and the purchase of the Purchased Interest as described in Section 2 shall be
implemented as follows: (a) the Armstrong Entities will convey an undivided interest in the Subject Assets equal to the sum of the Option
Interest and the Purchased Interest to WMD and (b) the Armstrong Entities will assign the Membership Interest directly to Elk Creek Operating
LP (it being acknowledged and agreed that such direct assignment to Elk Creek Operating, LP is merely for convenience and shall be treated as
(i) an assignment of the Membership Interest by the Armstrong Entities to Elk Creek, (ii) a deemed contribution of the Membership Interest by
Elk Creek , 99.99% to Elk Creek Operating, LP, and 0.01% to Elk Creek Operating GP, LLC and (iii) a deemed contribution of 0.01% of the
Membership Interest by Elk Creek Operating GP, LLC to Elk Creek Operating, LP). The assignment and deemed contribution described in
subsection (b) above shall be deemed to occur immediately following the effectiveness of the conveyances described in subsection (a) above.
The parties hereby agree that the closing of the transactions contemplated hereby (the “Closing”) shall take place on the date hereof (the
“Closing Date”), at the offices of Buchanan Ingersoll & Rooney PC, One Oxford Centre, 301 Grant Street, 20 th Floor, Pittsburgh, PA, or at
such other date or place as the parties shall mutually agree in writing. The Closing shall not occur unless and until the representations and
warranties of the parties are true and correct in all material respects as of the Closing Date. The parties acknowledge that upon the Closing
WMD is a disregarded entity for federal tax purposes and that the assignment of the Membership Interest shall be treated as a conveyance of
the Interest for tax purposes.
4. Closing Deliveries . At the Closing, the parties hereto shall make the following deliveries:
(a) Elk Creek shall pay the Purchase Price under the Elk Creek Options to the Armstrong Entities by tendering the Elk Creek Notes. Elk
Creek shall pay $5,000,000 in cash for the Purchased Interest by wire transfer to such account(s) as designated by the Armstrong
Entities in written instructions delivered to Elk Creek at least three business days prior to the Closing.
(b) Western Diamond and Western Land shall deliver the Membership Interest free and clear of any liens or encumbrances (other than
liens securing the PNC Financing) pursuant to an assignment of membership interests in the form
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attached hereto as Exhibit B , and such further instruments and documents as Elk Creek shall deem reasonably necessary to effectuate
the sale and transfer of the Membership Interest free and clear of liens and encumbrances (other than the liens securing the PNC
Financing), including without limitation the mortgages securing the Patriot Notes. The Armstrong Entities also shall deliver to Elk
Creek a certificate of non-foreign status that complies with Treasury Regulation 1.1445-2(b)(2).
(c) The Armstrong Entities shall cause Armstrong Coal Company, Inc. to enter into new leases for each parcel of the Subject Assets,
excluding the parcels described in the instruments set forth in subsections (ii) and (iii) of Exhibit A, with the post-closing joint owners
of each parcel of the Subject Assets (i.e., WMD and the remaining owner, either Western Diamond or Western Land) pursuant to the
terms and conditions of that certain Coal Mining Lease, substantially in the form set forth on Exhibit C attached hereto. If, at the
Closing, the Armstrong Entities have in place any inter-company leases or subleases of the Subject Assets that are inconsistent in any
respect with the Coal Mining Lease, the Armstrong Entities shall cause such inter-company leases or subleases to be terminated.
5. Representations of the Armstrong Entities . Each of the Armstrong Entities represents and warrants to Elk Creek as to itself, as of the
date hereof and the Closing Date, as follows:
(a) The entity is an entity duly organized or formed, validly existing and in good standing under the laws of the jurisdiction of its
incorporation or organization.
(b) The entity has all power and authority to enter into the Agreement and any ancillary documents contemplated herein, and the
Agreement and the transactions contemplated herein have been approved by all requisite action by its directors, members or
managers, as applicable.
(c) The Agreement constitutes a legal, valid and binding obligation of the entity, enforceable against the entity in accordance with its
terms.
(d) Neither the execution, the delivery or performance of the Agreement conflicts with any applicable law, any organizational document,
or any agreement, judgment, license, order or permit applicable to or binding upon the entity or any of its properties, except for any
consents required to be obtained by the Armstrong Entities in respect of any leasehold interests in and to the Subject Assets.
(e) No consent, approval, order, or authorization of, or declaration, filing, or registration with, any governmental entity is required to be
obtained or made by the entity in connection with the execution, delivery, or performance by the entity of the Agreement and, the
consummation by it of the transactions contemplated hereby.
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(f) The Subject Assets constitute all of the coal reserves and other real property that were mortgaged under the Patriot Notes.
(g) The Membership Interest constitutes 100% of the authorized and outstanding membership interests of WMD. There are no
outstanding options, warrants, rights, agreements, contracts, calls, commitments, written demands of any character or requirements of
any applicable laws which might obligate WMD to issue any membership interests of WMD. There are no pre-emptive rights
(statutory or otherwise) with respect to any of the outstanding membership interests of WMD. There are no contracts or agreements
with respect to the voting or transfer of the Membership Interest. WMD is not obligated to redeem or otherwise acquire any of its
outstanding Membership Interest. All dividends and other distributions declared prior to the date hereof with respect to the issued and
outstanding membership interests of WMD have been paid or distributed.
(h) Each of Western Diamond and Western Land has good and valid title to the Membership Interest owned by it, free and clear of all
liens, claims or encumbrances. At the Closing, each of Western Diamond and Western Land will transfer to Elk Creek good and valid
title to the Membership Interest free and clear of all liens, claims or encumbrances.
6. Representations of Elk Creek . Elk Creek hereby represents to the Armstrong Entities as follows:
(a) Elk Creek is a limited partnership duly formed, validly existing and in good standing under the laws of the State of Delaware.
(b) Elk Creek has all power and authority to enter into the Agreement and any ancillary documents contemplated herein, and the
Agreement and the transactions contemplated herein have been approved by all requisite action by its general partner.
(c) The Agreement constitutes a legal, valid and binding obligation of Elk Creek, enforceable against the entity in accordance with its
terms.
(d) Neither the execution, the delivery or performance of the Agreement conflicts with any applicable law, any organizational document,
or any agreement, judgment, license, order or permit applicable to or binding upon Elk Creek or any of its properties.
(e) No consent, approval, order, or authorization of, or declaration, filing, or registration with, any governmental entity is required to be
obtained or made by Elk Creek in connection with the execution, delivery, or performance by Elk Creek of the Agreement and, the
consummation by it of the transactions contemplated hereby.
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7. Arbitration . Any disagreement between the Armstrong Entities and Elk Creek arising hereunder shall be submitted to binding arbitration
in accordance with the rules of the American Arbitration Association then in effect. A panel of three arbitrators, knowledgeable with the coal
industry in the West Kentucky area, shall be named, one to be selected by the Elk Creek, one to be selected by the Armstrong Entities, and one
to be selected by the other two arbitrators. If the two arbitrators appointed by the Armstrong Entities and Elk Creek cannot agree on the
selection of the third neutral arbitrator selection of such arbitrator shall be made by the American Arbitration Association. The non-prevailing
party shall be responsible for the reasonable expenses, fees and costs (including, without limitation, reasonable attorney’s fees) incurred by
both the Armstrong Entities and Elk Creek in such arbitration. With regard to any monetary sum or quantum measurement such as coal
tonnages or reserves, the figures determined by each of the arbitrators shall be averaged and the determination which differs most from said
average shall be excluded; the remaining two determinations shall then be averaged and such average shall be final and conclusive.
8. Miscellaneous .
(a) Further Assurances . Each party to the Agreement agrees to perform such further acts and to execute and deliver such other and
additional documents as may be necessary to carry out the provisions of the Agreement.
(b) Amendment . The Agreement may not be amended in whole or in part except by the written agreement of the parties hereto.
(c) Assignment . Except as otherwise specifically provided, the Agreement and any right hereunder, shall not be assigned by any party
hereunder without the prior written consent of the other party, which shall not be unreasonably withheld; provided that Elk Creek
shall be entitled to assign the Agreement to one or more of its affiliates.
(d) Severability . If any clause or provision of the Agreement is illegal, invalid, or unenforceable under any present or future law, the
remainder of the Agreement will not be affected thereby. It is the intention of the parties that if any such provision is held to be
illegal, invalid or unenforceable, there will be added in lieu thereof a provision as similar in terms to such provision as is possible
which is legal, valid and enforceable.
(e) Binding Effect . The Agreement will inure to the benefit of and bind the respective heirs, legal representatives, successors and
permitted assigns of the parties hereto.
(f) Notices . All notices, requests and other communications hereunder must be in writing and will be deemed to have been duly given
only if delivered personally or by facsimile transmission or mailed (first class postage prepaid) to the parties at the following
addresses or facsimile numbers:
(i) if to the Armstrong Entities:
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Armstrong Land Company, LLC
7733 Forsyth Blvd, Suite 1625
St. Louis, MO 63105
Attn: J. Hord Armstrong, III
Facsimile: (314) 721-8211
(ii) if to Elk Creek:
Elk Creek, L.P.
c/o Yorktown Partners LLC
410 Park Avenue, 19 th Floor
New York, NY 10022
Attention: Bryan H. Lawrence
Facsimile: (212) 515-2105
(g) Governing Law; Venue . THE AGREEMENT SHALL BE GOVERNED, CONSTRUED AND INTERPRETED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK, EXCLUDING THAT BODY OF LAW PERTAINING TO CONFLICTS OF
LAW.
(h) Counterparts . The Agreement may be executed in multiple counterparts, each of which so executed shall be deemed to be an original,
but all such counterparts shall together constitute but one and the same instrument. Facsimile signatures shall be effective as original
signatures.
[Remainder of Page Left Intentionally Blank]
[Signature Page Follows]
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IN WITNESS WHEREOF, each of the undersigned, by its duly authorized person, has executed this Agreement as of the date first above
written.
ARMSTRONG ENTITIES:
ARMSTRONG LAND COMPANY, LLC
By:
Martin D. Wilson
President and Chief Financial Officer
ARMSTRONG RESOURCES HOLDINGS, LLC
By:
Martin D. Wilson
President and Chief Financial Officer
WESTERN DIAMOND LLC
By:
Martin D. Wilson, Manager
WESTERN LAND COMPANY, LLC
By:
Martin D. Wilson, Manager
WESTERN MINERAL DEVELOPMENT, LLC
By:
Martin D. Wilson, Manager
ELK CREEK, L.P.
