James River Coal CO - FORM 10-Q

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - James River Coal CO	Financial_Report.xls
EX-95 - MINE SAFETY AND HEALTH DATA - James River Coal CO	jrcc_10q-ex95.htm
EX-10.1 - EQUITY INCENTIVE PLAN - James River Coal CO	jrcc_10q-ex1001.htm
EX-31.1 - CERTIFICATION - James River Coal CO	jrcc_10q-ex3101.htm
EX-32.1 - CERTIFICATION - James River Coal CO	jrcc_10q-ex3201.htm
EX-32.2 - CERTIFICATION - James River Coal CO	jrcc_10q-ex3202.htm
EX-31.2 - CERTIFICATION - James River Coal CO	jrcc_10q-ex3102.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2012

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

For the transition period from __________________ to __________________

Commission File Number 000-51129

JAMES RIVER COAL COMPANY

(Exact name of registrant as specified in its charter)

Virginia		54-1602012
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

901 E. Byrd Street, Suite 1600 Richmond, Virginia		23219
(Address of principal executive offices)		(Zip Code)

(804) 780-3000

(Registrant’s telephone number, including area code)

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

Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ý No o

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.

Large accelerated filer o	Accelerated filer ý
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

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

Yes o No ý

The number of shares of the registrant’s Common Stock, par value $.01 per share, outstanding as of July 20, 2012 was 35,888,611.

FORWARD-LOOKING INFORMATION

From time to time, we make certain comments and disclosures in reports and statements, including this report, or statements made by our officers, which may be forward-looking in nature. These statements are known as “forward-looking statements,” as that term is used in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Examples include statements related to our future outlook, anticipated capital expenditures, projected cash flows and borrowings and sources of funding. We caution readers that forward-looking statements, including disclosures that use words such as “anticipate,” “believe,” “estimate,” “expect,” “goal,” “intend,” “may,” “should,” “could,” “objective,” “plan,” “predict,” “project,” “target,” “will,” or their negatives and similar words or statements, are subject to certain risks, trends and uncertainties that could cause actual cash flows, results of operations, financial condition, cost reductions, acquisitions, dispositions, financing transactions, operations, expansion, consolidation and other events to differ materially from the expectations expressed or implied in such forward-looking statements. We have based any forward-looking statements we have made on our current expectations and assumptions about future events and circumstances that are subject to risks, uncertainties and contingencies that could cause results to differ materially from those discussed in the forward-looking statements, including, but not limited to:

our cash flows, results of operation or financial condition;

the consummation of acquisition, disposition or financing transactions and the effect thereof on our business;

our ability to successfully integrate International Resource Partners LP and its related entities;

governmental policies, regulatory actions and court decisions affecting the coal industry or our customers’ coal usage;

legal and administrative proceedings, settlements, investigations and claims;

our ability to obtain and renew permits necessary for our existing and planned operation in a timely manner;

environmental concerns related to coal mining and combustion and the cost and perceived benefits of alternative sources of energy;

inherent risks of coal mining beyond our control, including weather and geologic conditions or catastrophic weather-related damage;

our production capabilities;

availability of transportation;

our ability to timely obtain necessary supplies and equipment;

market demand for coal, electricity and steel;

competition including competition from alternative energy sources;

our relationships with, and other conditions affecting, our customers;

employee workforce factors;

our assumptions concerning economically recoverable coal reserve estimates;

future economic or capital market conditions; and

our plans and objectives for future operations and expansion or consolidation.

We are including this cautionary statement in this document to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf, of us. Any forward-looking statements should be considered in context with the various disclosures made by us about our businesses, including without limitation the risk factors more specifically described below in Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q.

Forward-looking statements speak only as of the date they are made. We disclaim any intent or obligation to update these forward-looking statements unless required by securities law, and we caution the reader not to rely on them unduly.

FORM 10-Q INDEX

Page


PART I	FINANCIAL INFORMATION	3

Item 1.	Financial Statements.	3

	Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011	3

	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and 2011	5

	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2012 and the year ended December 31, 2011	6

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	16

Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	28

Item 4.	Controls and Procedures.	29

PART II	OTHER INFORMATION	29

Item 1.	Legal Proceedings.	29

Item 1A.	Risk Factors.	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	44

Item 3.	Defaults Upon Senior Securities.	44

Item 4.	Mine Safety Disclosures.	44

Item 5.	Other Information.	44

Item 6.	Exhibits.	45

	SIGNATURES	46

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

JAMES RIVER COAL COMPANY

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands)

	June 30, 2012			December 31, 2011
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	164,835			199,711
Trade receivables		99,870			107,557
Inventories:
Coal		59,224			52,717
Materials and supplies		18,377			17,800
Total inventories		77,601			70,517
Prepaid royalties		8,809			8,465
Other current assets		9,387			11,461
Total current assets		360,502			397,711
Property, plant, and equipment, net		889,978			909,294
Goodwill		26,492			26,492
Restricted cash and short term investments (note 1)		29,579			29,510
Other assets		35,790			41,575
Total assets	$	1,342,341			1,404,582
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	77,533			110,557
Accrued salaries, wages, and employee benefits		13,859			12,996
Workers' compensation benefits		9,200			9,200
Black lung benefits		2,512			2,512
Accrued taxes		5,680			7,563
Other current liabilities		23,308			27,861
Total current liabilities		132,092			170,689
Long-term debt, less current maturities		589,519			582,193
Other liabilities:
Noncurrent portion of workers' compensation benefits		63,100			60,721
Noncurrent portion of black lung benefits		57,894			56,152
Pension obligations		27,146			29,121
Asset retirement obligations		99,211			94,654
Other		13,287			14,390
Total other liabilities		260,638			255,038
Total liabilities		982,249			1,007,920
Commitments and contingencies (note 5)
Shareholders' equity:
Preferred stock, $1.00 par value. Authorized 10,000,000 shares		–			–
Common stock, $.01 par value. Authorized 100,000,000 shares; issued and outstanding 35,888,611 and 35,671,953 shares as of June 30, 2012 and December 31, 2011		359			357
Paid-in-capital		543,769			541,362
Accumulated deficit		(139,104	)		(97,682	)
Accumulated other comprehensive loss		(44,932	)		(47,375	)
Total shareholders' equity		360,092			396,662
Total liabilities and shareholders' equity	$	1,342,341			1,404,582

See accompanying notes to consolidated financial statements.

JAMES RIVER COAL COMPANY

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

	Three Months Ended						Six Months Ended
	June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011
Revenues
Coal sales revenue	$	259,628			328,182			539,391			492,037
Freight and handling revenue		17,730			23,855			39,952			24,582
Total revenue		277,358			352,037			579,343			516,619
Cost of sales:
Cost of coal sold		224,314			264,108			461,203			396,927
Freight and handling costs		17,730			23,855			39,952			24,582
Depreciation, depletion and amortization		32,514			28,210			62,634			44,245
Total cost of sales		274,558			316,173			563,789			465,754
Gross profit		2,800			35,864			15,554			50,865
Selling, general and administrative expenses		15,266			14,811			30,832			24,181
Acquisition costs		–			3,859			–			8,504
Total operating income (loss)		(12,466	)		17,194			(15,278	)		18,180
Interest expense		13,527			15,607			26,912			23,458
Interest income		(171	)		(128	)		(385	)		(183	)
Charges associated with repayment of debt		–			740			–			740
Miscellaneous income, net		(90	)		(181	)		(433	)		(302	)
Total other expense, net		13,266			16,038			26,094			23,713
Net income (loss) before income taxes		(25,732	)		1,156			(41,372	)		(5,533	)
Income tax expense		31			367			50			1,282
Net income (loss)	$	(25,763	)		789			(41,422	)		(6,815	)
Earnings (loss) per common share (note 6)
Basic earnings (loss) per common share	$	(0.74	)		0.02			(1.19	)		(0.22	)
Diluted earnings (loss) per common share	$	(0.74	)		0.02			(1.19	)		(0.22	)

See accompanying notes to condensed consolidated financial statements.

JAMES RIVER COAL COMPANY

AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands, except per share data)

(unaudited)

	Three Months Ended						Six Months Ended
	June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011

Net income (loss)	$	(25,763	)		789			(41,422	)		(6,815	)
Other comprehensive income
Amortization of pension actuarial amount		835			198			1,671			395
Amortization of black lung actuarial amount		386			142			772			284
Tax impact of adjustments to accumulated other comprehensive income		–			(232	)		–			(356	)
Other comprehensive income		1,221			108			2,443			323
Comprehensive income (loss)	$	(24,542	)		897			(38,979	)		(6,492	)

See accompanying notes to condensed consolidated financial statements.

JAMES RIVER COAL COMPANY

AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(in thousands)

(unaudited)

	Common stock shares			Common stock par value			Paid-in -capital			Retained earnings (accumulated deficit)			Accumulated other comprehensive income (loss)			Total
Balances, December 31, 2010		27,779		$	278			324,705			(58,593	)		(19,007	)		247,383
Net loss		–			–			–			(39,089	)		–			(39,089	)
Other comprehensive loss		–			–			–			–			(28,368	)		(28,368	)
Issuance of common stock, net of offering costs of $9,171		7,648			76			170,469			–			–			170,545
Equity component of convertible debt offering, net of offering costs of $2,117 and deferred taxes of $24,427		–			–			42,174			–			–			42,174
Issuance of restricted stock awards, net of forfeitures		307			3			(3	)		–			–			–
Repurchase of shares for tax withholding		(62	)		–			(1,266	)		–			–			(1,266	)
Stock based compensation		–			–			5,283			–			–			5,283
Balances, December 31, 2011		35,672			357			541,362			(97,682	)		(47,375	)		396,662
Net loss		–			–			–			(41,422	)		–			(41,422	)
Other comprehensive income		–			–			–			–			2,443			2,443
Issuance of restricted stock awards, net of forfeitures		309			3			(3	)		–			–			–
Repurchase of shares for tax withholding		(92	)		(1	)		(286	)		–			–			(287	)
Stock based compensation		–			–			2,696			–			–			2,696
Balances, June 30, 2012		35,889		$	359			543,769			(139,104	)		(44,932	)		360,092

See accompanying notes to consolidated financial statements

JAMES RIVER COAL COMPANY

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Six Months			Six Months
	Ended			Ended
	June 30,			June 30,
	2012			2011
Cash flows from operating activities:
Net loss	$	(41,422	)		(6,815	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation, depletion, and amortization		62,634			44,245
Accretion of asset retirement obligations		2,617			1,975
Amortization of debt discount and issue costs		8,667			6,383
Stock-based compensation		2,696			2,648
Deferred income tax benefit		–			2,236
Gain on sale or disposal of property, plant and equipment		(122	)		–
Write-off of deferred financing costs		–			740
Changes in operating assets and liabilities:
Receivables		7,687			38,568
Inventories		(3,724	)		(10,156	)
Prepaid royalties and other current assets		1,730			(878	)
Restricted cash		(69	)		(6,010	)
Other assets		4,417			(4,991	)
Accounts payable		(33,024	)		12,512
Accrued salaries, wages, and employee benefits		863			1,369
Accrued taxes		(2,170	)		(21	)
Other current liabilities		(4,691	)		4,339
Workers' compensation benefits		2,379			1,937
Black lung benefits		2,514			1,881
Pension obligations		(304	)		(971	)
Asset retirement obligations		(96	)		(2,123	)
Other liabilities		(157	)		(70	)
Net cash provided by operating activities		10,425			86,798
Cash flows from investing activities:
Additions to property, plant, and equipment		(45,881	)		(58,306	)
Payment for acquisition, net of cash acquired		–			(515,962	)
Proceeds from sale of property, plant and equipment		580			–
Net cash used in investing activities		(45,301	)		(574,268	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		–			505,000
Repayment of long-term debt		–			(150,000	)
Net proceeds from issuance of common stock		–			170,545
Debt issuance costs		–			(13,768	)
Net cash provided by financing activities		–			511,777
Increase (decrease) in cash		(34,876	)		24,307
Cash and cash equivalents at beginning of period		199,711			180,376
Cash and cash equivalents at end of period	$	164,835			204,683

See accompanying notes to condensed consolidated financial statements.

JAMES RIVER COAL COMPANY

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(1)

Summary of Significant Accounting Policies and Other Information

Description of Business and Principles of Consolidation

James River Coal Company and its wholly owned subsidiaries (collectively, the Company) mine, process and sell thermal and metallurgical coal through eight active mining complexes located throughout eastern Kentucky, southern West Virginia and southern Indiana. Substantially all coal sales and account receivables relate to the utility industry, steel industry and industrial markets.

The interim condensed consolidated financial statements of the Company presented in this report are unaudited. All significant intercompany balances and transactions have been eliminated in consolidation. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2011. The balances presented as of or for the year ended December 31, 2011 are derived from the Company’s audited consolidated financial statements.

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in order to prepare these consolidated financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP). Significant estimates made by management include the allocation of the purchase price in an acquisition to acquired assets and liabilities, allowance for non-recoupable prepaid royalties, the valuation allowance for deferred tax assets, asset retirement obligations and amounts accrued related to the Company’s workers’ compensation, black lung, pension and health claim obligations. Actual results could differ from these estimates. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring accruals, which are necessary to present fairly the consolidated financial position of the Company and the consolidated results of its operations and cash flows for all periods presented.

Cash and Cash Equivalents and Restricted Cash and Short Term Investments

Cash and cash equivalents are stated at cost. Cash equivalents consist of highly-liquid investments with an original maturity of three months or less when purchased.

Restricted cash is stated at cost. Restricted cash and short term investments consists of cash, cash equivalents and investments in bonds and certificate of deposits. The Company intends to hold all investments held as restricted cash until maturity. The restricted cash and short term investments are maintained in collateral accounts which provide the Company additional capacity under the Revolver to support its outstanding letters of credit (note 3) and to support the issuance of surety bonds.

Property, Plant, and Equipment, net

Property, plant and equipment are as follows (in thousands):

	June 30,		December 31,
	2012		2011
Property, plant, and equipment, at cost:
Land	$	10,107		9,930
Mineral rights		618,717		618,605
Buildings, machinery and equipment		681,008		635,055
Mine development costs		56,522		56,555
Total property, plant, and equipment		1,366,354		1,320,145
Less accumulated depreciation, depletion, and amortization		476,376		410,851
Property, plant and equipment, net	$	889,978		909,294

Other Current Liabilities

Other current liabilities are as follows (in thousands):

	June 30,		December 31,
	2012		2011
Accrued interest	$	8,545		8,396
Current portion of asset retirement obligation		7,000		6,862
Accrued royalties		6,533		10,655
Other		1,230		1,948
	$	23,308		27,861

Recent Accounting Pronouncements

In the first quarter of 2012, the Company adopted new accounting guidance that eliminates the option to report other comprehensive income and its components in the consolidated statement of changes in shareholders’ equity and comprehensive income. The Company now presents the total of comprehensive income, the components of net income and the components of other comprehensive income in two separate but consecutive statements. The adoption of this new financial presentation guidance concerns presentation only and has been retrospectively applied to all prior periods presented.