By: Elk Creek GP, LLC, its general partner
By:
Martin D. Wilson
President and Chief Financial Officer
Signature Page to Option Agreement, Option Exercise
and Membership Interest Purchase Agreement
EXHIBIT A
SUBJECT ASSETS
The Subject Assets shall mean all of the coal reserves and real property described in, and conveyed, demised or otherwise granted in or
under the following deeds and instruments, to Western Land Company, LLC and/or Western Diamond LLC, subject to all rights-of-way,
easements, leases, deed and plat restrictions, partitions, severances, encumbrances, licenses, reservations, conveyances and exceptions which
are of record as of the date of the exercise of the Option by Elk Creek, and to all rights of persons in possession, and to physical conditions,
encroachments and possessory rights which would be evident from an inspection of the property at such time:
(i) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC and Beaver Dam Coal Company to
Western Diamond LLC, dated September 19, 2006, of record in Deed Book 363, page 369, in the Office of the Ohio County Clerk;
(ii) The Partial Assignment of Coal Mining Lease from Central States Coal Reserves of Kentucky, LLC to Western Diamond LLC dated
September 19, 2006, of record in Deed Book 363, page 428, in the Office of the Ohio County Clerk;
(iii) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC and Beaver Dam Coal Company to
Western Diamond LLC, dated September 19, 2006, of record in Deed Book 363, page 414, in the Office of the Ohio County Clerk;
(iv) The Corporation Special Warranty Deed from Beaver Dam Coal Company to Western Diamond LLC, dated September 19, 2006, of
record in Deed Book 363, page 393, in the Office of the Ohio County Clerk;
(v) The Corporation Special Warranty Deed from Beaver Dam Coal Company to Western Diamond LLC, dated September 19, 2006, of
record in Deed Book 363, page 403, in the Office of the Ohio County Clerk;
(vi) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC to Western Diamond LLC, dated
May 31, 2007, of record in Deed Book 528, page 284, in the Office of the Muhlenberg County Clerk, and the Deed of Confirmation between
Central States Coal Reserves of Kentucky, LLC, Western Diamond LLC and Armstrong Coal Reserves, Inc., dated September 30, 2007, of
record in Deed Book 531, page 205, in the Office of the Muhlenberg County Clerk;
(vii) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC and Beaver Dam Coal Company to
Western Diamond LLC, dated May 31, 2007, of record in Deed Book 368, page 17, in the Office of the Ohio County Clerk, and the Deed of
Correction between Central States Coal Reserves of Kentucky, LLC, Beaver Dam Coal Company, LLC and Western Diamond LLC, of record
in Deed Book 369, page 759, in the Office of the Ohio County Clerk;
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(viii) The Partial Assignment and Assumption of Mineral Leasehold Estate from Central States Coal Reserves of Kentucky, LLC to Western
Diamond LLC, dated May 31, 2007, of record in Deed Book 528, page 320, in the Office of the Muhlenberg County Clerk;
(ix) The Partial Assignment and Assumption of Mineral Leasehold Estate from Central States Coal Reserves of Kentucky, LLC to Western
Diamond LLC, dated May 31, 2007, of record in Deed Book 528, page 330, in the Office of the Muhlenberg County Clerk.
(x) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC to Western Land Company, LLC, dated
December 12, 2006, of record in Deed Book 524, page 505, in the Office of the Muhlenberg County Clerk;
(xi) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC and Beaver Dam Coal Company to
Western Land Company, LLC, dated December 12, 2006, of record in Deed Book 365, page 36, in the Office of the Ohio County Clerk;
(xii) The Partial Assignment and Assumption of Mineral Leasehold Estate from Central States Coal Reserves of Kentucky, LLC to Western
Land Company, LLC, dated November 20, 2006, of record in Deed Book 524, page 523, in the Office of the Muhlenberg County Clerk, as
amended and restated in Deed Book 527, page 186, in the Office of the Muhlenberg County Clerk;
(xiii) The Partial Assignment and Assumption of Surface and Mineral Leasehold Estate from Central States Coal Reserves of Kentucky,
LLC to Western Land Company, LLC, dated November 20, 2006, of record in Deed Book 365, page 57, in the Office of the Muhlenberg
County Clerk;
(xiv) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC, Beaver Dam Coal Company, Ohio
County Coal Company, LLC and Grand Eagle Mining, Inc. to Western Land Company, LLC, dated March 30, 2007, of record in Deed Book
367, page 1, in the Office of the Ohio County Clerk;
(xv) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC to Western Land Company, LLC, dated
March 30, 2007, of record in Deed Book 527, page 118, in the Office of the Muhlenberg County Clerk, as corrected by Deed of Correction
dated September 30, 2007, of record in Deed Book 531, page 213, in the Office of the Muhlenberg County Clerk; and
(xvi) The Partial Assignment and Assumption of Surface and Mineral Leasehold Estate from Central States Coal Reserves of Kentucky,
LLC to Western Land Company, LLC, dated March 30, 2007, of record in Deed Book 527, page 161, in the Office of the Muhlenberg County
Clerk.
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EXHIBIT B
Form of Assignment of Membership Interest
ASSIGNMENT OF MEMBERSHIP INTERESTS
THIS ASSIGNMENT OF MEMBERSHIP INTERESTS (this “Assignment”) is executed as of February 9, 2011, by and between
(i) Western Diamond LLC, a Nevada limited liability company and Western Land Company, LLC, a Kentucky limited liability company
(collectively, “Assignors”), and (ii) Elk Creek Operating, L.P. a Delaware limited partnership (“Assignee”).
RECITALS:
1. Assignors collectively own a 100% membership interest (the “Interest”) in Western Mineral Development, LLC, a Delaware limited liability
company (the “Company”).
2. Assignee desires to acquire from Assignors, and Assignors desire to assign to Assignee, the Interest.
ASSIGNMENT:
NOW, THEREFORE, in consideration of the premises, warranties and mutual covenants set forth herein, the parties hereto agree as follows:
1. Assignment . Assignors hereby assign to Assignee, and Assignee hereby acquires from Assignors, all of Assignors’ right, title and interest in
and to the Interest and all of Assignors’ duties, liabilities and obligations under, or arising in connection with, the Interest. From and after the
date hereof, Assignors shall have no right, title or interest in the Company and Assignee shall be bound by the respective governing documents
of the Company, and, if required, Assignee hereby agrees that it will execute a counterpart signature page to the Limited Liability Company
Agreement of the Company to evidence its consent to be bound by such agreement.
2. Effective Date . This Assignment is effective for all purposes as of the date hereof, and from and after that date the net profits or net losses
of the Company shall be credited to Assignee and Assignors shall have no interests therein or claims thereto.
3. Future Cooperation on Subsequent Documents . Assignors and Assignee mutually agree to cooperate at all times from and after the date
hereof with respect to the supplying of any information requested by the other regarding any of the matters described in this Assignment, and
each agrees to execute such further deeds, bills of sale and assignments as may be reasonably requested for the purpose of giving effect to,
evidencing or giving notice of the transactions described herein.
4. Successors and Assigns . This Assignment shall be binding upon, and shall inure to the benefit of, the parties hereto and their successors
and assigns.
5. Modification and Waiver . No supplement, modification, waiver or termination of this Assignment or any provision hereof shall be binding
unless executed in writing by the parties to
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be bound thereby. No waiver of any provision of this Assignment shall constitute a waiver of any other provision (whether or not similar), nor
shall such waiver constitute a continuing waiver unless otherwise expressly provided.
6. Governing Law . This Assignment shall be governed by, and construed in accordance with, the laws of the State of New York (without
regard to principles of conflict of laws).
7. Counterparts . This Assignment may be executed in any number of counterparts, each of which shall be an original and all of which shall
together constitute one and the same Assignment.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, each of the undersigned, by its duly authorized person, has executed this Agreement as of the date first above
written.
WESTERN DIAMOND LLC
By:
Martin D. Wilson, Manager
WESTERN LAND COMPANY, LLC
By:
Martin D. Wilson, Manager
ELK CREEK OPERATING, L.P.
By: Elk Creek Operating GP, LLC,
its general partner
By:
Martin D. Wilson
President and Chief Financial Officer
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EXHIBIT C
FORM OF COAL MINING LEASE/SUBLEASE/LEASE AND SUBLEASE
This COAL MINING LEASE/SUBLEASE/LEASE AND SUBLEASE (the “Lease”) is made and entered into as of February 9, 2011 (the “Effective
Date”), by and among: (i) WESTERN DIAMOND LLC , a Nevada limited liability company/ WESTERN LAND COMPANY, LLC , a Kentucky
limited liability company, and WESTERN MINERAL DEVELOPMENT, LLC , a Delaware limited liability company, as tenants in common
(collectively, the “Lessor”), and (ii) ARMSTRONG COAL COMPANY, INC. , a Delaware corporation (the “Lessee”).
WITNESSETH:
WHEREAS , Lessor owns the fee interests as indicated on Schedule A, attached hereto, in the real property indicated on Schedule A (the
“Owned Property”) and/or the leasehold interests as indicated on Schedule B, attached hereto, in the real property indicated on Schedule B (the
“Leased Property”), demised pursuant to the agreements identified in Schedule B (as such agreements may be supplemented, amended,
restated, replaced, or modified from time to time, each such agreement an “Underlying Lease”), together with any greater estate therein as may
now exist or hereafter may be acquired by Lessor (the Owned Property and the Leased Property are, collectively, the “Premises”); and
WHEREAS , Lessor, desires to lease the Premises to Lessee, and Lessee desires to lease the same from Lessor, upon such terms and
conditions as are set forth herein;
NOW THEREFORE , in consideration of One Dollar and the mutual covenants hereinafter contained, the parties hereto agree as follows:
Subject to the terms hereof, Lessor does hereby lease unto Lessee the Premises and grant unto Lessee an exclusive license to enter upon the
Surface Lands (as hereafter defined) for the purpose of mining all veins of coal on the Premises. It is agreed that Lessor hereby grants to
Lessee, with respect to the Premises, to the extent the Lessor has the right to do so, all mining rights, privileges and immunities, of every nature
and kind (including deep mining, strip mining, highwall mining and auger mining rights) coal-bed methane rights and the rights to extract all
other minerals not covered by pre-existing rights currently held by Lessor or third parties, which are necessary, convenient or customary in
connection with or in relation to the conduct of mining operations or the development, equipment or improvement of mines, or for the mining,
extraction, removal or recovery of coal, including the right to disturb, cast, and pile all strata without regard to mineral content and for
preparing and marketing coal; such rights, including, without limitation, to the extent permitted by applicable statutes and regulations and to the
extent the Lessor has the right to grant the same, the right to install and maintain railroad, truck and river dock loading facilities, storage areas,
railroad tracks and switches, pumping stations, pole lines and wires; to create gob piles (provided gob piles are maintained, stabilized, and
removed or covered as governed by all existing and future laws); to dig ditches for the drainage of water; to lay pipe lines; to erect towers; to
provide for the storage of materials and supplies; to construct and use roadways; to erect and use buildings, plants and structures of every kind;
and, in general, and without limitation, to do any and all things incident to Lessee’s mining, processing, and marketing of coal produced from
the Premises; and Lessee is empowered and authorized to exercise all of the aforesaid rights, privileges and immunities.
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Subject, however, to the following rights existing as of the Effective Date: oil and gas lease rights, public roads, public drainage ditches,
easements for power lines, pipelines, railroads and rights-of-way, telephone lines, buried cables and all other easements and reservations.
TO HAVE AND TO HOLD the same unto the Lessee, its successors and assigns, for and during the term herein set forth and upon the
following terms and conditions:
ARTICLE 1
TERM OF LEASE
Section 1.1- Term . The term of this Lease (“Term”) shall commence on the Effective Date, and terminate on the tenth (10 th ) anniversary
of the Effective Date; provided, that the Term shall automatically be extended for ten (10) one-year extension periods, and thereafter until such
time as all of the minable and merchantable coal has been mined, unless Lessee delivers notice of non-renewal to Lessor prior to the end of the
then-existing Term. Lessee shall be entitled to terminate this Lease upon ninety (90) days’ written notice to Lessor, in which case Lessee’s
obligations, including any royalty payments, shall be limited to those incurred as of the date of such termination.
ARTICLE 2
MINING OPERATIONS AND SURFACE LANDS
Section 2.1- Mining Operations. Lessee will conduct mining operations on the Premises and the Surface Lands in a reasonable and
professional manner in accordance with standard practices employed in western Kentucky coalfields. Lessee shall conduct its mining
operations in accordance with, and shall comply with, all state and local laws and the lawful rules, regulations and orders of any governmental
authority in respect of such mining operations. Lessor grants to Lessee the right, at the cost and expense of Lessee, to do and perform, with
respect to the Premises, whatever may be required to be performed by Lessee, or may be deemed by Lessee to be required or to be advisable, in
order to comply with federal, state or local law or the lawful rules, regulations or orders or any governmental authority. Lessor further agrees to
execute and deliver upon the request of Lessee any additional forms or documentation required by any governmental agency or bureau with
regard to the prosecution of the mining operation.
Section 2.2- Use of Surface Lands. Lessor shall retain in its possession the instruments of every nature and kind evidencing Lessor’s interest
in and to the Premises and the Surface Lands and every part thereof; provided, however, that upon request by Lessee, Lessor shall make such
records available to Lessee for use thereof by Lessee. Except as otherwise provided herein, Lessor shall retain possession of the surface rights
related to the Premises (the “Surface Lands”), until the same shall be required by Lessee in connection with its mining operations hereunder, it
being recognized by Lessee that the Surface Lands are now or may hereafter be used by Lessor for farming or other purposes. When and as
often as Lessee shall first require any of the Surface Lands in connection with its mining operation, Lessee shall, not more than one hundred
twenty (120) or less than ninety (90) days prior to January 1 of the year when such Surface Lands will be required by Lessee, give written
notice to Lessor specifying such lands. At such time within said year as shall be mutually determined, but not before the expiration of one
hundred twenty (120) days after the receipt by Lessor of such notice, Lessor shall deliver exclusive possession of said Surface Lands to Lessee.
Notwithstanding the above, if circumstances warrant, Lessee shall
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have the right, upon giving Lessor forty (40) days’ written notice, to take possession of such Surface Lands in connection with its mining
operations by paying Lessor or crop tenant for crop damage or soil preparation costs, as the case may be. Lessee may, upon taking possession
thereof, remove and disturb such Surface Lands or any part thereof, except that Lessee shall, in its operations, prevent and avoid damage to
existing oil wells and/or pipelines. Forthwith upon termination of the need by Lessee for any particular part of the said Surface Lands in
connection with its mining operations hereunder, as determined by Lessee’s mining plans, Lessee shall surrender possession thereof to Lessor,
subject to the provisions of Article 8, Lessee shall, prior to such surrender of possession, comply with all applicable statutes and regulations
then in effect with respect to restoration of such Surface Lands. At Lessor’s request, and upon Lessee’s consent, such consent not to be
unreasonably withheld, Lessee may surrender additional Surface Lands to Lessor that are not in Lessee’s mining plan or have been reclaimed
by Lessee and reclamation bonds released. Thereafter, Lessee shall have no further obligations or rights with respect to such lands surrendered
and the same shall be deemed to be no longer a part of the Surface Lands; provided, however, that nothing contained in this sentence shall
derogate from or be construed to deny to Lessee, with respect to lands so surrendered, the rights granted herein. Lessor shall have the right to
convey title to any part of lands so surrendered, subject, however, to the consent of Lessee, such consent not to be unreasonably withheld, in
which case Lessee shall have no further rights to such lands and such lands shall no longer be part of this Lease. It is understood that Lessor
shall make no use of any lands so surrendered which may adversely affect Lessee’s and/or any assignees’ or sublessees’ rights hereunder in
meeting their obligations with regard to reclamation of such lands under applicable law.
Section 2.3- Underlying Leases. Lessee hereby agrees to comply with the applicable terms and conditions of any Underlying Lease, which
terms are hereby incorporated herein by reference.
ARTICLE 3
ROYALTIES
Section 3.1- Production Royalty Payments.
(a) Payment for Coal Mined. For all coal mined and sold by Lessee from the Premises, Lessee shall pay to Lessor a Production Royalty
Payment in an amount equal to seven percent (7%) of the Sales Price (as hereinafter defined) received by Lessee. In addition to the foregoing,
Lessee shall pay any royalties due for coal leased (not owned in fee) by Lessor. The aforementioned payments shall be defined herein as the
“Production Royalty Payments” for all purposes of this Lease.
(b) Definition of Sales Price. The term Sales Price as used herein shall mean the per ton consideration actually charged Lessee for each
2,000 pounds of coal sold F.O.B. the mine after final preparation and loading without any deduction of preparation and loading costs,
transportation costs, sales commissions or selling expenses, discounts, rebates, preparation charges or any other costs or charges whatsoever. In
the case of any coal not sold at arm’s length, sold to an affiliate of Lessee, consumed by Lessee or sold for a consideration other than money,
the per ton consideration for computing the Sales Price shall be the average sale price for coal of comparable quality under similar contracts,
F.O.B. the mine at the time of shipment or consumption without any deduction of preparation and loading costs, transportation costs, sales
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commissions or selling expenses, discounts, rebates, preparation charges or any other costs or charges whatsoever.
(c) Lessee to Keep Records. Lessee shall keep records of truck scale weights, or river barge dead weight surveys, or railroad car weights,
whichever is applicable, together with accurate surveys and progress maps used in conjunction with accepted and recognized engineering
methods which shall be taken as the basis for payment of Production Royalty Payments. Lessee shall keep a true and correct record of all coal
mined, removed and sold from the Premises and shall permit Lessor or its agents, at all reasonable times, to inspect the records, and perform
other practical and reasonable investigations to check the accuracy of the records of Lessee. Lessor, through its agents, may enter upon the
Premises at any time for the purpose of verifying the quantity of coal removed therefrom.
(d) Time, Place and Allocation of Payment of Production Royalty Payments. All Production Royalty Payments shall be paid by Lessee to
Lessor on or before the 25 th day of each calendar month on all coal mined and produced by Lessee from the Premises which was sold during
the preceding calendar month and for which Lessee has received payment. All Production Royalty Payments shall be paid by check or by wire
transfer if Lessor so instructs and payable to each of the entities constituting the “Lessor” in accordance with their respective undivided interest
in the Premises. Each payment of Production Royalty Payments hereunder shall be accompanied by a statement from Lessee showing the
number of tons of coal mined and sold during the preceding calendar month (showing separately coal produced by the strip, surface, auger or
open-pit method of mining and coal produced by any other method of mining), the weighted average of the Sales Price and the computation of
royalties payable on such coal so mined and sold during such calendar month. All payments due hereunder shall be mailed to Lessor at the
address listed in this Lease, or as otherwise directed by Lessor.
ARTICLE 4
DEFAULT
Section 4.1- Events of Default.
(a) Defaults Under this Lease. Should Lessee fail to pay any installment of any royalty payment herein provided for when due, or should
Lessee fail to observe or perform any other covenant on its part to be observed or performed under the terms of this Lease, Lessor shall have
the right to give Lessee written notice specifying the particular default or defaults of which complaint is made and of its intention to declare a
forfeiture of this Lease by reason of such default or defaults unless the same are rectified. If the default is the failure to pay to Lessor an
installment of a royalty payment at the time provided for herein, Lessee shall have five (5) days from the date of receipt of such notice to
correct such default. If the default is the failure of Lessee to observe or perform some other covenant of this Lease other than to pay royalty
payments to Lessor, Lessee shall have thirty (30) days (if such default cannot be cured within thirty (30) days, Lessee shall have such
additional reasonable time to cure such default, provided Lessee diligently takes action to cure such default within such thirty (30) day period)
from the date of receipt of such notice to cure such default. In case of a dispute as to whether or not any such default exists, the time Lessee
may cure such default, as aforesaid, shall not commence to run until after the dispute is resolved by arbitration.
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(b) Remedies Upon Default. If Lessee fails to remedy any such default or defaults within the time or times herein specified, then at the
option of Lessor, all of Lessee’s rights under this Lease shall terminate, except as otherwise provided in Section 4.1(e), and Lessor shall have
the right to re-enter and take possession of the Premises and the Surface Lands without obligation to assume any debt of Lessee; provided,
however, that the termination of this Lease in any manner or for any cause whatever shall not relieve Lessee of its obligation for any royalty
payment which may have accrued hereunder at the date of such termination; provided, further, that the remedy of termination in the event of
default by Lessee as above authorized shall not be deemed or interpreted as the exclusive remedy available to Lessor, and Lessor may require
and enforce performance by Lessee of each and every term and provision of this Lease incumbent upon the Lessee to be kept and performed,
utilizing any available remedy therefor.