(2)

International Resource Partners Acquisition

On April 18, 2011, the Company completed the acquisition of a 100 percent interest in International Resource Partners LP and its subsidiary companies (collectively IRP) for $516.0 million in an all-cash transaction (the IRP Acquisition). The base purchase price of $475.0 million was increased by the cash acquired and any working capital (as defined in the agreement) that exceeded $18.5 million. IRP did not have any debt at the time of the closing of the IRP Acquisition. The purchase price allocation was finalized in 2011. The IRP Acquisition was treated as a purchase of assets for tax purposes.

Prior to the acquisition, IRP was a privately held fully integrated coal company focused on producing and marketing high quality metallurgical and steam coal in Central Appalachia. IRP produced and sold various grades of metallurgical and steam coal from underground and surface mining operations in southern West Virginia and eastern Kentucky. IRP’s customer base consisted of domestic steel and coke producers, international steel producers and domestic electric utilities. At the acquisition date, IRP operated nine mines, including five underground mines and four surface mines.

As of the date of the IRP Acquisition, IRP controlled approximately 136 million tons of coal reserves and resources, consisting of approximately 61 million tons of metallurgical coal and an estimated 75 million tons of steam coal. The coal reserves and resources acquired from IRP include 85.5 million of proven and probable reserves. IRP leases a substantial portion of its coal reserves and resources from various third-party landowners.

The following unaudited pro forma information has been prepared for illustrative purposes only. The pro forma information assumes the IRP Acquisition and the financing transactions that were completed to affect the IRP Acquisition occurred on January 1, 2010. The financing transactions include the issuance of the 2019 Senior Notes, the redemption of the 2012 Senior Notes, the issuance of the 2018 Convertible Notes and the amendments to the Revolving Credit Agreement (all as described in note 3), as well as the issuance of 7.6 million shares of common stock. The unaudited pro forma results have been prepared based on estimates and assumptions that we believe are reasonable; however, they are not necessarily indicative of the consolidated results of operations had the IRP Acquisition and the related financing transaction occurred at the beginning of each of the periods presented or of future results of operations.

	Three months ended June 30, 2011		Six months ended June 30, 2011
	(in thousands)
Total revenues
As reported		352,037		516,619
Pro forma		406,681		740,799

Net income (loss)
As reported		789		(6,815	)
Pro forma		9,155		13,411

The amount of revenues and earnings attributable to IRP in the statements of operations for the three and six months ended June 30, 2011 and 2012 are not readily determinable, due to the consolidation of IRP’s operations into the Company’s existing operations, fulfillment of historical sales contracts between operations and various intercompany transactions.

(3)

Long Term Debt and Interest Expense

Long-term debt is as follows (in thousands):

	June 30, 2012		December 31, 2011
2019 Senior Notes	$	275,000	$	275,000
2018 Convertible Senior Notes, net of discount		170,722		166,821
2015 Convertible Senior Notes, net of discount		143,797		140,372
Revolver		–		–
Total long-term debt	$	589,519	$	582,193

2019 Senior Notes

In 2011, the Company issued $275.0 million of senior notes due on April 1, 2019 (the 2019 Senior Notes). The 2019 Senior Notes are unsecured and accrue interest at 7.875% per annum. Interest payments on the 2019 Senior Notes are required semi-annually. The Company may redeem the 2019 Senior Notes, in whole or in part, at any time on or after April 1, 2015 at redemption prices ranging from 103.938% beginning April 1, 2015 to 100% beginning on April 1, 2017. In addition, at any time prior to April 1, 2014, the Company may redeem up to 35% of the principal amount of the 2019 Senior Notes with the net cash proceeds of a public equity offering at a redemption price of 107.875%, plus accrued and unpaid interest to the redemption date.

The 2019 Senior Notes limit the Company’s ability, among other things, to pay cash dividends. In addition, if a change of control occurs (as defined in the Indenture), each holder of the 2019 Senior Notes will have the right to require the Company to repurchase all or a part of the 2019 Senior Notes at a price equal to 101% of their principal amount, plus any accrued interest to the date of repurchase.

2015 Convertible Senior Notes

In 2009, the Company issued $172.5 million of 4.5% convertible senior notes due on December 1, 2015 (the 2015 Convertible Senior Notes). The 2015 Convertible Senior Notes are shown net of a $28.7 million and a $32.1 million discount as of June 30, 2012 and December 31, 2011, respectively. The discount on the 2015 Convertible Senior Notes relates to the $44.8 million of the proceeds that were allocated to the equity component of the 2015 Convertible Senior Notes at issuance, resulting in an effective interest rate of 10.2%. The 2015 Convertible Senior Notes are unsecured and are convertible under certain circumstances and during certain periods at an initial conversion rate of 38.7913 shares of the Company’s common stock per $1,000 principal amount of the 2015 Convertible Senior Notes, representing an initial conversion price of approximately $25.78 per share of the Company’s stock. Interest on the 2015 Convertible Senior Notes is paid semi-annually.

None of the 2015 Convertible Senior Notes are currently eligible for conversion. The 2015 Convertible Senior Notes are convertible at the option of the holders (with the length of time the 2015 Convertible Senior Notes are convertible being dependent upon the conversion trigger) upon the occurrence of any of the following events:

At any time from September 1, 2015 until December 1, 2015;

If the closing sale price of the Company’s common stock for each of 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the conversion price of the 2015 Convertible Senior Notes in effect on the last trading day of the immediately preceding calendar quarter;

If the trading price of the 2015 Convertible Senior Notes for each trading day during any five consecutive business day period, as determined following a request of a holder of Notes, was equal to or less than 97% of the “Conversion Value” of the 2015 Convertible Senior Notes on such trading day; or

If the Company elects to make certain distributions to the holders of its common stock or engage in certain corporate transactions.

2018 Convertible Senior Notes

In 2011, the Company issued $230.0 million of 3.125% convertible senior notes due on March 15, 2018 (the 2018 Convertible Senior Notes). The 2018 Convertible Senior Notes are shown net of a $59.3 million and a $63.2 million discount as of June 30, 2012 and December 31, 2011, respectively. The discount on the 2018 Convertible Senior Notes relates to the $68.7 million of the proceeds that were allocated to the equity component of the 2018 Convertible Senior Notes at issuance, resulting in an effective interest rate of 8.9%. The 2018 Convertible Senior Notes are unsecured and are convertible under certain circumstances and during certain periods at an initial conversion rate of 32.7332 shares of the Company’s common stock per $1,000 principal amount of 2018 Convertible Senior Notes, representing an initial conversion price of approximately $30.55 per share of the Company’s stock. Interest payments on the 2018 Convertible Senior Notes are required semi-annually.

None of the 2018 Convertible Senior Notes are currently eligible for conversion. The 2018 Convertible Senior Notes are convertible at the option of the holders (with the length of time the 2018 Convertible Senior Notes are convertible being dependent upon the conversion trigger) upon the occurrence of any of the following events:

At any time from December 15, 2017 until March 15, 2018;

If the closing sale price of the Company’s common stock for each of 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the conversion price of the 2018 Convertible Senior Notes in effect on the last trading day of the immediately preceding calendar quarter;

If the trading price of the 2018 Convertible Senior Notes for each trading day during any five consecutive business day period, as determined following a request of a holder of 2018 Convertible Senior Notes, was equal to or less than 97% of the “Conversion Value” of the Notes on such trading day; or

If the Company elects to make certain distributions to the holders of its common stock or engage in certain corporate transactions.

Revolving Credit Agreement

The following is a summary of the significant terms of the Company’s Revolving Credit Agreement (the Revolver).

Maturity	June 30, 2015
Interest Rate	Company’s option of Base Rate (a) plus 2.25% or LIBOR plus 3.25% per annum.
Maximum Availability	Lesser of $100.0 million or the borrowing base(b)
Periodic Principal Payments	None

	(a)	Base rate is the higher of (1) the Federal Fund Rate plus 0.5%, (2) the prime rate and (3) a three month LIBOR rate plus a percentage as defined in the agreement.
	(b)	The Revolver’s borrowing base is based on the sum of 90% of the Company’s eligible accounts receivable plus 65% of the eligible inventory (not to exceed $40.0 million) less reserves from time to time set by the administrative agent. The eligible accounts receivable and inventories are further adjusted as specified in the Revolver and the eligible inventory currently excludes certain inventories of our subsidiaries in West Virginia. The Company’s borrowing base can also be increased by 95% of any cash collateral that the Company maintains in a cash collateral account.

The Revolver provides that the Company can use the Revolver availability to issue letters of credit. The Revolver provides for a 3.5% fee on any outstanding letters of credit issued under the Revolver and a 0.5% fee on the unused portion of the Revolver. The Revolver requires certain mandatory prepayments from certain asset sales, incurrence of indebtedness and excess cash flow. The Revolver includes financial covenants that require the Company to maintain a minimum Fixed Charge Coverage Ratio and limit capital expenditures, each as defined by the agreement. The minimum Fixed Charge Coverage Ratio is only applicable if the sum of the Company’s unrestricted cash plus the availability under the Revolver falls below $35.0 million and would remain in effect until the sum of the Company’s unrestricted cash plus the availability under the Revolver exceeds $35.0 million for 90 consecutive days. The limit on capital expenditures is only applicable if the Company’s unrestricted cash plus the availability under the Revolver falls below $50.0 million for a period of 5 consecutive days and would remain in effect until the Company’s unrestricted cash plus the availability under the Revolver exceeds $50.0 million for 90 consecutive days. These financial covenants were not applicable for the six months ended June 30, 2012.

As of June 30, 2012, the Company had used $59.4 million of the $86.5 million then available under the Revolver to secure outstanding letters of credit. As of June 30, 2012, the Company had $21.0 million of cash in a restricted cash collateral account to ensure that the Company has adequate capacity under the Revolver to support its outstanding letters of credit.

Interest Expense and Other

During the three and six months ended June 30, 2012, the Company made cash interest payments of $14.7 million and $18.3 million respectively. During the three and six months ended June 30, 2011, the Company made cash interest payments of $10.9 million.

The Company was in compliance with all of the financial covenants under its outstanding debt instruments as of June 30, 2012.

Principal and interest payments on the 2019 Senior Notes, which have been registered under the Securities Act of 1933, are guaranteed by each of James River Coal Company’s subsidiaries. James River Coal Company has no independent assets or operations (as defined in Rule 3-10(h)(5) of Regulation S-X) aside from those of its subsidiaries. The guarantees are full and unconditional and joint and several obligations (as such terms are defined in Rule 3-10(h)(5) of Regulation S-X) issued by all of the James River Coal Company’s subsidiaries. Accordingly, pursuant to Rule 3-10(f) of Regulation S-X, separate financial information with respect to the subsidiaries of James River Coal Company have not been provided.

(4)

Equity

Equity Based Compensation

The following table highlights the expense related to share-based payment for the periods ended June 30 (in thousands):

	Three months ended				Six months ended
	June 30,				June 30,
	2012		2011		2012		2011
Restricted stock	$	1,283		1,394		2,556		2,492
Stock options		65		76		140		156
Stock based compensation	$	1,348		1,470		2,696		2,648

The following is a summary of activity related to restricted stock and stock option awards for the six months ended June 30, 2012:

	Restricted Stock					Stock Options
				Weighted				Weighted
				Average				Average
	Number of			Fair Value		Number of		Exercise
	Shares			at Issue		Shares		Price
December 31, 2011		965,626		$	18.84		311,000	$	16.80
Granted		316,185			5.36		20,000		5.36
Vested/Exercised		(271,552	)		17.36		–		–
Canceled		(7,000	)		18.71		–		–
June 30, 2012		1,003,259			14.99		331,000		16.11

(5)

Commitments and Contingencies

The Company has established irrevocable letters of credit totaling $59.4 million as of June 30, 2012 to guarantee performance under certain contractual arrangements. The letters of credit have been issued under the Revolver (note 3).

The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

(6)

Earnings (Loss) per Share

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

The following table provides a reconciliation of the number of shares used to calculate basic and diluted earnings (loss) per share (in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011

Basic earnings (loss) per common share:
Net income (loss)	$	(25,763	)	$	789		$	(41,422	)	$	(6,815	)
Income allocated to participating securities		–			(21	)		–			–
Net income (loss) available to common shareholders	$	(25,763	)	$	768		$	(41,422	)		(6,815	)

Weighted average number of common and common equivalent shares outstanding:
Basic number of common shares outstanding		34,771			34,630			34,741			30,931
Dilutive effect of unvested restricted stock (participating securities)		–			966			–			–
Dilutive effect of stock options		–			74			–			–
Diluted number of common shares and common equivalent shares outstanding		34,771			35,670			34,741			30,931

Basic earnings (loss) per common share	$	(0.74	)	$	0.02		$	(1.19	)	$	(0.22	)

Diluted net income (loss) per common share:
Net income (loss)	$	(25,763	)	$	789		$	(41,422	)	$	(6,815	)
Income (loss) allocated to participating securities		–			–			–			–
Net income (loss) available to potential common shareholders	$	(25,763	)	$	789		$	(41,422	)	$	(6,815	)

Diluted earnings (loss) per common share	$	(0.74	)	$	0.02		$	(1.19	)	$	(0.22	)

For periods in which there was a loss, the Company excludes from its diluted loss per common share calculation options to purchase shares and the unvested portion of time vested restricted shares, as inclusion of these securities would have reduced the net loss per common share. The excluded instruments would have increased the diluted weighted average number of common and common equivalent shares outstanding by approximately 1.1 million for the three months ended June 30, 2012 and by approximately 1.1 million and 1.0 million for the six months ended June 30, 2012 and 2011, respectively. In addition, in periods of net losses, the Company has not allocated any portion of such losses to participating securities holders for its basic loss per common share calculation as such participating securities holders are not contractually obligated to fund such losses.

The Company’s 2015 and 2018 Convertible Senior Notes are convertible at the option of the holders upon the occurrence of certain events (note 3). As of June 30, 2012, none of the convertible senior notes had reached the specified thresholds for conversion.

(7)

Pension Expense

The Company has in place a defined benefit pension plan under which all benefits were frozen in 2007. The components of net periodic benefit cost are as follows (amounts in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Interest cost	$	886			910			1,770			1,821
Expected return on plan assets		(1,049	)		(1,070	)		(2,097	)		(2,139	)
Recognized net actuarial loss		835			198			1,671			395
Net periodic cost	$	672			38			1,344			77

(8)

Pneumoconiosis (Black Lung) Benefits

The components of net periodic benefit costs for black lung benefits are as follows (amounts in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Service cost	$	639		456		1,278		912
Interest cost		612		597		1,224		1,195
Amortization of actuarial losses		386		142		772		284
Net periodic benefit cost	$	1,637		1,195		3,274		2,391

(9)

Financial Instruments

The estimated fair value of financial instruments has been determined by the Company using available market information. As of June 30, 2012 and December 31, 2011, except for long-term debt obligations, the carrying amounts of all financial instruments approximate their fair values due to their short maturities.