(c) Arbitration. Any disagreement between Lessor and Lessee arising hereunder shall be submitted to binding arbitration in accordance
with the rules of the American Arbitration Association then in effect. A panel of three arbitrators, knowledgeable with the coal industry in the
western Kentucky area, shall be named, one to be selected by Lessee, one to be selected by Lessor, and one to be selected by the other two
arbitrators. If the two arbitrators appointed by Lessor and Lessee cannot agree on the selection of the third neutral arbitrator selection of such
arbitrator shall be made by the American Arbitration Association. The non-prevailing party shall be responsible for the reasonable expenses,
fees and costs (including, without limitation, reasonable attorney’s fees) incurred by both Lessor and Lessee in such arbitration. If royalty
payments are disputed, then those payments shall be placed by Lessee in an interest-bearing escrow account to be distributed in accordance
with the decision of the arbitrators. With regard to any monetary sum or quantum measurement such as coal tonnages or reserves, the figures
determined by each of the arbitrators shall be averaged and the determination which differs most from said average shall be excluded; the
remaining two determinations shall then be averaged and such average shall be final and conclusive.
(d) Rights of Lessee Upon Termination of Lease. Upon the termination of this Lease for any cause or in any manner, and upon
completion of all reclamation as required by governing authorities and upon payment by Lessee to Lessor of all royalties due hereunder, Lessee
shall have the right and obligation within a period of twelve (12) months from the date of such termination to remove all buildings, structures,
machinery, equipment, tools, tracks, power lines and other property owned by Lessee from any portion of the Surface Lands then owned by
Lessor; provided, however, that if the propriety of such termination shall be a matter of disagreement or dispute between Lessor and Lessee,
then such twelve (12) months’ period shall not commence to run until, after the dispute is resolved. Provided, further, that if Lessee,
notwithstanding the exercise of reasonable diligence, is prevented by causes beyond the control, and without the fault or negligence, of Lessee
from removing said property of Lessee within such twelve (12) months’ period, Lessee shall have, in addition to said twelve (12) months, a
period of time equal to the period of time during which Lessee was so prevented from removing such property.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
Section 5.1- Due Authority of Lessor and Quiet Enjoyment. Lessor covenants and warrants that it has full power and authority to grant,
lease, and let the Premises and the license to the Surface Lands as hereinabove and hereinafter set forth. Lessor, for itself and its successors
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and assigns, covenants that Lessee shall, against all and every person or persons lawfully claiming the whole or any part of the Premises or the
Surface Lands by, through, or under Lessor, have and quietly possess and enjoy the Premises and the Surface Lands throughout the term of this
Lease, so long as Lessee shall not be in default in the performance of any covenant of this Lease incumbent upon it to be kept and performed.
In the event of any such asserted claim which may affect or impair the quiet possession of any part of the Premises or the Surface Lands by
Lessee, notice in writing thereof shall be promptly delivered to Lessor, and Lessor shall be privileged to contest any such claim at its expense;
and in such event Lessee shall cooperate with Lessor to remedy the situation, with respect to the part of the Premises or the Surface Lands as to
which such claim has been asserted until such claim is settled, which Lessor agrees shall be done promptly if same can be done on a reasonable
basis. Lessor shall not enter into any agreement(s) with third parties that may interfere with the mining operation or create any obligation or
responsibility on Lessee’s part unless agreed to in writing by Lessee.
Section 5.2- Eminent Domain or Condemnation Proceedings . Lessor covenants that there are no eminent domain, zoning or condemnation
proceedings pending or threatened against or related to the Surface Lands or any portion thereof.
Section 5.3- Litigation . Lessor represents and warrants that there is no claim, legal action, suit, proceeding, arbitration, dispute,
governmental investigation or administrative proceeding, nor any order, decree, or judgment, pending or in effect, or, to Lessor’s knowledge,
threatened, against or affecting (i) the Premises and/or the Surface Lands, (ii) the ability of Lessor to execute this Lease, or (iii) the accuracy
and completeness of any representation and warranty of Lessor made herein.
Section 5.4- Third Party Claims . Lessor represents and warrants that neither Lessor nor the Premises and/or the Surface Lands are bound by
any contract, agreement, lease, license or subject to any encumbrance of any kind or nature, to which Lessor or its predecessors were a party
thereto, and that would in any manner restrict, limit or affect Lessee’s ability to mine and operate the Premises and/or the Surface Lands as
Lessee would choose, free of any obligation to or claim of any person or organization associated with, arising out of or in connection with any
such contract, agreement, lease, license or encumbrance of Lessor or of any affiliate thereof, or of any predecessor in title in interest to the
Premises and/or the Surface Lands, including any agreement applicable to any of its employees.
ARTICLE 6
INDEMNIFICATION
Section 6.1- Indemnification of Lessor. Lessee shall, at its own cost and expense, pay all wages, workmen’s compensation claims, claims
for material, equipment and supplies contracted for by the Lessee in connection with the conduct of its operations hereunder, and shall
indemnify and hold, Lessor and its assigns harmless of, from and against, any and all claims damages, demands, expenses, fines, liabilities and
taxes (of any character or nature whatsoever, regardless of by whom imposed), and losses of every conceivable kind, character and nature
whatsoever (including, but not limited to, claims for losses or damages to any property or injury to or death of any person) asserted by or on
behalf of any person arising out of, resulting from or in any way connected with Lessee’s presence on or mining of the coal on the Premises or
the Surface Lands. Lessee also covenants and agrees, at its expense, to pay, and to indemnify and save Lessor and
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its assigns harmless of, from and against, all costs, reasonable attorneys’ fees, expenses and liabilities incurred in any action or proceeding
brought by reason of any such claim or demand.
ARTICLE 7
TAXES
Section 7.1- Payment of Taxes. Lessee shall pay or cause to be paid the real estate taxes levied on the Premises and the Surface Lands and
shall pay all severance taxes or other taxes based upon production of coal mined from the Premises.
ARTICLE 8
RECLAMATION OF SURFACE LANDS
Section 8.1- Reclamation of Surface Lands by Lessee. Once mining commences on the Surface Lands, Lessee will reclaim the Surface
Lands in accordance with all existing applicable federal, state and local laws. In this connection, it will, among other things, fill in or cover all
cuts, pits and adits or establish water impoundments, restore the mined out areas to an acceptable contour, replant such areas and dispose of all
toxic and acid-bearing substances in accordance with all applicable laws and regulations in order to ensure that the Surface Lands will not
constitute an unreasonable hazard. Lessor shall have the right, but not the obligation, to inspect all land restoration and revegitation of the
Surface Lands and the disposal of toxic substances on the Surface Lands to see that Lessee has complied with all existing applicable federal,
state and local laws before Lessee requests releases from any federal, state or county bonding requirements in connection with the above.
Lessee shall have no obligation to dispose of foreign or toxic substances of Lessor or others without the written agreement of Lessee. Lessee
shall have the right to make re-entry onto the Surface Lands with machinery and equipment from time to time after the formal termination of
the term hereof for the purpose of compliance with any federal, state or local government requirements.
ARTICLE 9
GENERAL
Section 9.1- Remedies, Etc., Cumulative. Each right, power and remedy of Lessor or Lessee provided for in this Lease shall be cumulative
and concurrent and shall be in addition to every other right, power or remedy provided for in this Lease or now or hereafter existing at law or in
equity or by statute or otherwise, and the exercise or beginning of the exercise or the failure to exercise by Lessor or Lessee of any one or more
of the rights, powers or remedies provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise shall not
preclude the simultaneous or later exercise by Lessor or Lessee of any or all rights, powers or remedies.
Section 9.2- Notices. All notices and other communications with respect to this Lease shall be in writing and shall be deemed effectively
given when delivered personally or seventy-two (72) hours after mailing by certified mail, postage prepaid, to the following addresses of the
parties:
If to Lessor:
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Western Diamond LLC/Western Land Company, LLC
Western Mineral Development, LLC
7733 Forsyth Blvd., Suite 1625
St. Louis, MO 63105
Attn: J. Hord Armstrong, III
Facsimile: (314) 721-8211
If to Lessee:
Armstrong Coal Company, Inc.
7733 Forsyth Blvd., Suite 1625
St. Louis, MO 63105
Attn: J. Hord Armstrong, III
Facsimile: (314) 721-8211
Each party may change its address by giving written notice of such change to the other party.
Section 9.3- Binding Effect of Lease, Subleasing. This Lease shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided, however, that no assignment of this Lease or sublease of the Premises may be made by Lessee
other than to an affiliate of Lessee, without the prior written consent of Lessor, which consent shall not be unreasonably withheld, delayed or
conditioned.
Section 9.4- Entire Agreement. This Lease constitutes the entire agreement between the parties hereto with respect to the subject matter
hereof, and no alteration, modification or interpretation hereof shall be binding upon the parties hereto unless in writing and signed by Lessor
and Lessee.
Section 9.5- Governing Law and Section Headings. This Lease shall be interpreted and construed in accordance with the laws of the
Commonwealth of Kentucky. The titles of the Articles and Sections in this Lease have been inserted as a matter of convenience of reference
only and shall not control or affect the meaning or construction of any of the terms and provisions hereof.
Section 9.6- Force Majeure. If because of Force Majeure either party hereto is unable to carry out any of its obligations under this Lease
(other than obligations of either party to pay money due), and if such party promptly gives to the other party hereto written notice of such Force
Majeure, then the obligations of the party giving such notice shall be suspended to the extent made necessary by such Force Majeure and
during its continuance, provided the effect of such Force Majeure is eliminated in so far as possible with all reasonable dispatch. The term
“Force Majeure” as used herein shall mean any unforeseeable causes beyond the control and without fault or negligence of the party affected
thereby, such as acts of God, acts of the public enemy, insurrections, riots, labor disputes, labor or material shortages, fires, explosions, floods,
breakdowns of or damage to plants, equipment or facilities, interruptions to transportation, river freeze-ups, embargoes, legislation causing loss
of markets, orders or acts of civil or military authority, or other like or unlike causes which wholly or partly prevent the mining, loading or
delivering of the coal by Lessee.
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Section 9.7- Recording of Short Form. Lessor and Lessee agree to record a short form of this Lease in the Office of the _____ County Clerk.
Section 9.8- Oil and Gas. In connection with the mining of any coal on properties where Lessor owns the coal rights and on which there
exist any abandoned and/or active oil and gas wells, if Lessor and Lessee mutually agree that it is economically beneficial to mine through any
such wells, then Lessor and Lessee agree that each will pay (i) one half of the costs of plugging any abandoned oil or gas wells, and (ii) one
half of the costs of plugging, re-drilling and restoring production (including piping relocation) in the case of any active oil and gas wells.
[Signature pages follow]
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IN WITNESS WHEREOF , the parties hereto have each caused this Lease to be executed by one of its duly authorized officers as of the date
first above written.
WESTERN MINERAL DEVELOPMENT, LLC
By:
Martin D. Wilson, Manager
WESTERN DIAMOND LLC /WESTERN LAND COMPANY, LLC
By:
Martin D. Wilson, Manager
ARMSTRONG COAL COMPANY, INC.
By:
Martin D. Wilson, President
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SCHEDULE A
TO COAL MINING LEASE
[Description of Owned Property]
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SCHEDULE B
TO COAL MINING LEASE
[Description of Leased Premises]
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Exhibit 10.55
Elk Creek
Ohio County
COAL MINING LEASE AND SUBLEASE
This COAL MINING LEASE AND SUBLEASE (this “Lease”) is made and entered into as of February 9, 2011 (the “Effective Date”), by and
between: (i) CERALVO HOLDINGS, LLC , a Delaware limited liability company (the “Lessor”), and (ii) ARMSTRONG COAL COMPANY, INC. ,
a Delaware corporation (the “Lessee”).
WITNESSETH:
WHEREAS , Lessor owns the fee interests as indicated on Schedule A, attached hereto, in the real property indicated on Schedule A (the
“Owned Property”) and/or the leasehold interests as indicated on Schedule B, attached hereto, in the real property indicated on Schedule B (the
“Leased Property”), demised pursuant to the agreements identified in Schedule B (as such agreements may be supplemented, amended,
restated, replaced, or modified from time to time, each such agreement an “Underlying Lease”), together with any greater estate therein as may
now exist or hereafter may be acquired by Lessor (the Owned Property and the Leased Property are, collectively, the “Premises”); and
WHEREAS , Lessor desires to lease the Premises to Lessee, and Lessee desires to lease the same from Lessor, upon such terms and
conditions as are set forth herein.
NOW THEREFORE , in consideration of One Dollar and the mutual covenants hereinafter contained, the parties hereto agree as follows:
Subject to the terms hereof, Lessor does hereby lease unto Lessee the Premises and grant unto Lessee an exclusive license to enter upon the
Surface Lands (as hereafter defined) for the purpose of mining all veins of coal on the Premises. It is agreed that Lessor hereby grants to
Lessee, with respect to the Premises, to the extent the Lessor has the right to do so, all mining rights, privileges and immunities, of every nature
and kind (including deep mining, strip mining, highwall mining and auger mining rights), coal-bed methane rights and the rights to extract all
other minerals not covered by pre-existing rights currently held by Lessor or third parties, which are necessary, convenient or customary in
connection with or in relation to the conduct of mining operations or the development, equipment or improvement of mines, or for the mining,
extraction, removal or recovery of coal, including the right to disturb, cast, and pile all strata without regard to mineral content and for
preparing and marketing coal; such rights, including, without limitation, to the extent permitted by applicable statutes and regulations and to the
extent the Lessor has the right to grant the same, the right to install and maintain railroad, truck and river dock loading facilities, storage areas,
railroad tracks and switches, pumping stations, pole lines and wires; to create gob piles (provided gob piles are maintained, stabilized, and
removed or covered as governed by all existing and future laws); to dig ditches for the drainage of water; to lay pipe lines; to erect towers; to
provide for the storage of materials and supplies; to construct and use roadways; to erect and use
buildings, plants and structures of every kind; and, in general, and without limitation, to do any and all things incident to Lessee’s mining,
processing, and marketing of coal produced from the Premises; and Lessee is empowered and authorized to exercise all of the aforesaid rights,
privileges and immunities.
Subject, however, to the following rights existing as of the Effective Date: oil and gas lease rights, public roads, public drainage ditches,
easements for power lines, pipelines, railroads and rights-of-way, telephone lines, buried cables and all other easements and reservations.
TO HAVE AND TO HOLD the same unto the Lessee, its successors and assigns, for and during the term herein set forth and upon the
following terms and conditions:
ARTICLE 1
TERM OF LEASE
Section 1.1- Term . The term of this Lease (“Term”) shall commence on the Effective Date, and terminate on the tenth (10 th ) anniversary
of the Effective Date; provided, that the Term shall automatically be extended for ten (10) one-year extension periods, and thereafter until such
time as all of the minable and merchantable coal has been mined, unless Lessee delivers notice of non-renewal to Lessor prior to the end of the
then-existing Term. Lessee shall be entitled to terminate this Lease upon ninety (90) days’ written notice to Lessor, in which case Lessee’s
obligations, including any royalty payments, shall be limited to those incurred as of the date of such termination.
ARTICLE 2
MINING OPERATIONS AND SURFACE LANDS
Section 2.1- Mining Operations. Lessee will conduct mining operations on the Premises and the Surface Lands in a reasonable and
professional manner in accordance with standard practices employed in western Kentucky coalfields. Lessee shall conduct its mining
operations in accordance with, and shall comply with, all state and local laws and the lawful rules, regulations and orders of any governmental
authority in respect of such mining operations. Lessor grants to Lessee the right, at the cost and expense of Lessee, to do and perform, with
respect to the Premises, whatever may be required to be performed by Lessee, or may be deemed by Lessee to be required or to be advisable, in
order to comply with federal, state or local law or the lawful rules, regulations or orders or any governmental authority. Lessor further agrees to
execute and deliver upon the request of Lessee any additional forms or documentation required by any governmental agency or bureau with
regard to the prosecution of the mining operation.
Section 2.2- Use of Surface Lands. Lessor shall retain in its possession the instruments of every nature and kind evidencing Lessor’s interest
in and to the Premises and the Surface Lands and every part thereof; provided, however, that upon request by Lessee, Lessor shall make such
records available to Lessee for use thereof by Lessee. Except as otherwise provided herein, Lessor shall retain possession of the surface rights
related to the Premises (the “Surface Lands”), until the same shall be required by Lessee in connection with its mining operations hereunder, it
being recognized by Lessee that the
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Surface Lands are now or may hereafter be used by Lessor for farming or other purposes. When and as often as Lessee shall first require any of
the Surface Lands in connection with its mining operation, Lessee shall, not more than one hundred twenty (120) or less than ninety (90) days
prior to January 1 of the year when such Surface Lands will be required by Lessee, give written notice to Lessor specifying such lands. At such
time within said year as shall be mutually determined, but not before the expiration of one hundred twenty (120) days after the receipt by
Lessor of such notice, Lessor shall deliver exclusive possession of said Surface Lands to Lessee. Notwithstanding the above, if circumstances
warrant, Lessee shall have the right, upon giving Lessor forty (40) days’ written notice, to take possession of such Surface Lands in connection
with its mining operations by paying Lessor or crop tenant for crop damage or soil preparation costs, as the case may be. Lessee may, upon
taking possession thereof, remove and disturb such Surface Lands or any part thereof, except that Lessee shall, in its operations, prevent and
avoid damage to existing oil wells and/or pipelines. Forthwith upon termination of the need by Lessee for any particular part of the said Surface
Lands in connection with its mining operations hereunder, as determined by Lessee’s mining plans, Lessee shall surrender possession thereof to
Lessor, subject to the provisions of Article 8, Lessee shall, prior to such surrender of possession, comply with all applicable statutes and
regulations then in effect with respect to restoration of such Surface Lands. At Lessor’s request, and upon Lessee’s consent, such consent not to
be unreasonably withheld, Lessee may surrender additional Surface Lands to Lessor that are not in Lessee’s mining plan or have been
reclaimed by Lessee and reclamation bonds released. Thereafter, Lessee shall have no further obligations or rights with respect to such lands
surrendered and the same shall be deemed to be no longer a part of the Surface Lands; provided, however, that nothing contained in this
sentence shall derogate from or be construed to deny to Lessee, with respect to lands so surrendered, the rights granted herein. Lessor shall
have the right to convey title to any part of lands so surrendered, subject, however, to the consent of Lessee, such consent not to be
unreasonably withheld, in which case Lessee shall have no further rights to such lands and such lands shall no longer be part of this Lease. It is
understood that Lessor shall make no use of any lands so surrendered which may adversely affect Lessee’s and/or any assignees’ or sublessees’
rights hereunder in meeting their obligations with regard to reclamation of such lands under applicable law.
Section 2.3- Underlying Leases. Lessee hereby agrees to comply with the applicable terms and conditions of any Underlying Lease, which
terms are hereby incorporated herein by reference.
ARTICLE 3
ROYALTIES
Section 3.1- Production Royalty Payments.
(a) Payment for Coal Mined. For all coal mined and sold by Lessee from the Premises, Lessee shall pay to Lessor a Production Royalty
Payment in an amount equal to seven percent (7%) of the Sales Price (as hereinafter defined) received by Lessee. In addition to the foregoing,
Lessee shall pay any royalties due for coal leased (not owned in fee) by Lessor. The aforementioned payments shall be defined herein as
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the “Production Royalty Payments” for all purposes of this Lease. The parties agree that Lessor has received credit for an advance royalty equal
to $12,000,000 (“Advance Payment”), and the amount of the Advance Payment shall be applied against and be recoupable against all future
Production Royalty Payments otherwise coming due.
(b) Definition of Sales Price. The term Sales Price as used herein shall mean the per ton consideration actually charged Lessee for each
2,000 pounds of coal sold F.O.B. the mine after final preparation and loading without any deduction of preparation and loading costs,
transportation costs, sales commissions or selling expenses, discounts, rebates, preparation charges or any other costs or charges whatsoever. In
the case of any coal not sold at arm’s length, sold to an affiliate of Lessee, consumed by Lessee or sold for a consideration other than money,
the per ton consideration for computing the Sales Price shall be the average sale price for coal of comparable quality under similar contracts,
F.O.B. the mine at the time of shipment or consumption without any deduction of preparation and loading costs, transportation costs, sales
commissions or selling expenses, discounts, rebates, preparation charges or any other costs or charges whatsoever.