The carrying values and fair values of our long-term debt are as follows (in thousands)

	June 30, 2012				December 31, 2011
	Carrying Value		Fair Value		Carrying Value		Fair Value
2019 Senior Notes	$	275,000	$	138,325	$	275,000	$	207,625
2015 Convertible Senior Notes (excludes discount)		172,500		60,375		172,500		137,569
2018 Convertible Senior Notes (excludes discount)		230,000		62,100		230,000		135,976

The fair value of our senior notes and convertible senior notes are based on available market data at the date presented. The carrying value of the convertible senior notes reflected in long-term debt in the table above reflects the full face amount and has been adjusted in the Condensed Consolidated Balance Sheets for a discount related to the convertible feature (note 3).

(10)

Segment Information

The Company has two segments based on the coal basins in which the Company operates. These basins are located in Central Appalachia (CAPP) and in the Midwest (Midwest). The Company’s CAPP operations, which include the assets acquired in the IRP Acquisition, are located in eastern Kentucky and southern West Virginia. The Company’s Midwest operations are located in southern Indiana. The Company manages its coal sales by coal basin, not by individual mine complex. Mine operations are evaluated based on their per-ton operating costs. Operating segment results are shown below (in thousands).

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Total revenues
CAPP	$	250,236		$	323,792			526,320			461,377
Midwest		27,122			28,245			53,023			55,242
Corporate		–			–			–			–
Total	$	277,358		$	352,037			579,343			516,619

Depreciation, depletion and amortization
CAPP	$	28,674		$	25,199		$	55,167			38,251
Midwest		3,816			2,998			7,430			5,967
Corporate		24			13			37			27
Total	$	32,514		$	28,210			62,634			44,245

Total operating income (loss)
CAPP	$	(7,295	)	$	27,082		$	(2,239	)		38,725
Midwest		226			467			(2,299	)		(898	)
Corporate		(5,397	)		(10,355	)		(10,740	)		(19,647	)
Total	$	(12,466	)	$	17,194			(15,278	)		18,180

Net earnings (loss) (1)
CAPP	$	(7,295	)	$	27,082			(2,239	)		38,725
Midwest		226			467			(2,299	)		(898	)
Corporate		(18,694	)		(26,760	)		(36,884	)		(44,642	)
Total	$	(25,763	)	$	789			(41,422	)		(6,815	)

(1) Income and expense items that are not included in operating income (loss) are not allocated to the segments.

	June 30,		December 31,
	2012		2011
Total Assets
CAPP	$	1,206,089	$	1,232,029
Midwest		117,462		122,290
Corporate		18,790		50,263
Total	$	1,342,341	$	1,404,582

Goodwill
CAPP	$	–		–
Midwest		26,492		26,492
Corporate		–		–
Total	$	26,492		26,492

ITEM 2. 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 our condensed consolidated financial statements and the accompanying notes included elsewhere in this filing and the Company’s annual report on Form 10-K for the year ended December 31, 2011. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of numerous factors, including the risks discussed in "Risk Factors" in this filing. For more on forward looking statements, see the section entitled “Forward Looking Information” at the beginning of this report.

Overview

We mine, process and sell thermal and metallurgical coal through eight active mining complexes located throughout eastern Kentucky, southern West Virginia and southern Indiana. The majority of our metallurgical coal was obtained in the April 18, 2011 acquisition (the IRP Acquisition) of International Resource Partners LP and its subsidiary companies (collectively IRP). We have two reportable business segments based on the coal basins in which we operate (Central Appalachia (CAPP) and the Midwest (Midwest)). We derived 45% of our total revenues in the six months ended June 30, 2012, from coal sales to electric utility customers and the remaining 55% from coal sales (including metallurgical coal) to industrial and other customers. For the six months ended June 30, 2012, our mines produced 5.3 million tons of coal (including 0.3 million tons of contract coal) and we purchased another 0.8 million tons for resale. Of the 5.3 million tons produced from Company mines, approximately 65% came from underground mines, while the remaining 35% came from surface mines. In the six months ended June 30, 2012, we generated total revenues of $579.3 million and had a net loss of $41.4 million.

CAPP Segment

In Central Appalachia, our thermal coal sales are primarily to customers in the southern portion of the South Atlantic region of the United States. The South Atlantic Region includes the states of Florida, Georgia, South Carolina, North Carolina, West Virginia, Virginia, Maryland and Delaware. Our metallurgical coal is sold primarily to steel companies in North America, South America, Europe, Asia and Africa. Approximately 37% of our total CAPP segment revenues in the six months ended June, 2012 were derived from sales made outside the United States, including Brazil, Canada, France, Germany, India and United Kingdom. For the six months ended June 30, 2012, our CAPP mines produced 4.2 million tons of coal (including 0.3 million tons of contract coal) and we purchased another 0.8 million tons for resale. Of the 4.2 million tons produced from our CAPP mines, 75% came from underground mines, while the remaining came from surface mines. For the six months ended June 30, 2012, we shipped 4.8 million tons of coal and generated coal sale revenues of $488 million from our CAPP segment. For the six months ended June 30, 2012, Georgia Power Company, Rashtriya Ispat Nigam Limited, US Steel and South Carolina Public Service Authority, were our largest customers, representing approximately 12%, 12%, 11% and 11% of our total revenues, respectively. No other CAPP customer accounted for more than 10% of our total revenues.

Midwest Segment

In the Midwest, the majority of our coal is sold in the East North Central Region, which includes the states of Illinois, Indiana, Ohio, Michigan and Wisconsin. For the six months ended June 30, 2012, our Midwest mines produced approximately 1.2 million tons of coal. Of the Midwest tons produced, 72% came from surface mines, while the remaining came from underground mines. For the six months ended June 30, 2012, we shipped 1.2 million tons of coal and generated coal sale revenues of $52 million from our Midwest segment. No Midwest customer accounted for more than 10% of our total revenues.

Results of Operations

Three Months Ended June 30, 2012 Compared with the Three Months Ended June 30, 2011

Revenues

The following tables show volume and revenue information by segment (in thousands, except per ton amounts).

	Three Months Ended
	June 30,
	2012		2011		Change
Volume shipped (tons)
CAPP tons
Steam		1,412		1,893		-25%
Metallurgical		897		727		23%
Total CAPP tons		2,309		2,620		-12%
Midwest steam tons		601		641		-6%
Total volume shipped		2,910		3,261		-11%

	Three Months Ended June 30,
	2012				2011				Change
Revenues	Total		Per Ton		Total		Per Ton		Total
Coal sales revenue
CAPP steam	$	117,229		83.02		169,977		89.79		-31%
CAPP metallurgical		115,581		128.85		130,499		179.50		-11%
Total CAPP coal sales revenue		232,810		100.83		300,476		114.69		-23%
Midwest steam		26,818		44.62		27,706		43.22		-3%
Total coal sales revenue		259,628		89.22		328,182		100.64		-21%
Freight and handling revenue
CAPP		17,426		7.55		23,316		8.90		-25%
Midwest steam		304		0.51		539		0.84		-44%
Total freight and handling revenue		17,730		6.09		23,855		7.32		-26%
Total revenue		277,358		95.31		352,037		107.95		-21%

Total tons shipped during the three months ended June 30, decreased by 11% in 2012 as compared to 2011. Coal sales revenue for the three months ended June 30, decreased 21% in 2012 as compared to 2011. The decrease in tons shipped and coal sales revenue was primarily related to a lower average sales price in the CAPP region for both steam and metallurgical coal and a decrease in tons shipped of steam coal in the CAPP region attributed to lower demand.

Freight and handling revenue consists of shipping and handling costs invoiced to coal customers and paid to third-party carriers. These revenues are directly offset by freight and handling costs.

Operating and Other Costs

The following tables show selected costs in total and by segment (in thousands, except per ton amounts).

	Three Months Ended June 30,
	2012				2011				Change
	Total		Per Ton		Total		Per Ton		Total
Volume shipped (tons)		2,910				3,261

Cost of coal sold	$	224,314		77.08		264,108		80.99		-15%
Freight and handling costs		17,730		6.09		23,855		7.32		-26%
Depreciation, depletion and amortization		32,514		11.17		28,210		8.65		15%
Selling, general and administrative		15,266		5.25		14,811		4.54		3%
Acquisition costs		–		–		3,859		1.18		-100%
Interest expense		13,527		4.65		15,607		4.79		-13%

	Three months ended June 30,
	2012				2011
		CAPP	Midwest	Corporate		CAPP	Midwest	Corporate

Cost of coal sold	$	202,476	21,838	–		240,794	23,314	–
Per ton		87.69	36.34	–		91.91	36.37	–

Freight and handling costs		17,426	304	–		23,316	539	–
Per ton		7.55	0.51	–		8.90	0.84	–

Depreciation, depletion and amortization		28,674	3,816	24		25,199	2,998	13
Per ton		12.42	6.35	–		9.62	4.68	–

Cost of Coal Sold

For the three months ended June 30, the cost of coal sold, excluding depreciation, depletion and amortization, decreased from $264.1 million in 2011 to $224.3 million in 2012. Our cost per ton of coal sold in the CAPP region decreased from $91.91 per ton in the 2011 period to $87.69 per ton in the 2012 period. This decrease was primarily due to a decrease in the volume of metallurgical coal purchased from third parties in the 2012 period as compared to 2011. Our costs continue to be impacted by lower productivity due to increased federal and state regulatory scrutiny, a decrease in tons produced in response to market conditions and an increase in commodity prices. For more detail regarding the increased regulatory activity see “Part II – Item 1A – Risk Factors – Underground mining is subject to increased regulation, and may require us to incur additional cost.”

Our cost per ton of coal sold in the Midwest decreased $0.03 to $36.34 per ton in the 2012 period as compared to the 2011 period.

Freight and handling costs

Freight and handling costs decreased due to a decrease in metallurgical tons shipped in the three months ended June 30, 2012 as compared to the 2011 period.

Depreciation, depletion and amortization

For the three months ended June 30, depreciation, depletion and amortization increased from $28.2 million in the 2011 period to $32.5 million in the 2012 period. In the CAPP region, depreciation, depletion and amortization increased $3.5 million to $28.7 million, which is primarily due to the depreciation, depletion and amortization on the fixed assets acquired from IRP. In 2012, the assets were held for the full period while they were held for only a portion of the 2011 period. This increase was offset by a $3.4 million decrease in the amortization on the contracts acquired from IRP. In the Midwest, depreciation, depletion and amortization increased $0.8 million to $3.8 million attributed to a higher asset base in the 2012 period as compared to 2011.

Selling, general and administrative

For the three months ended June 30, selling, general and administrative expenses increased from $14.8 million in the 2011 period to $15.3 million in the 2012 period. The increase includes a $1.0 million increase in legal, permitting and bonding expenses offset by a $0.7 million decrease in salaries and benefits costs.

Interest Expense

For the three months ended June 30, interest expense decreased from $15.6 million in 2011 to $13.5 million in 2012. The decrease was the result the redemption in full of our 2012 Senior Notes in June 2011. Interest expense for the three months ended June, 2012 and 2011 includes $4.4 million and $4.3 million, respectively, related to the amortization of debt discounts and debt issuance costs.

Income Taxes

Our effective tax rate for the three months ended June 30, 2012 was (0.1)% and our effective tax rate for the three months ended June 30, 2011 was 31.7%. For the three months ended June 30, 2012, our effective income tax rate was impacted primarily by the amount of the valuation allowance recorded. For the three months ended June 30, 2011, our effective income tax rate was impacted primarily by a change in state tax rates as a result of the IRP Acquisition and the effects of percentage depletion. Percentage depletion is an income tax deduction that is limited to a percentage of taxable income from each of our mining properties. Because percentage depletion can be deducted in excess of cost basis in the properties, it creates a permanent difference and directly impacts the effective tax rate. Fluctuations in the effective tax rate may occur due to the varying levels of profitability (and thus, taxable income and percentage depletion) at each of our mine locations. The criteria for recording a valuation allowance are described in “Critical Accounting Estimates – Income Taxes.” As of June 30, 2012, we had a $53.8 million valuation allowance against gross deferred tax assets.

Six Months Ended June 30, 2012 Compared with the Six Months Ended June 30, 2011

Revenues

The following tables show volume and revenue information by segment (in thousands, except per ton amounts).

	Six Months Ended
	June 30,
	2012		2011		Change
Volume shipped (tons)
CAPP tons
Steam		3,176		3,274		-3%
Metallurgical		1,625		761		114%
Total CAPP tons		4,801		4,035		19%
Midwest steam tons		1,160		1,299		-11%
Total volume shipped		5,961		5,334		12%

	Six Months Ended June 30,
	2012				2011				Change
Revenues	Total		Per Ton		Total		Per Ton		Total
Coal sales revenue
CAPP steam	$	269,095		84.73		303,417		92.67		-11%
CAPP metallurgical		218,755		134.62		134,644		176.93		62%
Total CAPP coal sales revenue		487,850		101.61		438,061		108.57		11%
Midwest steam		51,541		44.43		53,976		41.55		-5%
Total coal sales revenue		539,391		90.49		492,037		92.25		10%
Freight and handling revenue
CAPP		38,470		8.01		23,316		5.78		65%
Midwest steam		1,482		1.28		1,266		0.97		17%
Total freight and handling revenue		39,952		6.70		24,582		4.61		63%
Total revenue		579,343		97.19		516,619		96.85		12%

Total tons shipped during the six months ended June 30, increased by 12% in 2012 as compared to 2011. Coal sales revenue for the six months ended June 30, increased 10% in 2012 as compared to 2011. The increase in tons shipped and coal sales revenue (including the change in mix to include metallurgical coal) was primarily related to the increase in metallurgical coal shipments and revenues that resulted from the IRP Acquisition in April 2011. These increases were offset by a lower average sales price in the CAPP region and a decrease in steam tons shipped attributed to lower demand.

Freight and handling revenue consists of shipping and handling costs invoiced to coal customers and paid to third-party carriers. These revenues are directly offset by freight and handling costs.

Operating and Other Costs

The following tables show selected costs in total and by segment (in thousands, except per ton amounts).

	Six Months Ended June 30,
	2012				2011				Change
	Total		Per Ton		Total		Per Ton		Total
Volume shipped (tons)		5,961		5,334
Cost of coal sold	$	461,203		77.37		396,927		74.41		16%
Freight and handling costs		39,952		6.70		24,582		4.61		63%
Depreciation, depletion and amortization		62,634		10.51		44,245		8.29		42%
Selling, general and administrative		30,832		5.17		24,181		4.53		28%
Acquisition costs		–		–		8,504		1.59		-100%
Interest expense		26,912		4.51		23,458		4.40		15%

	Six months ended June 30,
	2012				2011
		CAPP	Midwest	Corporate		CAPP	Midwest	Corporate

Cost of coal sold	$	416,305	44,898	–		349,493	47,434	–
Per ton		86.71	38.71	–		86.62	36.52	–

Freight and handling costs		38,470	1,482	–		23,316	1,266	–
Per ton		8.01	1.28	–		5.78	0.97	–

Depreciation, depletion and amortization		55,167	7,430	37		38,251	5,967	27
Per ton		11.49	6.41	–		9.48	4.59	–

Cost of Coal Sold

For the six months ended June 30, the cost of coal sold, excluding depreciation, depletion and amortization, increased from $396.9 million in 2011 to $461.2 million in 2012. Our total costs in the CAPP region are impacted by the increased costs as a result of the IRP Acquisition which occurred in April 2011. Our cost per ton of coal sold in the CAPP region increased from $86.62 per ton in the 2011 period to $86.71 per ton in the 2012 period. Our costs continue to be impacted by lower productivity due to increased federal and state regulatory scrutiny, a decrease in tons produced in response to market conditions and an increase in commodity prices. For more detail regarding the increased regulatory activity see “Part II – Item 1A – Risk Factors – Underground mining is subject to increased regulation, and may require us to incur additional cost.”