(c) Lessee to Keep Records. Lessee shall keep records of truck scale weights, or river barge dead weight surveys, or railroad car weights,
whichever is applicable, together with accurate surveys and progress maps used in conjunction with accepted and recognized engineering
methods which shall be taken as the basis for payment of Production Royalty Payments. Lessee shall keep a true and correct record of all coal
mined, removed and sold from the Premises and shall permit Lessor or its agents, at all reasonable times, to inspect the records, and perform
other practical and reasonable investigations to check the accuracy of the records of Lessee. Lessor, through its agents, may enter upon the
Premises at any time for the purpose of verifying the quantity of coal removed therefrom.
(d) Time, Place and Allocation of Payment of Production Royalty Payments. All Production Royalty Payments shall be paid by Lessee to
Lessor on or before the 25 th day of each calendar month on all coal mined and produced by Lessee from the Premises which was sold during
the preceding calendar month and for which Lessee has received payment. All Production Royalty Payments shall be paid by check or by wire
transfer if Lessor so instructs. Each payment of Production Royalty Payments hereunder shall be accompanied by a statement from Lessee
showing the number of tons of coal mined and sold during the preceding calendar month (showing separately coal produced by the strip,
surface, auger or open-pit method of mining and coal produced by any other method of mining), the weighted average of the Sales Price and
the computation of royalties payable on such coal so mined and sold during such calendar month. All payments due hereunder shall be mailed
to Lessor at the address listed in this Lease, or as otherwise directed by Lessor.
ARTICLE 4
DEFAULT
Section 4.1- Events of Default.
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(a) Defaults Under this Lease. Should Lessee fail to pay any installment of any royalty payment herein provided for when due, or should
Lessee fail to observe or perform any other covenant on its part to be observed or performed under the terms of this Lease, Lessor shall have
the right to give Lessee written notice specifying the particular default or defaults of which complaint is made and of its intention to declare a
forfeiture of this Lease by reason of such default or defaults unless the same are rectified. If the default is the failure to pay to Lessor an
installment of a royalty payment at the time provided for herein, Lessee shall have five (5) days from the date of receipt of such notice to
correct such default. If the default is the failure of Lessee to observe or perform some other covenant of this Lease other than to pay royalty
payments to Lessor, Lessee shall have thirty (30) days (if such default cannot be cured within thirty (30) days, Lessee shall have such
additional reasonable time to cure such default, provided Lessee diligently takes action to cure such default within such thirty (30) day period)
from the date of receipt of such notice to cure such default. In case of a dispute as to whether or not any such default exists, the time Lessee
may cure such default, as aforesaid, shall not commence to run until after the dispute is resolved by arbitration.
(b) Remedies Upon Default. If Lessee fails to remedy any such default or defaults within the time or times herein specified, then at the
option of Lessor, all of Lessee’s rights under this Lease shall terminate, except as otherwise provided in Section 4.1(e), and Lessor shall have
the right to re-enter and take possession of the Premises and the Surface Lands without obligation to assume any debt of Lessee; provided,
however, that the termination of this Lease in any manner or for any cause whatever shall not relieve Lessee of its obligation for any royalty
payment which may have accrued hereunder at the date of such termination; provided, further, that the remedy of termination in the event of
default by Lessee as above authorized shall not be deemed or interpreted as the exclusive remedy available to Lessor, and Lessor may require
and enforce performance by Lessee of each and every term and provision of this Lease incumbent upon the Lessee to be kept and performed,
utilizing any available remedy therefor.
(c) Arbitration. Any disagreement between Lessor and Lessee arising hereunder shall be submitted to binding arbitration in accordance
with the rules of the American Arbitration Association then in effect. A panel of three arbitrators, knowledgeable with the coal industry in the
western Kentucky area, shall be named, one to be selected by Lessee, one to be selected by Lessor, and one to be selected by the other two
arbitrators. If the two arbitrators appointed by Lessor and Lessee cannot agree on the selection of the third neutral arbitrator selection of such
arbitrator shall be made by the American Arbitration Association. The non-prevailing party shall be responsible for the reasonable expenses,
fees and costs (including, without limitation, reasonable attorney’s fees) incurred by both Lessor and Lessee in such arbitration. If royalty
payments are disputed, then those payments shall be placed by Lessee in an interest-bearing escrow account to be distributed in accordance
with the decision of the arbitrators. With regard to any monetary sum or quantum measurement such as coal tonnages or reserves, the figures
determined by each of the arbitrators shall be averaged and the determination which differs most from said average shall be excluded; the
remaining two determinations shall then be averaged and such average shall be final and conclusive.
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(d) Rights of Lessee Upon Termination of Lease. Upon the termination of this Lease for any cause or in any manner, and upon
completion of all reclamation as required by governing authorities and upon payment by Lessee to Lessor of all royalties due hereunder, Lessee
shall have the right and obligation within a period of twelve (12) months from the date of such termination to remove all buildings, structures,
machinery, equipment, tools, tracks, power lines and other property owned by Lessee from any portion of the Surface Lands then owned by
Lessor; provided, however, that if the propriety of such termination shall be a matter of disagreement or dispute between Lessor and Lessee,
then such twelve (12) months’ period shall not commence to run until, after the dispute is resolved. Provided, further, that if Lessee,
notwithstanding the exercise of reasonable diligence, is prevented by causes beyond the control, and without the fault or negligence, of Lessee
from removing said property of Lessee within such twelve (12) months’ period, Lessee shall have, in addition to said twelve (12) months, a
period of time equal to the period of time during which Lessee was so prevented from removing such property.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
Section 5.1- Due Authority of Lessor and Quiet Enjoyment. Lessor covenants and warrants that it has full power and authority to grant,
lease, and let the Premises and the license to the Surface Lands as hereinabove and hereinafter set forth. Lessor, for itself and its successors and
assigns, covenants that Lessee shall, against all and every person or persons lawfully claiming the whole or any part of the Premises or the
Surface Lands by, through, or under Lessor, have and quietly possess and enjoy the Premises and the Surface Lands throughout the term of this
Lease, so long as Lessee shall not be in default in the performance of any covenant of this Lease incumbent upon it to be kept and performed.
In the event of any such asserted claim which may affect or impair the quiet possession of any part of the Premises or the Surface Lands by
Lessee, notice in writing thereof shall be promptly delivered to Lessor, and Lessor shall be privileged to contest any such claim at its expense;
and in such event Lessee shall cooperate with Lessor to remedy the situation, with respect to the part of the Premises or the Surface Lands as to
which such claim has been asserted until such claim is settled, which Lessor agrees shall be done promptly if same can be done on a reasonable
basis. Lessor shall not enter into any agreement(s) with third parties that may interfere with the mining operation or create any obligation or
responsibility on Lessee’s part unless agreed to in writing by Lessee.
Section 5.2- Eminent Domain or Condemnation Proceedings . Lessor covenants that there are no eminent domain, zoning or condemnation
proceedings pending or threatened against or related to the Surface Lands or any portion thereof.
Section 5.3- Litigation . Lessor represents and warrants that there is no claim, legal action, suit, proceeding, arbitration, dispute,
governmental investigation or administrative proceeding, nor any order, decree, or judgment, pending or in effect, or, to Lessor’s knowledge,
threatened, against or affecting (i) the Premises and/or the Surface Lands, (ii) the ability of Lessor to execute this Lease, or (iii) the accuracy
and completeness of any representation and warranty of Lessor made herein.
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Section 5.4- Third Party Claims . Lessor represents and warrants that neither Lessor nor the Premises and/or the Surface Lands are bound by
any contract, agreement, lease, license or subject to any encumbrance of any kind or nature, to which Lessor or its predecessors were a party
thereto, and that would in any manner restrict, limit or affect Lessee’s ability to mine and operate the Premises and/or the Surface Lands as
Lessee would choose, free of any obligation to or claim of any person or organization associated with, arising out of or in connection with any
such contract, agreement, lease, license or encumbrance of Lessor or of any affiliate thereof, or of any predecessor in title in interest to the
Premises and/or the Surface Lands, including any agreement applicable to any of its employees.
ARTICLE 6
INDEMNIFICATION
Section 6.1- Indemnification of Lessor. Lessee shall, at its own cost and expense, pay all wages, workmen’s compensation claims, claims
for material, equipment and supplies contracted for by the Lessee in connection with the conduct of its operations hereunder, and shall
indemnify and hold, Lessor and its assigns harmless of, from and against, any and all claims damages, demands, expenses, fines, liabilities and
taxes (of any character or nature whatsoever, regardless of by whom imposed), and losses of every conceivable kind, character and nature
whatsoever (including, but not limited to, claims for losses or damages to any property or injury to or death of any person) asserted by or on
behalf of any person arising out of, resulting from or in any way connected with Lessee’s presence on or mining of the coal on the Premises or
the Surface Lands. Lessee also covenants and agrees, at its expense, to pay, and to indemnify and save Lessor and its assigns harmless of, from
and against, all costs, reasonable attorneys’ fees, expenses and liabilities incurred in any action or proceeding brought by reason of any such
claim or demand.
ARTICLE 7
TAXES
Section 7.1- Payment of Taxes. Lessee shall pay or cause to be paid the real estate taxes levied on the Premises and the Surface Lands and
shall pay all severance taxes or other taxes based upon production of coal mined from the Premises.
ARTICLE 8
RECLAMATION OF SURFACE LANDS
Section 8.1- Reclamation of Surface Lands by Lessee. Once mining commences on the Surface Lands, Lessee will reclaim the Surface
Lands in accordance with all existing applicable federal, state and local laws. In this connection, it will, among other things, fill in or cover all
cuts, pits and adits or establish water impoundments, restore the mined out areas to an acceptable contour, replant such areas and dispose of all
toxic and acid-bearing substances in accordance with all applicable laws and regulations in order to ensure that the Surface Lands will not
constitute an unreasonable hazard. Lessor shall have the right, but not the obligation, to inspect all land restoration and revegitation of the
Surface Lands and the disposal of toxic substances on the Surface Lands to see that
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Lessee has complied with all existing applicable federal, state and local laws before Lessee requests releases from any federal, state or county
bonding requirements in connection with the above. Lessee shall have no obligation to dispose of foreign or toxic substances of Lessor or
others without the written agreement of Lessee. Lessee shall have the right to make re-entry onto the Surface Lands with machinery and
equipment from time to time after the formal termination of the term hereof for the purpose of compliance with any federal, state or local
government requirements.