Our cost per ton of coal sold in the Midwest increased $2.19 per ton to $38.71 per ton in the 2012 period as compared to the 2011 period. The major components of this increase include an increase in variable costs of $1.84 per ton and labor and benefit costs of $1.21 per ton offset by a decrease in trucking costs of $1.18 per ton.

Freight and handling costs

Freight and handling costs increased due to a higher volume of metallurgical shipments in the six months ended June 30, 2012 as compared to the same period in 2011. The Company had no metallurgical shipments prior to the IRP Acquisition in April 2011.

Depreciation, depletion and amortization

For the six months ended June 30, depreciation, depletion and amortization increased from $44.2 million in the 2011 period to $62.6 million in the 2012 period. In the CAPP region, depreciation, depletion and amortization increased $16.9 million to $55.2 million, which is primarily due to the increase in the asset base as a result of IRP Acquisition. In the Midwest, depreciation, depletion and amortization increased $1.5 million to $7.4 million, which is primarily due to a higher asset base in the 2012 period as compared to 2011.

Selling, general and administrative

For the six months ended June 30, selling, general and administrative expenses increased from $24.2 million in the 2011 period to $30.8 million in the 2012 period, which is primarily due to increased selling, general and administrative expenses as a result of the IRP Acquisition.

Interest Expense

For the six months ended June 30, interest expense increased from $23.5 million in 2011 to $26.9 million in 2012. The increase was the result of the issuance of our 2018 Convertible Senior Notes and 2019 Senior Notes in March 2011, offset by the redemption in full of our 2012 Senior Notes in June 2011. Interest expense for the six months ended June 30, 2012 and 2011 includes $8.7 million and $6.4 million, respectively, related to the amortization of debt discounts and debt issuance costs.

Income Taxes

Our effective tax rate for the six months ended June 30, 2012 was (0.1)% and our effective tax rate for the six months ended June 30, 2011 was (23.2)%. For the six months ended June 30, 2012, our effective income tax rate was impacted primarily by the amount of the valuation allowance recorded. For the six months ended June 30, 2011, our effective income tax rate was impacted primarily by a change in estimated book to tax differences, a change in state tax rates as a result of the IRP Acquisition and the effects of percentage depletion. Percentage depletion is an income tax deduction that is limited to a percentage of taxable income from each of our mining properties. Because percentage depletion can be deducted in excess of cost basis in the properties, it creates a permanent difference and directly impacts the effective tax rate. Fluctuations in the effective tax rate may occur due to the varying levels of profitability (and thus, taxable income and percentage depletion) at each of our mine locations. The criteria for recording a valuation allowance are described in “Critical Accounting Estimates – Income Taxes.” As of June 30, 2012, we had a $53.8 million valuation allowance against gross deferred tax assets.

Liquidity and Capital Resources

The following chart reflects the components of our debt (in thousands):

	June 30, 2012		December 31, 2011
2019 Senior Notes	$	275,000	$	275,000
2018 Convertible Senior Notes, net of discount		170,722		166,821
2015 Convertible Senior Notes, net of discount		143,797		140,372
Revolver		–		–
Total long-term debt	$	589,519	$	582,193

2019 Senior Note, 2018 Convertible Senior Notes and 2015 Convertible Senior Notes

There have been no changes to the terms of our 2019 Senior Notes, 2018 Convertible Senior Notes or 2015 Convertible Senior Notes during 2012. See Item 1 of Part I, “Financial Statements — Note 3 — Long Term Debt and Interest Expense” for a description of our 2019 Senior Notes, 2018 Convertible Senior Notes and 2015 Convertible Senior Notes.

Revolving Credit Agreement

There have been no changes to the terms of our Revolver under our Revolving Credit Agreement during 2012. See Item 1 of Part I, “Financial Statements — Note 3 — Long Term Debt and Interest Expense” for a description of our Revolving Credit Agreement.

As of June 30, 2012, we had used $59.4 million of the $86.5 million then available under the Revolver to secure outstanding letters of credit.

We were in compliance with all of the financial covenants under our outstanding debt instruments as of June 30, 2012. We cannot assure you that we will remain in compliance in subsequent periods. If necessary, we will consider seeking a waiver or other alternatives to remain in compliance with the covenants. For more detail regarding the covenants under the Facilities, see Part II - Item 1A - Risk Factors - “We may be unable to comply with restrictions imposed by the terms of our indebtedness, which could result in a default under these instruments.”

Liquidity

As of June 30, 2012, we had total liquidity of approximately $191.9 million, consisting of $27.1 million of unused borrowing capacity under the Revolver and $164.8 million of cash and cash equivalents (excluding restricted cash and short term investments). As of June 30, 2012, we had used $59.4 million of the availability under the Revolver to secure outstanding letters of credit.

Net cash from operating activities reflects net income (loss) adjusted for non-cash charges and changes in net working capital (including non-current operating assets and liabilities). Net cash provided by operating activities was $10.4 million and $86.8 million for the six months ended June 30, 2012 and 2011, respectively. We had a net loss of $41.4 million in the six months ended June 30, 2012 as compared to net loss of $6.8 million in the six months ended June 30, 2011. In reconciling our net loss to cash provided by operating activities, $76.4 million was added for non cash charges during 2012, as compared to $58.2 million added during 2011. During 2012, our net loss, as adjusted for non cash charges, was decreased by $24.6 million as a result of changes in cash from our operating assets and liabilities. The change in our operating assets and liabilities for 2012 included a $33.0 million decrease in accounts payable. This change in our accounts payable is primarily due to the timing of payments to vendors associated with export shipments. During 2011, our net loss, as adjusted for non cash charges, was increased by $35.4 million as a result of changes in cash from our operating assets and liabilities. The change in our operating assets and liabilities for 2011 included a $38.6 million decrease in receivables and a $10.2 million increase in inventories.

Net cash used in investing activities decreased by $529.0 million to $45.3 million for the six months ended June 30, 2012 as compared to the same period in 2011, which reflects payment for the IRP Acquisition, net of cash acquired of $516.0 million. Capital expenditures for property, plant and equipment decreased $12.4 million to $45.9 million for the six months ended June 30, 2012 as compared to the same period in 2011. Capital expenditures primarily consisted of new and replacement mine equipment and various projects to improve the production and efficiency of our mining operations. Additionally, during the six months ended June 30, 2012 and 2011, our capital expenditures included approximately $3.4 million and $9.9 million, respectively, for safety mandates and new mine and infrastructure development.

We had no financing activities for the six months ended June 30, 2012. Net cash provided by financing activities was $511.7 million for the six months ended June 30, 2011 and consists of $491.2 million of net proceeds from the issuance of the 2019 Senior Notes and the 2018 Convertible Senior Notes net of debt issuance costs, and $170.5 million of net proceeds from the issuance of common stock which were offset by $150.0 million used to repay the 2012 Senior Notes.

Our primary source of cash is expected to be sales of coal to our utility, industrial and steel customers. We currently have approximately 3.5 million tons of coal committed for sale to our utility and industrial customers at an average price of approximately $58.41 per ton for 2013. The committed tons include 2.2 million tons in our Midwest segment and 1.3 million tons in our CAPP segment. Our metallurgical coal sales are normally priced on an annual or quarterly basis and accordingly, we have not entered into commitments for both price and quantity for these tons. The price of coal received can change dramatically based on market factors and will directly affect this source of cash. Our primary uses of cash include the payment of ordinary mining expenses to mine coal, capital expenditures, scheduled debt and interest payments and benefit payments. Ordinary mining expenses are driven by the cost of supplies, including steel prices and diesel fuel. Benefit payments include payments for workers’ compensation and black lung benefits paid over the lives of our employees as the claims are submitted. We are required to pay these when due, and are not required to set aside cash for these payments. We have posted surety bonds secured by letters of credit or issued letters of credit with state regulatory departments to guarantee these payments. We believe that our Revolver provides us with the ability to meet the necessary bonding requirements.

We believe that currently available cash, cash generated from operations, borrowings under our Revolver and future debt and equity offerings, if any, will be sufficient to meet working capital requirements, anticipated capital expenditures and scheduled debt payments throughout 2012 and for the next several years . Nevertheless, our ability to satisfy our working capital requirements and debt service obligations, or fund planned capital expenditures, will substantially depend upon our future operating performance (which will be affected by prevailing economic conditions in the coal industry), debt covenants, and financial, business and other factors, some of which are beyond our control.

In the event that the sources of cash described above are not sufficient to meet our future cash requirements, we will need to reduce certain planned expenditures, seek additional financing, or both. We may seek to raise funds through additional debt financing or the issuance of additional equity securities. If such actions are not sufficient, we may need to limit our growth, sell assets or reduce or curtail some of our operations to levels consistent with the constraints imposed by our available cash flow, or any combination of these options. Our ability to seek additional debt or equity financing may be limited by our existing and any future financing arrangements, economic and financial conditions, or all three. In particular, our existing 2019 Senior Notes, 2015 Convertible Senior Notes, 2018 Convertible Senior Notes and our Revolver restrict our ability to incur additional indebtedness. We cannot provide assurance that any reductions in our planned expenditures or in our expansion would be sufficient to cover shortfalls in available cash or that additional debt or equity financing would be available on terms acceptable to us, if at all.

Reserves

Marshall Miller & Associates, Inc. (MM&A) prepared a detailed study of our CAPP reserves as of March 31, 2004 based on all of our geologic information, including our updated drilling and mining data. MM&A completed their report on our CAPP reserves in June 2004. MM&A also prepared a detailed study of the reserves as of December 31, 2010 for the reserves obtained in the IRP Acquisition (which was based in part on previous evaluations of the properties). For our Midwest reserves, MM&A prepared a detailed study of reserves as of February 1, 2005 for the reserves obtained in the acquisition of Triad and as of April 11, 2006 for certain additional reserves acquired in the second quarter of 2006 in the Midwest. The MM&A studies were planned and performed to obtain reasonable assurance of the subject demonstrated reserves. In connection with the studies, MM&A prepared reserve maps and had certified professional geologists develop estimates based on data supplied by us, Triad and IRP using standards accepted by government and industry. We have used MM&A’s March 31, 2004 study of the CAPP reserves and the December 31, 2010 study of the reserves acquired from IRP as the basis for our current internal estimate of our CAPP reserves and MM&A’s February 1, 2005 and April 11, 2006 studies as the basis for our current internal estimate of our Midwest reserves.

Reserves for these purposes are defined by SEC Industry Guide 7 as that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. The reserve estimates were prepared using industry-standard methodology to provide reasonable assurance that the reserves are recoverable, considering technical, economic and legal limitations. Although MM&A has reviewed our reserves and found them to be reasonable (notwithstanding unforeseen geological, market, labor or regulatory issues that may affect the operations), MM&A’s engagement did not include performing an economic feasibility study for our reserves. In accordance with standard industry practice, we have performed our own economic feasibility analysis for our reserves. It is not generally considered to be practical, however, nor is it standard industry practice, to perform a feasibility study for a company’s entire reserve portfolio. In addition, MM&A did not independently verify our control of our properties, and has relied solely on property information supplied by us. Reserve acreage, average seam thickness, average seam density and average mine and wash recovery percentages were verified by MM&A to prepare a reserve tonnage estimate for each reserve. There are numerous uncertainties inherent in estimating quantities and values of economically recoverable coal reserves as discussed in “Critical Accounting Estimates – Coal Reserves”.

Based on the MM&A reserve studies and the foregoing assumptions and qualifications, and after giving effect to our operations from the respective dates of the studies through June 30, 2012, we estimate that, as of June 30, 2012, we controlled approximately 317.6 million tons of proven and probable coal reserves in the CAPP region and 39.2 million tons in the Midwest region. The following table provides additional information regarding changes to our reserves for the six months ended June 30, 2012 (in millions of tons):

	CAPP			Midwest			Total

Proven and Probable Reserves, as of December 31, 2011 (1)		322.4			40.4			362.8
Coal Extracted		(4.2	)		(1.2	)		(5.4	)
Acquisitions (2)		0.2			–			0.2
Adjustments (3)		(0.8	)		–			(0.8	)
Divesture (4)		–			–			–
Proven and Probable Reserves, as of June 30, 2012 (1)		317.6			39.2			356.8

Calculated in the same manner, and based on the same assumptions and qualifications, as used in the MM&A studies described above, but these estimates have not been reviewed by MM&A. Proven reserves have the highest degree of geologic assurance and are reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings, or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspections, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established. Probable reserves have a moderate degree of geologic assurance and are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation. This reserve information reflects recoverable tonnage on an as-received basis with 5.5% moisture.

Represents estimated reserves on leases entered into or properties acquired during the relevant period. We calculated the reserves in the same manner, and based on the same assumptions and qualifications, as used in the MM&A studies described above, but these estimates have not been reviewed by MM&A.

Represents changes in reserves due to additional information obtained from exploration activities, production activities or discovery of new geologic information. We calculated the adjustments to the reserves in the same manner, and based on the same assumptions and qualifications, as used in the MM&A studies described above, but these estimates have not been reviewed by MM&A.

Represents changes in reserves due to expired or transferred leases.

Key Performance Indicators

We manage our business through several key performance metrics that provide a summary of information in the areas of sales, operations, and general and administrative costs.

In the sales area, our long-term metrics are the volume-weighted average remaining term of our contracts and our open contract position for the next several years. During periods of high prices, we may seek to lengthen the average remaining term of our contracts and reduce the open tonnage for future periods. In the short-term, we closely monitor the Average Selling Price per Ton (ASP), and the mix between our spot sales and contract sales.

In the operations area, we monitor the volume of coal that is produced by each of our principal sources, including company mines, contract mines, and purchased coal sources. For our company mines, we focus on both operating costs and operating productivity. We closely monitor the cost per ton of our mines against our budgeted costs and against our other mines.

EBITDA and Adjusted EBITDA are also measures used by management to measure operating performance. We define EBITDA as net income (loss) plus interest expense (net), income tax expense (benefit) and depreciation, depletion and amortization. We regularly use EBITDA to evaluate our performance as compared to other companies in our industry that have different financing and capital structures and/or tax rates. In addition, we use EBITDA in evaluating acquisition targets. EBITDA is not a recognized term under U.S generally accepted accounting principles (US GAAP) and is not an alternative to net income, operating income or any other performance measures derived in accordance with US GAAP or an alternative to cash flow from operating activities as a measure of operating liquidity. Adjusted EBITDA is used in calculating compliance with our debt covenants and adjusts EBITDA for certain items as defined in our debt agreements, including stock compensation, acquisition costs and certain bank fees.

Trends and Uncertainties In Our Business

Coal prices continue to suffer from a mixture of lower natural gas prices, increased government regulation, the global economic slowdown, and an unseasonably warm winter in the United States.

Near term, historically low natural gas prices have increased natural gas’ share of electricity production. Production of natural gas from non-traditional sources such as shale has resulted in growing natural gas inventories and lower prices. Due to record inventories, the U.S. Energy Information Administration (EIA) estimates that the 2012 average natural gas spot price, which was $4.00 per MMBtu in 2011, will average $2.58 per MMBtu in 2012. The EIA forecasts that by 2013 natural gas spot prices will average $3.22 per MMBtu. By comparison, the average spot price for natural gas in 2008 was $8.86 per MMBtu.

In recent months, the price of natural gas has rebounded from its April 2012 low of $1.95 per MMBtu, averaging $2.46 per MMBtu in June. Natural gas prices should continue to increase due to reductions in the number of natural gas rigs operating, which are currently near their lowest levels since 1999, curbed production from less-profitable “dry” natural gas wells, and what has thus far in 2012 been record or near record heat for much of the country.

The EIA forecasts that in 2012 electricity generation from coal will decline by almost 14% while generation from natural gas will increase by approximately 23%. The EIA forecasts that the year-over-year gains for natural gas should slow and then reverse as higher natural gas prices, along with record coal inventories, encourage utilities to increase their utilization of coal-fired power plants. Coal’s share of electricity generation is forecasted to rise by 1.3% in 2013, in comparison to a 1% decline for natural gas.

The weakness in the U.S. domestic coal market has been partially offset by strong U.S. coal exports. According to the EIA, in 2011, the U.S. exported 107 million short tons of coal, the highest since 1991, and is forecasted to export 112 million short tons in 2012. The Central Appalachia region, which accounts for all of our shipments to international markets, was the primary beneficiary of the export market, largely due to Central Appalachia’s production of metallurgical coal. Steel production has continued to recover since the 2009 lows, which accounts for the increased demand for metallurgical coal. While we anticipate that the demand for metallurgical coal will continue to be strong in the future, the uncertainty in Europe and slowing economies in China, India and Brazil have reduced near-term pricing and demand.

In response to the lower prices and weaker demand for both steam and metallurgical coal, a number of publicly traded Central Appalachia producers have announced production cuts and layoffs. Because the Central Appalachia production market is fragmented with numerous small operators, it is difficult to quantify the total of Central Appalachia production cuts. To address the weak market for coal, we have primarily managed our production through a reduction in work schedules and idling of certain mines.

In addition to coal prices and demand, our profitability is affected by our production costs, which have increased in recent years. We expect the higher costs to continue for the next several years, due to a number of factors, including increased governmental regulations, high prices in worldwide commodity markets, and a highly competitive market for a limited supply of skilled mining personnel. See Item 1A of Part II “Risk Factors” for additional information on factors beyond our control that could affect our production costs.

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to certain off-balance sheet arrangements, including guarantees, operating leases, indemnifications, and financial instruments with off-balance sheet risk, such as bank letters of credit and performance or surety bonds. Liabilities related to these arrangements are not reflected in our consolidated balance sheets, and, except for the operating leases, we do not expect any material impact on our cash flow, results of operations or financial condition from these off-balance sheet arrangements.

We use surety bonds to secure reclamation, workers’ compensation and other miscellaneous obligations. At June 30, 2012, we had $149.2 million of outstanding surety bonds with third parties. These bonds were in place to secure obligations as follows: post-mining reclamation bonds of $103.5 million, workers’ compensation bonds of $40.3 million, wage payment, collection bonds, and other miscellaneous obligation bonds of $5.4 million. Surety bond costs have increased over time and the market terms of surety bonds have generally become less favorable. To the extent that surety bonds become unavailable, we would seek to secure obligations with letters of credit, cash deposits, or other suitable forms of collateral.

We also use cash collateral accounts and bank letters of credit to secure our obligations for post-mining reclamation, workers’ compensation programs, various insurance contracts and other obligations. As of June 30, 2012, we had $59.4 million of letters of credit outstanding. The letters of credit are issued under our Revolver.

Critical Accounting Estimates

Overview

Our discussion and analysis of our financial condition, results of operations, liquidity and capital resources are based upon our consolidated financial statements, which have been prepared in accordance with U.S generally accepted accounting principles (US GAAP). US GAAP require estimates and judgments that affect reported amounts for assets, liabilities, revenues and expenses. The estimates and judgments we make in connection with our consolidated financial statements are based on historical experience and various other factors we believe are reasonable under the circumstances. Note 1 of the notes to the condensed consolidated financial statements and to our annual consolidated financial statements filed on Form 10-K describes our significant accounting policies. The following critical accounting policies have a material effect on amounts reported in our consolidated financial statements.

Workers' Compensation

We are liable under various state statutes for providing workers’ compensation benefits. Except as indicated, we are self insured for workers’ compensation at our Kentucky operations, with specific excess insurance purchased from independent insurance carriers to cover individual traumatic claims in excess of the self-insured limits. For the period June 2002 to June 2005, workers compensation coverage was insured through a third party insurance company using a large risk rating plan. Our operations in Indiana are insured through a third party insurance company using a large risk rating plan. Our operations in West Virginia are fully insured with a guaranteed cost policy through a third party insurance company for both Workers’ Compensation and Employers Liability coverage.

We accrue for the present value of certain workers’ compensation obligations as calculated annually by an independent actuary based upon assumptions for work-related injury and illness rates, discount rates and future trends for medical care costs. The discount rate is based on interest rates on bonds with maturities similar to the estimated future cash flows. The discount rate used to calculate the present value of these future obligations was 3.8% at December 31, 2011. Significant changes to interest rates result in substantial volatility to our consolidated financial statements. If we were to decrease our estimate of the discount rate from 3.8% to 3.3%, all other things being equal, the present value of our workers’ compensation obligation would increase by approximately $2.6 million. A change in the law, through either legislation or judicial action, could cause these assumptions to change. If the estimates do not materialize as anticipated, our actual costs and cash expenditures could differ materially from that currently estimated. Our estimated workers’ compensation liability as of June 30, 2012 was $72.3 million.

Coal Miners' Pneumoconiosis

We are required under the Federal Mine Safety and Health Act of 1977, as amended, as well as various state statutes, to provide pneumoconiosis (black lung) benefits to eligible current and former employees and their dependents. We provide for federal and state black lung claims through a self-insurance program for our operations in Kentucky. For the period between June 2002 and June 2005, all black lung liabilities were insured through a third party insurance company using a large risk rating plan. Our operations in Indiana are insured through a third party insurance company using a large risk rating plan. Our operations in West Virginia are fully insured with a guaranteed cost policy through a third party insurance company.

An independent actuary calculates the estimated pneumoconiosis liability annually based on assumptions regarding disability incidence, medical costs, mortality, death benefits, dependents and interest rates. The discount rate is based on interest rates on high quality corporate bonds with maturities similar to the estimated future cash flows. The discount rate used to calculate the present value of these future obligations was 4.3% at December 31, 2011. Significant changes to interest rates result in substantial volatility to our consolidated financial statements. If we were to decrease our estimate of the discount rate by 0.5% to 3.8%, all other things being equal, the present value of our black lung obligation would increase by approximately $4.6 million. A change in the law, through either legislation or judicial action, could cause these assumptions to change. If these estimates prove inaccurate, the actual costs and cash expenditures could vary materially from the amount currently estimated. Our estimated pneumoconiosis liability as of June 30, 2012 was $60.4 million.

Defined Benefit Pension

We have in place a non-contributory defined benefit pension plan under which all benefits were frozen in 2007. The estimated cost and benefits of our non-contributory defined benefit pension plans are determined annually by independent actuaries, who, with our review and approval, use various actuarial assumptions, including discount rate and expected long-term rate of return on pension plan assets. In estimating the discount rate, we look to rates of return on high-quality, fixed-income investments with comparable maturities. At December 31, 2011, the discount rate used to determine the obligation was 4.2%. Significant changes to interest rates result in substantial volatility to our consolidated financial statements. If we were to decrease our estimate of the discount rate from 4.2% to 3.7%, all other things being equal, the present value of our projected benefit obligation would increase by approximately $6.3 million. The expected long-term rate of return on pension plan assets is based on long-term historical return information and future estimates of long-term investment returns for the target asset allocation of investments that comprise plan assets. The expected long-term rate of return on plan assets used to determine expense was 7.5% for the period ended December 31, 2011. Significant changes to these rates would introduce volatility to our pension expense. Our accrued pension obligation as of June 30, 2012 was $27.1 million.

Reclamation and Mine Closure Obligation

The Surface Mining Control Reclamation Act of 1977 establishes operational, reclamation and closure standards for all aspects of surface mining as well as many aspects of underground mining. Our asset retirement obligation liabilities consist of spending estimates related to reclaiming surface land and support facilities at both surface and underground mines in accordance with federal and state reclamation laws. Our total reclamation and mine-closing liabilities are based upon permit requirements and our engineering estimates related to these requirements. US GAAP requires that asset retirement obligations be initially recorded as a liability based on fair value, which is calculated as the present value of the estimated future cash flows. Our management and engineers periodically review the estimate of ultimate reclamation liability and the expected period in which reclamation work will be performed. In estimating future cash flows, we considered the estimated current cost of reclamation and applied inflation rates and a third party profit. The third party profit is an estimate of the approximate markup that would be charged by contractors for work performed on our behalf. The discount rate is our estimate of our credit adjusted risk free rate. The estimated liability can change significantly if actual costs vary from assumptions or if governmental regulations change significantly. The actual costs could be different due to several reasons, including the possibility that our estimates could be incorrect, in which case our liabilities would differ. If we perform the reclamation work using our personnel rather than hiring a third party, as assumed under US GAAP, then the costs should be lower. If governmental regulations change, then the costs of reclamation will be impacted. US GAAP recognizes that the recorded liability could be different than the final cost of the reclamation and addresses the settlement of the liability. When the obligation is settled, and there is a difference between the recorded liability and the amount paid to settle the obligation, a gain or loss upon settlement is included in earnings. Our asset retirement obligation as of June 30, 2012 was $106.2 million.

Contingencies

We are the subject of, or a party to, various suits and pending or threatened litigation involving governmental agencies or private interests. We have accrued the probable and reasonably estimable costs for the resolution of these claims based upon management’s best estimate of potential results, assuming a combination of litigation and settlement strategies. Management does not believe that the outcome or timing of current legal or environmental matters will have a material impact on our financial condition, results of operations, or cash flows. See the notes to the consolidated financial statements for further discussion on our contingencies.

Income Taxes

Deferred tax assets and liabilities are required to be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Deferred tax assets are also required to be reduced by a valuation allowance if it is more likely than not that some portion of the deferred tax asset will not be realized. In evaluating the need for a valuation allowance, we take into account various factors, including the expected level of future taxable income. We have also considered tax planning strategies in determining the deferred tax asset that will ultimately be realized. If actual results differ from the assumptions made in the evaluation of the amount of our valuation allowance, we record a change in valuation allowance through income tax expense in the period such determination is made.

We have a valuation allowance of $53.8 million against our gross deferred tax assets as of June 30, 2012.

Coal Reserves

There are numerous uncertainties inherent in estimating quantities and values of economically recoverable coal reserves. Many of these uncertainties are beyond our control. As a result, estimates of economically recoverable coal reserves are by their nature uncertain. Information about our reserves consists of estimates based on engineering, economic and geological data initially assembled by our staff and analyzed by Marshall Miller & Associates, Inc. (MM&A). The reserve information has subsequently been updated by our staff. The updates to the reserves have been calculated in the same manner, and based on similar assumptions and qualifications, as used in the MM&A studies described above, but these updates to the reserve estimates have not been reviewed by MM&A. A number of sources of information were used to determine accurate recoverable reserves estimates, including:

all currently available data;

our own operational experience and that of our consultants;

historical production from similar areas with similar conditions;

previously completed geological and reserve studies;

the assumed effects of regulations and taxes by governmental agencies; and

assumptions governing future prices and future operating costs.

Reserve estimates will change from time to time to reflect, among other factors:

mining activities;

new engineering and geological data;

acquisition or divestiture of reserve holdings; and

modification of mining plans or mining methods.

Each of these factors may in fact vary considerably from the assumptions used in estimating reserves. For these reasons, estimates of the economically recoverable quantities of coal attributable to a particular group of properties, and classifications of these reserves based on risk of recovery and estimates of future net cash flows may vary substantially. Actual production, revenue and expenditures with respect to reserves will likely vary from estimates, and these variances could be material. In particular, a variance in reserve estimates could have a material adverse impact on our annual expense for depreciation, depletion and amortization and on our annual calculation for potential impairment. For a further discussion of our coal reserves, see “Reserves.”

Business Combinations

We account for our business combinations under the acquisition method of accounting. The total cost of acquisitions is allocated to the underlying identifiable net tangible and intangible assets based on their respective estimated fair values. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment, with assistance of third party valuation services, and often involves the use of significant estimates and assumptions with respect to the timing and amounts of future cash inflows and outflows, discount rates, market prices and asset lives, among other items.

Evaluation of Goodwill and Long-Lived Assets for Impairment

Goodwill is not amortized, but is subject to periodic assessments of impairment. Impairment testing is performed at the reporting unit level. We test goodwill for impairment annually during the fourth quarter, or when changes in circumstances indicate that the carrying value may not be recoverable. Long-lived asset groups are tested for recoverability when changes in circumstances indicate the carrying value may not be recoverable. Events that trigger a test for recoverability include material adverse changes in projected revenues and expenses, significant underperformance relative to historical or projected future operating results and significant negative industry or economic trends.

The estimates used to determine whether impairment has occurred to goodwill and long-lived assets are subject to a number of management assumptions. We estimate the fair value of a reporting unit or asset group based on market prices (i.e., the amount for which the asset could be bought by or sold to a third party), when available. When market prices are not available, we estimate the fair value of the reporting unit or asset group using the income approach and/or the market approach, which are subject to a number of management assumptions. The income approach uses cash flow projections. Inherent in our development of cash flow projections are assumptions and estimates derived from a review of our operating results, approved operating budgets, expected growth rates and cost of capital. We also make certain assumptions about future economic conditions, interest rates, and other market data. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates can change in future periods.