ARTICLE 9
GENERAL
Section 9.1- Remedies, Etc., Cumulative. Each right, power and remedy of Lessor or Lessee provided for in this Lease shall be cumulative
and concurrent and shall be in addition to every other right, power or remedy provided for in this Lease or now or hereafter existing at law or in
equity or by statute or otherwise, and the exercise or beginning of the exercise or the failure to exercise by Lessor or Lessee of any one or more
of the rights, powers or remedies provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise shall not
preclude the simultaneous or later exercise by Lessor or Lessee of any or all rights, powers or remedies.
Section 9.2- Notices. All notices and other communications with respect to this Lease shall be in writing and shall be deemed effectively
given when delivered personally or seventy-two (72) hours after mailing by certified mail, postage prepaid, to the following addresses of the
parties:
If to Lessor:
Ceralvo Holdings, LLC
7733 Forsyth Blvd., Suite 1625
St. Louis, MO 63105
Attn: J. Hord Armstrong, III
Facsimile: (314) 721-8211
If to Lessee:
Armstrong Coal Company, Inc.
7733 Forsyth Blvd., Suite 1625
St. Louis, MO 63105
Attn: J. Hord Armstrong, III
Facsimile: (314) 721-8211
Each party may change its address by giving written notice of such change to the other party.
Section 9.3- Binding Effect of Lease, Subleasing. This Lease shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided, however, that no assignment of this Lease or sublease of the Premises
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may be made by Lessee other than to an affiliate of Lessee, without the prior written consent of Lessor, which consent shall not be
unreasonably withheld, delayed or conditioned.
Section 9.4- Entire Agreement. This Lease constitutes the entire agreement between the parties hereto with respect to the subject matter
hereof, and no alteration, modification or interpretation hereof shall be binding upon the parties hereto unless in writing and signed by Lessor
and Lessee.
Section 9.5- Governing Law and Section Headings. This Lease shall be interpreted and construed in accordance with the laws of the
Commonwealth of Kentucky. The titles of the Articles and Sections in this Lease have been inserted as a matter of convenience of reference
only and shall not control or affect the meaning or construction of any of the terms and provisions hereof.
Section 9.6- Force Majeure. If because of Force Majeure either party hereto is unable to carry out any of its obligations under this Lease
(other than obligations of either party to pay money due), and if such party promptly gives to the other party hereto written notice of such Force
Majeure, then the obligations of the party giving such notice shall be suspended to the extent made necessary by such Force Majeure and
during its continuance, provided the effect of such Force Majeure is eliminated in so far as possible with all reasonable dispatch. The term
“Force Majeure” as used herein shall mean any unforeseeable causes beyond the control and without fault or negligence of the party affected
thereby, such as acts of God, acts of the public enemy, insurrections, riots, labor disputes, labor or material shortages, fires, explosions, floods,
breakdowns of or damage to plants, equipment or facilities, interruptions to transportation, river freeze-ups, embargoes, legislation causing loss
of markets, orders or acts of civil or military authority, or other like or unlike causes which wholly or partly prevent the mining, loading or
delivering of the coal by Lessee.
Section 9.7- Recording of Short Form. Lessor and Lessee agree to record a short form of this Lease in the Office of the Ohio County Clerk.
Section 9.8- Oil and Gas. In connection with the mining of any coal on properties where Lessor owns the coal rights and on which there
exist any abandoned and/or active oil and gas wells, if Lessor and Lessee mutually agree that it is economically beneficial to mine through any
such wells, then Lessor and Lessee agree that each will pay (i) one half of the costs of plugging any abandoned oil or gas wells, and (ii) one
half of the costs of plugging, re-drilling and restoring production (including piping relocation) in the case of any active oil and gas wells.
IN WITNESS WHEREOF , the parties hereto have each caused this Lease to be executed by one of its duly authorized officers as of the date
first above written.
CERALVO HOLDINGS, LLC
By: /s/ Martin D. Wilson
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Martin D. Wilson, Manager
ARMSTRONG COAL COMPANY, INC.
By: /s/ Martin D. Wilson
Martin D. Wilson, President
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Exhibit 10.60
MEMBERSHIP INTEREST PURCHASE AGREEMENT
This Membership Interest Purchase Agreement (the “Contract”), made as of this 29th day of December, 2011 (“Contract Date”) by and
between: WESTERN DIAMOND LLC , a Nevada limited liability company, and WESTERN LAND COMPANY, LLC , a Kentucky
limited liability company, (hereinafter “Sellers”) agree to sell, and ARMSTRONG RESOURCE PARTNERS, L.P. , a Delaware limited
partnership (“Buyer”), agrees to buy all of Seller’s right, title and membership interest in Armstrong Conveyance I, LLC (“AC”), a Delaware
limited liability company, representing 100% of the membership interests of AC (the “Membership Interests”), upon the terms and conditions
set forth herein.
1. Conveyance of Partial Undivided Interest in Property . Upon payment of $20,000,000 by Buyer to Sellers (the “Purchase Price”), Sellers
hereby jointly agree to indirectly convey to Buyer an undivided interest in the Property (as such term is hereafter defined) as described below.
Sellers shall convey to AC a partial undivided interest in that certain real property and coal reserves described in the Exhibit A attached hereto
and made a part hereof (the “Property”), subject to the exclusions and exceptions set forth thereon, equal to a fraction, the numerator of which
shall be equal to Twenty Million Dollars ($20,000,000), and the denominator of which is a dollar amount the Parties agree represents the
aggregate fair market value of the Property (the “Purchased Interest”).
2. Title . Sellers shall convey to AC title to the Property by Corporation Special Warranty Deed; subject, however, to those (if any)
rights-of-way, easements, leases, deed and plat restrictions, partitions, severances, encumbrances, licenses, reservations and exceptions which
are of record on this Contract Date, and to all rights of persons in possession and to physical conditions, encroachments and possessory rights
which would be evident from an inspection of the Property. Sellers shall have no obligation to furnish Buyer any evidence of its title to the
Property. Buyer agrees that they will have their attorney conduct whatever examination of title to the Property or purchase title insurance as
Buyer deems necessary. The cost of such title insurance or attorney’s opinion shall be at Buyer’s expense.
3. Closing . This Contract shall be fulfilled, the sale closed and possession of the property given, on or before ninety (90) days after Buyer
and/or its parent companies or affiliates has delivered the Purchase Price to Sellers (the “Closing” or “Closing Date”), or at such date as the
Parties shall mutually agree. The Closing shall not occur unless and until the representations and warranties of the Parties are hue and correct in
all material respects as of the Closing Date.
The Closing shall be implemented as follows: (a) the Sellers will convey the Purchased Interest to AC and (b) the Sellers will assign the
Membership Interest directly to Elk Creek Operating LP (it being acknowledged and agreed that such direct assignment to Elk Creek
Operating, LP is merely for convenience and shall be treated as (i) an assignment of the Membership Interest by the Armstrong Entities to Elk
Creek, (ii) a deemed contribution of the Membership Interest by Elk Creek, 99.99% to Elk Creek Operating, LP, and 0.01% to Elk Creek
Operating GP, LLC and (iii) a deemed contribution of 0.01% of the Membership Interest by Elk Creek Operating GP, LLC to Elk Creek
Operating, LP). The assignment and deemed
contribution described in subsection (b) above shall be deemed to occur immediately following the effectiveness of the conveyances described
in subsection (a) above.
Upon closing this Contract each party shall have been deemed to have waived any and all defects of performance hereunder by the other
patty, other than the payment of good funds, but including defects of title.
4. Representations of the Sellers . Each of the Sellers represents and warrants to Buyer as to itself, as of the date hereof and the Closing
Date, as follows:
(a) The entity is an entity duly organized or formed, validly existing and in good standing under the laws of the jurisdiction of its
incorporation or organization.
(b) The entity has all power and authority to enter into the Agreement and any ancillary documents contemplated herein, and the
Agreement and the transactions contemplated herein have been approved by all requisite action by its directors, members or
managers, as applicable.
(c) The Agreement constitutes a legal, valid and binding obligation of the entity, enforceable against the entity in accordance with its
terms.
(d) Neither the execution, the delivery or performance of the Agreement conflicts with any applicable law, any organizational document,
or any agreement, judgment, license, order or permit applicable to or binding upon the entity or any of its properties, except for any
consents required to be obtained by the Sellers.
(e) No consent, approval, order, or authorization of, or declaration, filing, or registration with, any governmental entity is required to be
obtained or made by the entity in connection with the execution, delivery, or performance by the entity of the Agreement and, the
consummation by it of the transactions contemplated hereby.
(f) The Membership Interest constitutes 100% of the authorized and outstanding membership interests of AC. There are no outstanding
options, warrants, rights, agreements, contracts, calls, commitments, written demands of any character or requirements of any
applicable laws which might obligate AC to issue any membership interests of AC. There are no pre-emptive rights (statutory or
otherwise) with respect to any of the outstanding membership interests of AC. There are no contracts or agreements with respect to
the voting or transfer of the Membership Interest. AC is not obligated to redeem or otherwise acquire any of its outstanding
Membership Interest. All dividends and other distributions declared prior to the date hereof with respect to the issued and outstanding
membership interests of AC have been paid or distributed.
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(g) Each of the Sellers has good and valid title to the Membership Interest owned by it, free and clear of all liens, claims or
encumbrances. At the Closing, each of Sellers will transfer to Buyer good and valid title to the Membership Interest free and clear of
all liens, claims or encumbrances.
5. Representations of Buyer . Buyer hereby represents to the Sellers as follows:
(a) Buyer is a limited partnership duly formed, validly existing and in good standing under the laws of the State of Delaware.
(b) Buyer has all power and authority to enter into the Agreement and any ancillary documents contemplated herein, and the Agreement
and the transactions contemplated herein have been approved by all requisite action by its general partner.
(c) The Agreement constitutes a legal, valid and binding obligation of Buyer, enforceable against the entity in accordance with its terms.
(d) Neither the execution, the delivery or performance of the Agreement conflicts with any applicable law, any organizational document,
or any agreement, judgment, license, order or permit applicable to or binding upon Buyer or any of its properties.