Changes in assumptions or estimates could materially affect the determination of fair value of an asset group, and therefore could affect the amount of potential impairment of the asset. The following assumptions are key to our income approach:

	·	We make assumptions about coal production, sales price for unpriced coal, cost to mine the coal and estimated residual value of property, plant and equipment. These assumptions are key inputs for developing our cash flow projections. These projections are derived using our internal operating budget and are developed on a mine by mine basis. These projections are updated annually and reviewed by the Board of Directors. Historically, the Company’s primary variances between its projections and actual results have been with regard to assumptions for future coal production, sales prices of coal and costs to mine the coal. These factors are based on our best knowledge at the time we prepare our budgets but can vary significantly due to regulatory issues, unforeseen mining conditions, change in commodity prices, availability and costs of labor and changes in supply and demand. While we make our best estimates at the time we prepare our budgets it is reasonably likely that these estimates will change in future budgets, due to the changing nature of the coal environment;
	·	Economic Projections – Assumptions regarding general economic conditions are included in and affect the assumptions used in our impairment tests. These assumptions include, but are not limited to, supply and demand for coal, inflation, interest rates, and prices of raw materials (commodities); and
	·	Discount Rates – When measuring a possible impairment, future cash flows are discounted at a rate that we believe represents our cost of capital.

Recent Accounting Pronouncements

See Item 1 of Part I, “Financial Statements – Note 1 – Summary of Significant Accounting Policies and Other Information – Recent Accounting Pronouncements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At June 30, 2012, all $589.5 million of our outstanding debt has a fixed interest rate and is not sensitive to changes in the general level of interest rates. Our Revolver has floating interest rates based on our option of either the base rate or LIBOR rate. As of June 30, 2012, we had no borrowings outstanding under the Revolver. We currently do not use interest rate swaps to manage this risk. A 100 basis point (1.0%) increase in the average interest rate for our floating rate borrowings would increase our annual interest expense by approximately $0.1 million for each $10 million of borrowings under the Revolver.

We manage our commodity price risk through the use of long-term coal supply agreements, which we define as contracts with a term of one year or more, rather than through the use of derivative instruments. The percentage of our sales pursuant to long-term contracts was approximately 76% for the six months ended June 30, 2012.

All of our transactions are denominated in U.S. dollars, and, as a result, we do not have material exposure to currency exchange-rate risks.

We are not engaged in any foreign currency exchange rate or commodity price-hedging transactions and we have no trading market risk.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (CEO) and Chief Accounting Officer (CAO) (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CAO concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CAO, as appropriate, to allow timely decisions regarding required disclosure.

The Company’s management, including the Company’s CEO and CAO, does not expect that the Company’s disclosure controls and procedures or the Company’s internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of the controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

There were no changes in our internal control over financial reporting during the three months ended June 30, 2012 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are party to a number of legal proceedings incidental to our normal business activities, including a large number of workers’ compensation claims. While we cannot predict the outcome of these proceedings, in our opinion, any liability arising from these matters individually and in the aggregate should not have a material adverse effect on our consolidated financial position, cash flows or results of operations.

ITEM 1A. RISK FACTORS

For a discussion of certain risk factors that may impact our business, refer to “Critical Accounting Estimates” within this Form 10-Q. The following are additional risks and uncertainties that we believe are material to our business. It is possible that there are additional risks and uncertainties that affect our business that will arise or become material in the future.

Risks Related to the Coal Industry

Because the demand and pricing for coal is greatly influenced by consumption patterns of the domestic electricity generation industry and the worldwide steel industry, a reduction in the demand for coal by these industries would likely cause our revenues and profitability to decline significantly.

We derived 45% of our total revenues for the six months ended June 30, 2012 and 56% of our total revenues in 2011, from our electric utility customers. Our remaining revenue was from industrial customers, including those in the steel industry that we provide metallurgical coal.

We compete with coal producers in the United States and overseas for domestic and international sales. Demand for our coal and the prices that we will be able to obtain primarily will depend upon coal consumption patterns of the electric utility industry and the worldwide steel industry. Consumption by the utility industry is affected by the demand for electricity, environmental and other governmental regulations, technological developments and the price of competing coal and alternative fuel supplies including nuclear, natural gas, oil and renewable energy sources, including hydroelectric power. In particular, coal fired electrical generation faces strong competition from natural gas as historically low natural gas prices have dramatically increased natural gas’ share of electrical generation. Gas-fired electrical generation has the potential to continue displacing coal-fired electrical generation due in part to increased natural gas supply from shale formations resulting in lower natural gas prices and environmental regulations that tend to favor natural gas over coal.

Demand by the electricity industry is impacted by weather patterns, overall economic activity and the associated demand for power by industrial users. Demand by the steel industry is primarily affected by economic growth and the demand for steel used in construction as well as appliances and automobiles.

Due to economic and market conditions, our contracts for steam and metallurgical coal deliveries in 2012 provide lower sales prices than the average sales prices we received for deliveries of similar coal in 2011. While we manage our coal contracts on a composite basis to maximize the returns on our coal sold by moving coal to higher priced markets where possible (for example moving coal between the industrial coal market and the domestic utility market) there can be no assurances that pricing we receive on tons sold in 2012 and beyond will be reflective of the per-ton price of coal that we have received in prior periods.

Portions of our coal reserves possess quality characteristics that enable us to mine, process and market them as either metallurgical coal or high quality steam coal, depending on the prevailing conditions in the markets for metallurgical and steam coal. A decline in the metallurgical market relative to the steam market could cause us to shift coal from the metallurgical market to the steam market, potentially reducing the price we could obtain for this coal and adversely impacting our cash flows, results of operations or financial condition.

Any downward pressure on coal prices would likely cause our profitability to decline.

Electric utility deregulation is expected to provide incentives to generators of electricity to minimize their fuel costs and is believed to have caused electric generators to be more aggressive in negotiating prices with coal suppliers. To the extent utility deregulation causes our customers to be more cost-sensitive, deregulation may have a negative effect on our profitability.

Changes in the export and import markets for coal products could affect the demand for our coal, our pricing and our profitability.

We compete in a worldwide market. The pricing and demand for our products is affected by a number of factors beyond our control. These factors include:

	·	currency exchange rates;
	·	growth of economic development;
	·	price of alternative sources of electricity or steel;
	·	worldwide demand; and
	·	ocean freight rates.

Any decrease in the amount of coal exported from the United States, or any increase in the amount of coal imported into the United States, could have a material adverse impact on the demand for our coal, our pricing and our profitability.

Ongoing uncertainty in European economies and slowing economies in China, India and Brazil have reduced and may continue to reduce near-term pricing and demand for coal exported from the United States.

Increased consolidation and competition in the U.S. coal industry may adversely affect our revenues and profitability.

During the last several years, the U.S. coal industry has experienced increased consolidation, which has contributed to the industry becoming more competitive. Consequently, many of our competitors in the domestic coal industry are major coal producers who have significantly greater financial resources than us. The intense competition among coal producers may impact our ability to retain or attract customers and may therefore adversely affect our future revenues and profitability.

If the coal industry experiences overcapacity in the future, our profitability could be impaired.

An increase in the demand for coal could attract new investors to the coal industry, which could spur the development of new mines, and result in added production capacity throughout the industry. Higher price levels of coal could also encourage the development of expanded capacity by new or existing coal producers. Any resulting increases in capacity could reduce coal prices and reduce our margins.

Fluctuations in transportation costs and the availability and dependability of transportation could affect the demand for our coal and our ability to deliver coal to our customers.

Increases in transportation costs could have an adverse effect on demand for our coal. Customers choose coal supplies based, primarily, on the total delivered cost of coal. Any increase in transportation costs would cause an increase in the total delivered cost of coal. That could cause some of our customers to seek less expensive sources of coal or alternative fuels to satisfy their energy needs. In addition, significant decreases in transportation costs from other coal-producing regions, both domestic and international, could result in increased competition from coal producers in those regions. For instance, coal mines in the western United States could become more attractive as a source of coal to consumers in the eastern United States, if the costs of transporting coal from the West were significantly reduced.

Our Central Appalachia mines generally ship coal via rail systems, ocean vessels and barges. During 2011, we shipped approximately 90% of our coal from our Central Appalachia mines via rail system, including coal that was transported by rail to export vessels. In the Midwest, we shipped approximately 55% of our produced coal by truck and the remainder via the rail system or by barge. We believe that our 2012 transportation modes will continue to be comparable to those used in 2011. Our dependence upon railroads, third party trucking companies, ocean vessels and barges impacts our ability to deliver coal to our customers. Disruption of service due to weather-related problems, mechanical difficulties, strikes, lockouts, bottlenecks and other events could temporarily impair our ability to supply coal to our customers, resulting in decreased shipments. Decreased performance levels over longer periods of time could cause our customers to look elsewhere for their fuel needs, negatively affecting our revenues and profitability.

In past years, the major eastern railroads (CSX and Norfolk Southern) have experienced periods of increased overall rail traffic due to an expanding economy and shortages of both equipment and personnel. This increase in traffic could impact our ability to obtain the necessary rail cars to deliver coal to our customers and have an adverse impact on our financial results.

Shortages or increased costs of skilled labor in the coal regions that we operate may hamper our ability to achieve high labor productivity and competitive costs.

Coal mining continues to be a labor-intensive industry. In times of increased demand, many producers attempt to increase coal production, which historically has resulted in a competitive market for the limited supply of trained coal miners. In some cases, this market situation has caused compensation levels to increase, particularly for “skilled” positions such as electricians and mine foremen. To maintain current production levels, we may be forced to respond to increases in wages and other forms of compensation, and related recruiting efforts by our competitors. Any future shortage of skilled miners, or increases in our labor costs, could have an adverse impact on our labor productivity and costs and on our ability to expand production.

Government laws, regulations and other requirements relating to the protection of the environment, health and safety and other matters impose significant costs on us, and future requirements could limit our ability to produce coal at a competitive price.

We are subject to extensive federal, state and local regulations with respect to matters such as:

employee health and safety;

permitting and licensing requirements;

air quality standards;

water quality standards;

plant, wildlife and wetland protection;

blasting operations;

the management and disposal of hazardous and non-hazardous materials generated by mining operations;

the storage of petroleum products and other hazardous substances;

reclamation and restoration of properties after mining operations are completed;

discharge of materials into the environment, including air emissions and wastewater discharge;

surface subsidence from underground mining; and

the effects of mining operations on groundwater quality and availability.

Complying with these requirements, including the terms of our permits, has had, and will continue to have, a significant effect on our costs of operations. We could incur substantial costs, including clean-up costs, fines, civil or criminal sanctions and third party claims for personal injury or property damage as a result of violations of or liabilities under these laws and regulations.

The coal industry is also affected by significant legislation mandating specified benefits for retired miners. In addition, the utility industry, which is the most significant end user of coal, is subject to extensive regulation regarding the environmental impact of its power generating activities. Coal contains impurities, including sulfur, mercury, chlorine and other elements or compounds, many of which are released into the air when coal is burned. Stricter environmental regulations of emissions from coal-fired electric generating plants could increase the costs of using coal, thereby reducing demand for coal as a fuel source or the volume and price of our coal sales, or making coal a less attractive fuel alternative in the planning and building of utility power plants in the future.

New legislation, regulations and orders adopted or implemented in the future (or changes in interpretations of existing laws and regulations) may materially adversely affect our mining operations, our cost structure and our customers’ operations or ability to use coal.

The majority of our coal supply agreements contain provisions that allow the purchaser to terminate its contract if legislation is passed that either restricts the use or type of coal permissible at the purchaser’s plant or results in too great an increase in the cost of coal. These factors and legislation, if enacted, could have a material adverse effect on our financial condition and results of operations.

Climate change initiatives could significantly reduce the demand for coal, increase our costs and reduce the value of our coal assets.

Global climate change continues to attract considerable public and scientific attention with widespread concern about the impacts of human activity, especially the emissions of greenhouse gases (“GHG”), such as carbon dioxide and methane. Combustion of fossil fuels, such as the coal we produce, results in the creation of carbon dioxide that is currently emitted into the atmosphere by coal end users, such as coal-fired electric generation power plants. Our underground mines emit methane, which must be expelled for safety reasons.

Considerable and increasing government attention in the United States and other countries is being paid to reducing greenhouse gas emissions, including carbon dioxide (CO2) emissions from coal-fired power plants and methane emissions from mining operations. Although the United States has not ratified the Kyoto Protocol to the 1992 United Nations Framework Convention on Climate Change (“UNFCCC”), which became effective for many countries in 2005 and establishes a binding set of emission targets for greenhouse gases, the United States is actively participating in various international initiatives within and outside of the UNFCCC process to negotiate developed and developing nation commitments for greenhouse gas emission reductions and related financing. For example, in December 2009, approximately 190 countries participated in the UNFCC meetings in Copenhagen. The participants “took note” of a non-binding accord under which participating nations would report their commitments to reduce greenhouse gas emissions. Under this non-binding framework, the U.S. committed to cut greenhouse gas emissions by 17% below 2005 levels by 2020, 42% below 2005 levels by 2030, and 83% below 2005 levels by 2050. Any international greenhouse gas agreement in which the United States participates, if at all, could adversely affect the price and demand for coal.

U.S. legislative and regulatory action also may address greenhouse gas emissions. At the federal level, Congress actively considered in the past, and may consider in the future, legislation that would establish a nationwide GHG emissions cap-and-trade or other market-based program to reduce greenhouse gas emissions. The EPA also has commenced regulatory action that could lead to controls on carbon dioxide from larger emitters such as coal-fired power plants and industrial sources. In advance of federal action, state and regional climate change initiatives, such as the Regional Greenhouse Gas Initiative of eastern states, the Western Regional Climate Action Initiative, and recently enacted legislation in California and other states are taking effect before federal action. In addition, some states and municipalities in the United States have adopted or may adopt in the future regulations on greenhouse gas emissions. Some states and municipal entities have commenced litigation in different jurisdictions seeking to have certain utilities, including some of our customers, reduce their emission of carbon dioxide. Apart from governmental regulation, in February 2008, three of Wall Street’s largest investment banks announced that they had adopted climate change guidelines for lenders. The guidelines require the evaluation of carbon risks in the financing of utility power plants which may make it more difficult for utilities to obtain financing for coal-fired plants.

Considerable uncertainty is associated with these climate change initiatives. The content of new treaties, legislation or regulation is not yet determined, and many of the new regulatory initiatives remain subject to review by the agencies or the courts. Predicting the economic effects of climate change legislation is difficult given the various alternatives proposed and the complexities of the interactions between economic and environmental issues. Any regulations on greenhouse gas emissions, however, are likely to impose significant emissions control expenditures on many coal-fired power plants and industrial boilers and could have the effect of making them unprofitable. As a result, these generators may switch to other fuels that generate less of these emissions, possibly reducing future demand for coal and the construction of coal-fired power plants. In this regard, many of our coal supply agreements contain provisions that allow a purchaser to terminate its contract if legislation is passed that either restricts the use or type of coal permissible at the purchaser's plant or results in specified increases in the cost of coal or its use to comply with applicable ambient air quality standards. 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 and a material adverse effect on our results of operations, cash flows and financial condition. In addition, if regulation of greenhouse gas emissions does not exempt the release of coalbed methane, we may have to curtail coal production, pay higher taxes, or incur costs to purchase credits that permit us to continue operations as they now exist at our underground coal mines.

We are subject to the federal Clean Water Act and similar state laws which impose treatment, monitoring and reporting obligations.

The federal Clean Water Act and corresponding state laws affect coal mining operations by imposing restrictions on discharges into regulated waters. Permits requiring regular monitoring and compliance with effluent limitations and reporting requirements govern the discharge of pollutants into regulated waters. New requirements under the Clean Water Act and corresponding state laws could cause us to incur significant additional costs that adversely affect our operating results.

Regulations have expanded the definition of black lung disease and generally made it easier for claimants to assert and prosecute claims, which could increase our exposure to black lung benefit liabilities.

In January 2001, the United States Department of Labor amended the regulations implementing the federal black lung laws to give greater weight to the opinion of a claimant’s treating physician, expand the definition of black lung disease and limit the amount of medical evidence that can be submitted by claimants and respondents. The amendments also alter administrative procedures for the adjudication of claims, which, according to the Department of Labor, results in streamlined procedures that are less formal, less adversarial and easier for participants to understand. These and other changes to the federal black lung regulations could significantly increase our exposure to black lung benefits liabilities.

The Patient Protection and Affordable Care Act of 2010 (Act) was enacted into law on March 23, 2010 and included a black-lung provision that creates a rebuttable presumption that a miner with at least 15 years of service, with totally disabling pulmonary or respiratory lung impairment and negative radiographic chest x-ray evidence would be disabled due to pneumoconiosis and be eligible for black lung benefits. The new Act also makes it easier for widows of miners to become eligible for benefits. The enactment of this new legislation could significantly impact the Company’s future payments for black lung benefits.

In recent years, legislation on black lung reform has been introduced but not enacted in Congress and in the Kentucky legislature. It is possible that additional legislation will be reintroduced for consideration by Congress. If any of the proposals included in this or similar legislation is passed, the number of claimants who are awarded benefits could significantly increase. Any such changes in black lung legislation, if approved, may adversely affect our business, financial condition and results of operations.

Extensive environmental laws and regulations affect the end-users of coal and could reduce the demand for coal as a fuel source and cause the volume of our sales to decline.

The Clean Air Act and similar state and local laws extensively regulate the amount of sulfur dioxide, particulate matter, nitrogen oxides, mercury and other compounds emitted into the air from electric power plants, which are the largest end-users of our coal. Compliance with such laws and regulations, which can take a variety of forms, may reduce demand for coal as a fuel source because they can require significant emissions control expenditures for coal-fired power plants to attain applicable ambient air quality standards, which may lead these generators to switch to other fuels that generate less of these emissions, to retire or reduce production from older coal-fired power plants and/or to decrease the construction of coal-fired power plants.

The EPA has adopted more stringent National Ambient Air Quality Standards for nitrogen dioxide and sulfur dioxide, both of which are emitted from coal-fired combustion units. The EPA is considering whether to adopt a more stringent standard for ground-level ozone, to which emissions from coal combustion units can contribute. The demand for coal could be affected at electric generating facilities located in geographic areas that exceed the modified standards.

The U.S. Department of Justice, on behalf of the EPA, has in the past filed lawsuits against several investor-owned electric utilities for alleged violations of the Clean Air Act. We supply coal to some of the utilities that have been sued in the past, although none of these lawsuits are active, and it is possible that other of our customers will be sued on these grounds in the future. These lawsuits could require the utilities to pay penalties, install pollution control equipment or undertake other emission reduction measures, any of which could adversely impact their demand for our coal.

A regional haze program initiated by the EPA to protect and to improve visibility at and around national parks, national wilderness areas and international parks restricts the construction of new coal-fired power plants whose operation may impair visibility at and around federally protected areas and may require some existing coal-fired power plants to install additional control measures designed to limit haze-causing emissions.

The Clean Air Act also imposes standards on sources of hazardous air pollutants. The EPA’s Utility MACT rule regulates emissions of mercury and other inorganic pollutants from electric power plants. The rule also includes standards for nitrogen oxides, sulfur dioxide, and particulate matter. The EPA’s Industrial Boiler MACT rule limits emissions from industrial boilers, including those fueled by coal. These standards and future standards could have the effect of decreasing demand for coal. So-called multi-pollutant bills, which could regulate additional air pollutants, have been proposed by various members of Congress. If such initiatives are enacted into law, power plant operators could choose other fuel sources to meet their requirements, reducing the demand for coal.

The EPA’s Cross-State Air Pollution Rule (CSAPR) could cause power plant operators to choose other fuel sources to meet their requirements, reducing the demand for coal, which may cause coal prices and sales of our coal to materially decline. The impact of CSAPR will depend on its final form and the outcome of any legal challenges and cannot be determined at this time.

As a result of the U.S. Supreme Court’s decision on April 2, 2007 in Massachusetts, et al. v. EPA, 549 U.S. 497 (2007), finding that greenhouse gases fall within the Clean Air Act definition of “air pollutant,” the EPA was required to determine whether emissions of greenhouse gases “endanger” public health or welfare. In December 2009, the EPA published an “Endangerment Finding” stating that current and projected concentrations of carbon dioxide and five other greenhouse gases in the atmosphere threaten the public’s health and welfare. The EPA’s Endangerment Finding was challenged in federal court by numerous states (see, Coalition for Responsible Regulation, Inc. et al. v. EPA); however, on June 26, 2012, the U.S. District Court of Appeals for the District of Columbia ruled in favor of the EPA, validating the EPA’s Endangerment Finding and enabling the EPA to proceed with a broad regulatory program for the control of greenhouse gas emissions, including carbon dioxide emissions. The EPA has recently completed several rulemaking actions indicating its intent to limit greenhouse gas emissions, including, among others, a final greenhouse gas reporting rule for certain major stationary source permitting programs, final regulations to control greenhouse gas emissions from light duty vehicles, proposed regulations limiting carbon dioxide emissions from new, modified and reconstructed power plants, and a final “tailoring” rule explaining how it would implement the Clean Air Act’s Title V and prevention of significant deterioration permitting programs with respect to greenhouse gas emissions from major stationary sources.

In recent legislative sessions, both houses of Congress have considered, but failed to enact, new legislation that could establish a national cap on, or other regulation of, carbon emissions and other greenhouse gases. Recent proposals include a cap and trade system that would require the purchase of emission permits, which could be traded on the open market. These and other proposals would make it more costly to operate coal-fired plants and could make coal a less attractive fuel for future power plants. Any new or proposed requirements adversely affecting the use of coal could adversely affect our operations and results.

The permitting of new coal-fired power plants has also recently been contested by state regulators and environmental organizations based on concerns relating to greenhouse gas emissions. In several litigation cases, plaintiffs are seeking various remedies, including injunctive relief, against power plant owners. However, the risk of an adverse outcome has been mitigated by the June 20, 2011 decision of the U.S. Supreme Court in Connecticut v. AEP. The Supreme Court reversed the decision of the United States Court of Appeals for the Second Circuit which had allowed plaintiffs’ claims that public utilities’ greenhouse gas emissions created a “public nuisance” to go to trial. The Supreme Court held that the EPA’s authority to regulate greenhouse gas emissions under the Clean Air Act displaces federal common law claims. The effect of these recent cases may also be mitigated in the event Congress adopts greenhouse gas legislation and because the EPA has finalized the adoption of greenhouse gas emission standards. Nevertheless, increased efforts to control greenhouse gas emissions by state, federal, judicial or international authorities could result in reduced demand for coal.

The EPA has issued a proposed rule to regulate the management of coal ash that results from the combustion of coal. The proposed rule would classify coal ash produced at electric power plants as a waste, thereby making it subject to significant restrictions on storage and disposal. In conjunction with the rulemaking, EPA has conducted assessments of the integrity of dams, impoundments, and other structures where coal ash from electric power plants is deposited. Although the rulemaking has been delayed, further scrutiny of coal ash management practices could result in reduced demand for coal.

We must obtain governmental permits and approvals for mining operations, which can be a costly and time consuming process and result in restrictions on our operations.

Numerous governmental permits and approvals are required for mining operations. Our operations are principally regulated under permits issued by state regulatory and enforcement agencies pursuant to the federal Surface Mining Control and Reclamation Act (SMCRA). Additionally, we often require permits under the Clean Water Act and the Clean Air Act. Regulatory authorities exercise considerable discretion in the timing and scope of permit issuance. Requirements imposed by these authorities may be costly and time consuming and may result in delays in the commencement or continuation of exploration or production operations. In addition, we often are required to prepare and present to federal, state and local authorities data pertaining to the effect or impact that proposed exploration for or production of coal might have on the environment. Further, the public may comment on and otherwise engage in the permitting process, including through intervention in the courts. Accordingly, the permits we need may not be issued, or, if issued, may not be issued in a timely fashion, or may involve requirements that restrict our ability to conduct our mining operations or to do so profitably.

In particular, permit issuance under Section 404 of the Clean Water Act, which is often required for valley fills, ponds or impoundments, refuse, road building, placement of excess material and other mine development activities, is facing increasingly stringent regulatory and administrative requirements and a series of court challenges that have resulted in increased costs and delays in the permitting process. Previously, a Section 404 permit could be either a simplified Nationwide Permit #21 (NWP 21) or a more complicated individual permit. Litigation respecting the validity of the NWP 21 permit program has been ongoing for several years. In 2010, the Army Corps of Engineers (COE) announced its decision to suspend the use of NWP 21 in a six state Appalachian region, including Kentucky and West Virginia, where we operate. Recently, the COE reissued the NWP 21 permit with significant new limitations on authorized impacts to surface water, including a prohibition against valley fills. Litigation respecting the issuance of certain Section 404 permits has also been ongoing for several years, focusing primarily on whether the COE’s decision to issue such permits conformed to the requirements of the Clean Water Act and/or the National Environmental Policy Act. The matters at issue in such litigation are such that a ruling for the plaintiffs could have an adverse impact on our planned surface mining operations.

In 2009, the EPA announced publicly that it will exercise its statutory right to more actively review Section 404 permitting actions by the COE. In the third quarter of 2009, the EPA announced that it would further review 79 surface mining permit applications, including four of our permits. These 79 permits were identified as likely to impact water quality and therefore required additional review under the Clean Water Act. EPA oversight could further delay and/or restrict the issuance of such permits, either of which events could have an adverse impact on our planned mining operations.

More recently, the EPA announced acceptable levels for the conductivity of water in streams receiving discharge from permitted coal mining sites in a six-state area of Central Appalachia, including Kentucky and West Virginia. If such levels of conductivity are enforced as numerical limits, they could have a significant impact on our ability to secure Section 404 permits and have a material impact on our operations. The National Mining Association (NMA), on behalf of its member companies including coal producers such as ourselves, filed suit against the EPA and the COE contesting the legality of the enhanced review process and the imposition of such conductivity standard. The U.S. District Court for the District of Columbia granted the NMA’s motion for partial summary judgment and vacated the multi-criteria integrated resource assessment and the enhanced coordination process that were being applied to Section 404 permits. The court determined that in issuing the guidance, the EPA exceeded its statutory authority under the Clean Water Act. The court also determined those pronouncements to constitute legislative rules, and as such, to have been issued in violation of the Administrative Procedures Act because they were issued without public notice and an opportunity to submit comments. On July 31, 2012, the U.S. District Court for the District of Columbia issued its opinion on the remainder of the NMA’s complaint and overturned the EPA’s Final Guidance memorandum concerning conductivity of water in streams. The court held that the Final Guidance constituted final agency action and the EPA overstepped its authority under the Clean Water Act and SMCRA.

Environmental groups have recently filed lawsuits against multiple mining companies, including us, for alleged discharges of selenium in violation of applicable permit levels at coal mining sites. The lawsuits have been filed under the citizen suit provisions of the federal Clean Water Act. In the lawsuits, the environmental groups contend that the mining companies should install treatment facilities to limit the discharge of selenium and pay civil penalties for the alleged violations. Some of the cases have been resolved through settlements between the environmental groups and the mining companies. We currently do not believe any lawsuit brought against us related to these matters will have a material impact on our operations.

For discussion related to the Clean Water Act, see Item 1 “Business – Environmental and Other Regulatory Matters” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

We have significant reclamation and mine closure obligations. If the assumptions underlying our accruals are materially inaccurate, we could be required to expend greater amounts than anticipated.

The SMCRA establishes operational, reclamation and closure standards for all aspects of surface mining as well as many aspects of underground mining. We accrue for the costs of current mine disturbance and of final mine closure, including the cost of treating mine water discharge where necessary. Under U.S. generally accepted accounting principles we are required to account for the costs related to the closure of mines and the reclamation of the land upon exhaustion of coal reserves. The fair value of an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The present value of the estimated asset retirement costs is capitalized as part of the carrying amount of the long-lived asset. The amounts recorded are dependent upon a number of variables, including the estimated future retirement costs, estimated proven reserves, assumptions involving profit margins, inflation rates, and the assumed credit-adjusted interest rates. Furthermore, these obligations are unfunded. If these accruals are insufficient or our liability in a particular year is greater than currently anticipated, our future operating results could be adversely affected.

Also, see “Critical Accounting Estimates – Reclamation and Mine Closure Obligation” for additional information regarding our accrued reclamation costs.

Our operations may adversely impact the environment which could result in material liabilities to us.

The processes required to mine coal may cause certain impacts or generate certain materials that might adversely affect the environment from time to time. The mining processes we use could cause us to 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 claim.

Certain coal that we mine needs to be cleaned at preparation plants, which generally requires coal refuse areas and/or slurry impoundments. Such areas and impoundments are subject to extensive regulation and monitoring. Slurry impoundments have been known to fail, releasing large volumes of coal slurry into nearby surface waters and property, resulting in damage to the environment and natural resources, as well as injuries to wildlife. We maintain coal refuse areas and slurry impoundments at a number of our mining complexes. If one of our impoundments were to fail, we could be subject to substantial claims for the resulting environmental impact and associated liability, as well as for 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 (“AMD”). We include our estimated exposure for AMD in our accrued reclamation costs. If these accruals are insufficient or our liability in a particular year is greater than currently anticipated, our future operating results could be adversely affected.

These and other similar unforeseen impacts that our operations may have on the environment, as well as exposures to certain substances or wastes associated with our operations, could result in costs and liabilities that could materially and adversely affect us and could have a material adverse impact on our cash flows, results of operations or financial condition.

Foreign currency fluctuations could adversely affect the competitiveness of our coal abroad.

We rely on customers in other countries for a portion of our sales, with shipments to countries in North America, South America, Europe, Asia and Africa. We compete in these international markets against coal produced in other countries. Coal is sold internationally in United States dollars. As a result, mining costs in competing producing countries may be reduced in United States dollar terms based on currency exchange rates, providing an advantage to foreign coal producers. Currency fluctuations among countries purchasing and selling coal could adversely affect the competitiveness of our coal in international markets.

Terrorist attacks and threats, escalation of military activity in response to such attacks or acts of war may negatively affect our business, financial condition and results of operations.