(e) No consent, approval, order, or authorization of, or declaration, filing, or registration with, any governmental entity is required to be
obtained or made by Buyer in connection with the execution, delivery, or performance by Buyer of the Agreement and, the
consummation by it of the transactions contemplated hereby.
6. Closing Costs . Sellers and Buyer shall pay prorata the real estate taxes on the Property due and payable for the tax year in which the
Closing occurs. Buyer shall pay all subsequent installments of real estate taxes, any special assessments, title examination expenses of Buyer’s
counsel, any surveying expenses and deed recording fees.
7. Risk of Loss or Damage . Sellers will, at Sellers’ expense, maintain such policies of insurance on the Property and improvements thereon
as are currently in force until the Closing Date. The risk of loss or damage to the Property or to any or all improvements thereon between the
Contract Date and Closing Date shall be on Sellers. The occurrence of any loss or damage, whether substantial or insubstantial, shall not avoid,
terminate, or impair this Contract, nor entitle Buyer to any reduction in the Price.
8. Condition of Property .
(a) The Property is sold “as is.” Sellers make no warranty that the above- referenced land is either safe or suitable for the purposes for
which it is intended to be used,
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or for any other purpose or use. The land may be unsuitable for reasons including but not limited to rough, unnatural and unstable
surfaces, inadequate subjacent or lateral support, circumstances relating to the environmental quality of the land, or other conditions
arising out of the prior use of the land.
(b) Sellers agree to permit Buyer, its employees, servants, representatives or contractors to enter upon the Property at a reasonable time
and in a reasonable manner for the purpose of performing such tests, borings, surveys, studies, sampling, inspections as the Buyer
deems necessary; provided, however, such acts do not unreasonably interfere with the Sellers’ current use of the land or ongoing
operations on the property.
(c) Buyer agrees to defend, indemnify and hold Sellers harmless from and against all claims, liabilities, law suits, losses, damages, and
expenses, including attorney’s fees, arising either directly or indirectly, out of actions, or omissions, taken by Buyer, their employees,
servants, representatives or contractors, pursuant to this agreement. The provisions of this paragraph shall survive the expiration,
termination or cancellation of the agreement and shall apply to any action taken by any government agency after the Closing Date.
9. Ancillary Provisions of this Contract . This Contract and the attached Exhibit A constitute the entire agreement between the Parties,
supersede all representations, notices, advertisements, bids, agreements, memoranda and correspondence between, by or for the Parties relating
to the Property, and shall be construed in accordance with the laws of the Commonwealth of Kentucky. No amendment or modification of this
Contract shall be binding unless made in writing. Waiver by either party or performance by the other party of any of the provisions of this
Contract shall not be construed as a waiver of any further right to insist upon full performance of the terms of this Contract. No adjustment in
the Purchase Price shall later be made for any variances in acreage from that set forth in the deeds described on Exhibit A; and the Purchase
Price shall be construed as a lump sum amount paid for the Property as described in Exhibit A. Each patty shall be entitled to insist strictly
upon the timeliness of performance by the other Patty of the other Party’s obligations.
Each Party hereby indemnifies and holds harmless the other Party from all claims for commissions, fees, expenses and liability of any
broker, agent or finder, or person claiming to such, by or through such indemnifying Party.
Neither Patty shall record this Contract. Neither Party shall assign this Contract, or any of rights hereunder, without the prior written consent
of the other Patty, except to their affiliates, subsidiaries or parent companies. Any such assignment or attempted or purported assignment shall
be void as to the other Party and, moreover, shall constitute a material breach of this Contract.
If Sellers breach this Contract, Buyer’s remedy shall be limited to enforcing specifically this Contract. If Buyer breaches this Contract,
Sellers may recover Seller’s damages.
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If the parties do not execute this Contract contemporaneously, then the party first executing and delivering this Contract to the other shall be
deemed to have made an offer to enter into this Contract which shall be irrevocable for a period of ninety (90) days following the date of such
execution. This offer may be accepted by the other party by executing this Contract and delivering an executed copy to the first patty.
IN WITNESS WHEREOF, the Parties have executed this Contract as of the date first above written, by their own hand and deed, and/or by
their duly authorized representatives, each of which represents, by signing this Contract, personally represents and guarantees his authority to
sign for the party indicated.
WESTERN DIAMOND LLC ARMSTRONG RESOURCE PARTNERS, L.P.
By: Elk Creek GP, LLC, its general partner
By: Martin D. Wilson, Manager
By: Martin D. Wilson, President
WESTERN LAND COMPANY, LLC
By: Martin D. Wilson, Manager
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EXHIBIT A
The Property shall mean all of the coal reserves and real property described in, and conveyed, demised or otherwise granted in or under the
following deeds and instruments, to Western Land Company, LLC and/or Western Diamond LLC, subject to all rights-of-way, easements,
leases, deed and plat restrictions, partitions, severances, encumbrances, licenses, reservations, conveyances and exceptions of record, and to all
rights of persons in possession, and to physical conditions, encroachments and possessory rights which would be evident from an inspection of
the property at such time, and further excluding any portion of the mineral reserves, mining rights, surface property or other real property
associated with Armstrong’s Parkway Mine.:
(i) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC and Beaver Dam Coal Company to
Western Diamond LLC, dated September 19, 2006, of record in Deed Book 363, page 369, in the Office of the Ohio County Clerk;
(ii) The Partial Assignment of Coal Mining Lease from Central States Coal Reserves of Kentucky, LLC to Western Diamond LLC dated
September 19,2006, of record in Deed Book 363, page 428, in the Office of the Ohio County Clerk;
(iii) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC and Beaver Dam Coal Company to
Western Diamond LLC, dated September 19, 2006, of record in Deed Book 363, page 414, in the Office of the Ohio County Clerk;
(iv) The Corporation Special Warranty Deed from Beaver Dam Coal Company to Western Diamond LLC, dated September 19,2006, of
record in Deed Book 363, page 393, in the Office of the Ohio County Clerk;
(v) The Corporation Special Warranty Deed from Beaver Dam Coal Company to Western Diamond LLC, dated September 19,2006, of
record in Deed Book 363, page 403, in the Office of the Ohio County Clerk;
(vi) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC to Western Diamond LLC, dated
May 31, 2007, of record in Deed Book 528, page 284, in the Office of the Muhlenberg County Clerk, and the Deed of Confirmation between
Central States Coal Reserves of Kentucky, LLC, Western Diamond LLC and Armstrong Coal Reserves, Inc., dated September 30, 2007, of
record in Deed Book 531, page 205, in the Office of the Muhlenberg County Clerk;
(vii) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC and Beaver Dam Coal Company to
Western Diamond LLC, dated May 31, 2007, of record in Deed Book 368, page 17, in the Office of the Ohio County Clerk, and the Deed of
Correction between Central States Coal Reserves of Kentucky, LLC, Beaver Dam Coal Company, LLC and Western Diamond LLC, of record
in Deed Book 369, page 759, in the Office of the Ohio County Clerk;
(viii) The Partial Assignment and Assumption of Mineral Leasehold Estate from Central States Coal Reserves of Kentucky, LLC to Western
Diamond LLC, dated May 31, 2007, of record in Deed Book 528, page 320, in the Office of the Muhlenberg County Clerk;
(ix) The Partial Assignment and Assumption of Mineral Leasehold Estate from Central States Coal Reserves of Kentucky, LLC to Western
Diamond LLC, dated May 31, 2007, of record in Deed Book 528, page 330, in the Office of the Muhlenberg County Clerk.
(x) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC to Western Land Company, LLC, dated
December 12,2006, of record in Deed Book 524, page 505, in the Office of the Muhlenberg County Clerk;
(xi) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC and Beaver Dam Coal Company to
Western Land Company, LLC, dated December 12, 2006, of record in Deed Book 365, page 36, in the Office of the Ohio County Clerk;
(xii) The Partial Assignment and Assumption of Mineral Leasehold Estate from Central States Coal Reserves of Kentucky, LLC to Western
Land Company, LLC, dated November 20, 2006, of record in Deed Book 524, page 523, in the Office of the Muhlenberg County Clerk, as
amended and restated in Deed Book 527, page 186, in the Office of the Muhlenberg County Clerk;
(xiii) The Partial Assignment and Assumption of Surface and Mineral Leasehold Estate from Central States Coal Reserves of Kentucky,
LLC to Western Land Company, LLC, dated November 20,2006, of record in Deed Book 365, page 57, in the Office of the Muhlenberg
County Clerk;
(xiv) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC, Beaver Dam Coal Company, Ohio
County Coal Company, LLC and Grand Eagle Mining, Inc. to Western Land Company, LLC, dated March 30, 2007, of record in Deed Book
367, page 1, in the Office of the Ohio County Clerk;
(xv) The Corporation Special Warranty Deed from Central States Coal Reserves of Kentucky, LLC to Western Land Company, LLC, dated
March 30, 2007, of record in Deed Book 527, page 118, in the Office of the Muhlenberg County Clerk, as corrected by Deed of Correction
dated September 30, 2007, of record in Deed Book 531, page 213, in the Office of the Muhlenberg County Clerk; and
(xvi) The Partial Assignment and Assumption of Surface and Mineral Leasehold Estate from Central States Coal Reserves of Kentucky,
LLC to Western Land Company, LLC, dated March 30, 2007, of record in Deed Book 527, page 161, in the Office of the Muhlenberg County
Clerk.
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
We consent to the reference to our firm under the caption “Independent Registered Public Accounting Firms” and to the use of our report dated
May 9, 2011 (except Notes 17 and 20, as to which the date is October 7, 2011 and Note 3, as to which the date is February 10, 2012) in the
Registration Statement (Form S-1 No. 333-177259) and related prospectus of Armstrong Energy, Inc. and Subsidiaries (formerly Armstrong
Land Company, LLC and Subsidiaries) for the registration of shares of its common stock.
/s/ Ernst & Young LLP
St. Louis, Missouri
February 10, 2012
Exhibit 23.3
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated July 30, 2010 (October 7, 2011 as to Note 17 and the “Reorganization” paragraph in Note 20) with respect to
the financial statements and schedules of Armstrong Energy, Inc. and Subsidiaries (formerly Armstrong Land Company, LLC and Subsidiaries)
contained in the Registration Statement and Prospectus. We consent to the use of the aforementioned report in the Registration Statement and
Prospectus, and to the use of our name as it appears under the caption “Independent Registered Public Accounting Firms.”
/s/ Grant Thornton LLP
St. Louis, Missouri
February 10, 2012