Terrorist attacks and threats, escalation of military activity in response to such attacks or acts of war may negatively affect our business, financial condition and results of operations. Our business is affected by general economic conditions, fluctuations in consumer confidence and spending, and market liquidity, which can decline as a result of numerous factors outside of our control, such as terrorist attacks and acts of war. Future terrorist attacks against U.S. targets, rumors or threats of war, actual conflicts involving the United States or its allies, or military or trade disruptions affecting our customers could cause delays or losses in transportation and deliveries of coal to our customers, decreased sales of our coal and extension of time for payment of accounts receivable from our customers. Strategic targets such as energy-related assets may be at greater risk of future terrorist attacks than other targets in the United States. In addition, disruption or significant increases in energy prices could result in government-imposed price controls. It is possible that any, or a combination, of these occurrences could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Operations

We have experienced operating losses and net losses in recent years and may experience losses in the future.

We experienced operating losses during the six months ended June 30, 2102, and each of the years ended December 31, 2011, 2008 and 2007. While we were profitable in 2010 and 2009, we must continue to carefully manage our business, including the management of our contracts and our production costs. Although we seek to balance the open portion of our contracts to achieve optimal revenues over the long term, the market price of coal is affected by many factors that are outside of our control. We have experienced an increase in production costs in recent years. Additionally, certain of our long term contracts for sales of coal are priced substantially above current spot prices for coal. Our profitability in the future will be impacted by the price levels that we achieve on future long term contracts. Accordingly, we cannot assure you that we will be able to achieve profitability in the future.

We may fail to realize the growth prospects and cost savings anticipated as a result of the IRP Acquisition.

The success of the recent IRP Acquisition will depend, in part, on our ability to realize the anticipated business opportunities and growth prospects from combining our businesses with those of IRP. We may never realize these business opportunities and growth prospects. Integrating operations will be complex and will require significant efforts and expenditures. Our management might have its attention diverted while trying to integrate operations and corporate and administrative infrastructures. We might experience increased competition that limits our ability to expand our business, and we might not be able to capitalize on expected business opportunities, including retaining current customers. If any of these factors limit our ability to integrate the operations successfully or on a timely basis, the expectations of future results of operations expected to result from the IRP Acquisition might not be met.

It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses, tax costs or inefficiencies, or inconsistencies in standards, controls, information technology systems, procedures and policies, any of which could adversely affect our ability to maintain relationships with clients, employees or other third parties or our ability to achieve the anticipated benefits of the IRP Acquisition and could harm our financial performance.

The new obligations of IRP becoming part of a public company may require significant resources and management attention.

Upon consummation of the IRP Acquisition, we acquired a privately-held company that had not previously been required to prepare or file periodic and other reports with the SEC or to generally comply with the requirements of the federal securities laws applicable to public companies, including rules and regulations implemented by the SEC and the Public Company Accounting Oversight Board and the requirement to document and assess the effectiveness of its internal control over financial reporting in order to satisfy the requirements of Section 404 of Sarbanes-Oxley. We will need to include an assessment of our internal control over financial reporting that includes the IRP business in our periodic reports by December 31, 2012. Establishing, testing and maintaining an effective system of internal control over financial reporting requires significant resources and time commitments on the part of our management and our finance and accounting staff, may require additional staffing and infrastructure investments, could increase our legal, insurance and financial compliance costs and may divert the attention of management. In addition, our actual operating costs may exceed the operating costs set forth in our pro forma financials. Moreover, if we discover aspects of IRP’s internal control over financial reporting that require improvement, we cannot be certain that our remedial measures will be effective. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could adversely affect our financial and operating results, investor’s confidence or increase our risk of material weaknesses in internal control over financial reporting.

The loss of, or significant reduction in, purchases by our largest customers could adversely affect our revenues.

For the six months ended June 30, 2012, we generated approximately 12% of our total revenue from Georgia Power Company, 12% of our total revenue from Rashtriya Ispat Nigam Limited, 11% of our total revenue from US Steel and 11% of our total revenue from South Carolina Public Service Authority. These contracts expire in 2012 and 2013. The execution of a substantial coal supply agreement is frequently the basis on which we undertake the development of coal reserves required to be supplied under the contract. We could be materially adversely affected to the extent that we are unable to replace these expiring coal supply agreements with agreements providing similar profit margins or are unable to achieve prices comparable to previous periods if the contract specifies periodic pricing.

Many of our coal supply agreements contain provisions that permit adjustment of the contract price upward or downward at specified times. Failure of the parties to agree on a price under those provisions may allow either party to either terminate the contract or reduce the coal to be delivered under the contract. Coal supply agreements also typically contain force majeure provisions allowing temporary suspension of performance by the customer or us for the duration of specified events beyond the control of the affected party. Most coal supply agreements contain provisions requiring us to deliver coal meeting quality thresholds for certain characteristics such as:

British thermal units (Btus);

sulfur content;

ash content;

grindability;

ash fusion temperature;

reflectance; and

volatility.

In some cases, failure to meet these specifications could result in economic penalties, including price adjustments, the rejection of deliveries or termination of the contracts. In addition, all of our contracts allow our customers to renegotiate or terminate their contracts in the event of changes in regulations or other governmental impositions affecting our industry that increase the cost of coal beyond specified limits. Further, we have been required in the past to make other pricing adjustments to comply with contractual requirements relating to the sulfur content of coal sold to our customers, and may be required to do so in the future.

The operating profits we realize from coal sold under supply agreements depend on a variety of factors. In addition, price adjustments and other provisions may increase our exposure to short term coal price volatility provided by those contracts.

Certain of our contracts are fixed in quantity but are priced on a quarterly or semi-annual basis. Our operating results are impacted by these changes in prices. A reduction in prices will result in a decrease to our profit margins.

In addition, our ability to receive payment for coal sold and delivered under these contracts depends on the continued creditworthiness of our customers. The bankruptcy of any of our customers could materially and adversely affect our financial position.

Our financial condition may be adversely affected if we are required by some of our customers to provide performance assurances for certain below-market sales contracts.

Some of our coal supply contracts contain provisions that could require us to provide performance assurances if we experience a material adverse change or, under certain other contracts, if the customer believes our creditworthiness has become unsatisfactory. Generally, under such contracts, performance assurances are only required if the contract price per ton of coal is below the current market price of the coal. The performance assurances are generally provided by the posting of a letter of credit, cash collateral, other security, or a guaranty from a creditworthy guarantor. As of June 30, 2012, we have not received any requests from any of our customers to provide performance assurances. If we are required to post performance assurances on some or all of our contracts with performance assurances provisions, there could be a material adverse impact on our cash flows, results of operations or financial condition.

Our operating results will be negatively impacted if we are unable to balance our mix of contract and spot sales.

We have implemented a sales plan that includes long term contracts (one year or greater) and spot sales/ short term contracts (less than one year). We have structured our sales plan based on the assumptions that demand will remain adequate to maintain current shipping levels and that any disruptions in the market will be relatively short-lived. If we are unable to maintain our planned balance of contract sales with spot sales, or our markets become depressed for an extended period of time, our volumes and margins could decrease, negatively affecting our operating results.

Our ability to operate our company effectively could be impaired if we lose senior executives or fail to employ needed additional personnel.

The loss of senior executives could have a material adverse effect on our business. There may be a limited number of persons with the requisite experience and skills to serve in our senior management positions. We may not be able to locate or employ qualified executives on acceptable terms. In addition, as our business develops and expands, we believe that our future success will depend greatly on our continued ability to attract and retain highly skilled and qualified personnel. We might not continue to be able to employ key personnel, or to attract and retain qualified personnel in the future. Failure to retain senior executives or attract key personnel could have a material adverse effect on our operations and financial results.

Underground mining is subject to increased regulation, and may require us to incur additional cost.

Underground coal mining is subject to ever increasing federal and state regulatory control relating to mine safety and health and to ever increasing enforcement activities intended to compel compliance with such laws and regulations. Within the last few years the industry has seen enactment of the federal MINER Act and subsequent additional legislation and regulation imposing significant new safety initiatives and the Dodd-Frank Act imposing new mine safety information reporting requirements. Various states also have enacted their own new laws and regulations imposing additional requirements related to mine safety. These new laws and regulations have and will continue to cause us to incur substantial additional costs, which will adversely impact our operating performance.

The U.S. Department of Labor, Mine Safety and Health Administration (MSHA), periodically notifies certain coal mines that a potential pattern of violations may exist based upon an initial statistical screening of violation history and pattern criteria review by MSHA. In the past, certain of our mines have received notices that a potential pattern of violations might exist. Upon receipt of such a notification, we conduct a comprehensive review of the operation that received the notification and prepare and submit to MSHA a plan designed to enhance employee safety at the mine through better education, training, mining practices, and safety management. Following implementation of the plan, MSHA conducts a complete inspection of the mine and further evaluates the situation and then advises the operator whether a Pattern of Violation (POV) exists and whether further action will be taken. The failure to remediate the situation resulting in a finding that a POV does exist at a mine could have a significant impact on our operations, including the permanent or temporary closure of our mines.

On April 12, 2011, MSHA notified our subsidiary Bledsoe Coal Corporation that a POV exists at its Abner Branch Rider Mine. As a result, if MSHA finds any violation of a mandatory health or safety standard that could significantly and substantially contribute to the cause and effect of a coal or other mine safety or health hazard, MSHA shall require all persons in the areas affected by such violation, except those persons referred to in Section 104(c) of the Mine Act, to be withdrawn from, and to be prohibited from entering such area until MSHA determines the violation has been abated. A POV can be terminated when 1) an inspection of the entire mine is completed and no significant and substantial health or safety violations are found, or 2) no withdrawal order is issued by MSHA in accordance with Section 104(e)(1) of the Mine Act within 90 days of the issuance of the pattern notice. The Abner Branch Rider Mine produced approximately 293,000 tons in 2011, of which approximately 206,000 tons were produced after being placed on POV. The POV could have a significant impact on the operations of that mine.

In 2010, a U.S. House of Representatives committee approved a mine safety bill which would give MSHA additional powers to temporarily close mines, mandate additional safety training and impose larger penalties on companies and their executives. A comparable bill introduced in the US Senate failed to receive the necessary votes for passage. If reintroduced and subsequently enacted, this or a similar bill could further increase our costs and impact operating performance.

Unexpected decreases in availability of raw materials or increases in raw material costs could significantly impair our operating results.

Our operations are dependent on reliable supplies of mining equipment, replacement parts, explosives, diesel fuel, tires, magnetite and steel-related products (including roof bolts). If the cost of any mining equipment or key supplies increases significantly, or if they should become unavailable due to higher industry-wide demand or less production by suppliers, there could be an adverse impact on our cash flows, results of operations or financial condition.

Coal mining is subject to conditions or events beyond our control, which could cause our quarterly or annual results to deteriorate.

Our coal mining operations are conducted in underground and surface mines. These mines are subject to conditions or events beyond our control that could disrupt operations, affect production and the cost of mining at particular mines for varying lengths of time and have a significant impact on our operating results. These conditions or events have included:

	·	variations in thickness of the layer, or seam, of coal;
	·	variations in geological conditions;
	·	amounts of rock and other natural materials intruding into the coal seam;
	·	equipment failures and unexpected major repairs;
	·	unexpected maintenance problems;
	·	unexpected departures of one or more of our contract miners;
	·	fires and explosions from methane and other sources;
	·	accidental mine water discharges or other environmental accidents;
	·	other accidents or natural disasters; and
	·	weather conditions.

Mining in Central Appalachia is complex due to geological characteristics of the region.

The geological characteristics of coal reserves in Central Appalachia, such as depth of overburden and coal seam thickness, make them complex and costly to mine. As mines become depleted, replacement reserves may not be available when required or, if available, may not be capable of being mined at costs comparable to those characteristic of the depleting mines. In addition, as compared to mines in other regions permitting, licensing and other environmental and regulatory requirements are more costly and time consuming to satisfy. These factors could materially adversely affect the mining operations and cost structures of, and customers’ ability to use coal produced by, operators in Central Appalachia, including us.

Our future success depends upon our ability to acquire or develop additional coal reserves that are economically recoverable.

Our recoverable reserves decline as we produce coal. Since we attempt, where practical, to mine our lowest-cost reserves first, we may not be able to mine all of our reserves at a similar cost as we do at our current operations. Our planned development and exploration projects might not result in significant additional reserves, and we might not have continuing success developing additional mines. For example, our construction of additional mining facilities necessary to exploit our reserves could be delayed or terminated due to various factors, including unforeseen geological conditions, weather delays or unanticipated development costs. Our ability to acquire additional coal reserves in the future also could be limited by restrictions under our existing or future debt facilities, competition from other coal companies for attractive properties or the lack of suitable acquisition candidates.

In order to develop our reserves, we must receive various governmental permits. We have not yet applied for the permits required or developed the mines necessary to mine all of our reserves. In addition, we might not continue to receive the permits necessary for us to operate profitably in the future. We may not be able to negotiate new leases from the government or from private parties or obtain mining contracts for properties containing additional reserves or maintain our leasehold interests in properties on which mining operations are not commenced during the term of the lease.

We face significant uncertainty in estimating our recoverable coal reserves, and variations from those estimates could lead to decreased revenues and profitability.

Forecasts of our future performance are based on estimates of our recoverable coal reserves. Estimates of those reserves initially were based on studies conducted by Marshall Miller & Associates, Inc. in 2004 for our CAPP reserves at that time, 2010 for the CAPP reserves acquired from IRP and 2005 and 2006 for our Midwest reserves in accordance with industry-accepted standards which we have updated for current activity using similar methodologies. A number of sources of information were used to determine recoverable reserves estimates, including:

	·	currently available geological, mining and property control data and maps;
	·	our own operational experience and that of our consultants;
	·	historical production from similar areas with similar conditions;
	·	previously completed geological and reserve studies;
	·	the assumed effects of regulations and taxes by governmental agencies; and
	·	assumptions governing future prices and future operating costs.

Reserve estimates will change from time to time to reflect, among other factors:

	·	mining activities;
	·	new engineering and geological data;
	·	acquisition or divestiture of reserve holdings; and
	·	modification of mining plans or mining methods.

Therefore, actual coal tonnage recovered from identified reserve areas or properties, and costs associated with our mining operations, may vary from estimates. These variations could be material, and therefore could result in decreased profitability.

Defects in title or loss of any leasehold interests in our properties could limit our ability to mine these properties or result in significant unanticipated costs.

We conduct substantially all of our mining operations on properties that we lease. The loss of any lease could adversely affect our ability to mine the associated reserves. Because we generally do not obtain title insurance or otherwise verify title to our leased properties, our right to mine some of our reserves has been in the past, and may again in the future be, adversely affected if defects in title or boundaries exist. In order to obtain leases or rights to conduct our mining operations on property where these defects exist, we have had to, and may in the future have to, incur unanticipated costs. In addition, we may not be able to successfully negotiate new leases for properties containing additional reserves. Some leases have minimum production requirements. Failure to meet those requirements could result in losses of prepaid royalties and, in some rare cases, could result in a loss of the lease itself.

Factors beyond our control could impact the amount and pricing of coal supplied by our independent contractors and other third parties.

In addition to coal we produce from our Company-operated mines, we have mines that typically are operated by independent contract mine operators, and we purchase coal from third parties for resale. For the six months ended June 30, 2012, approximately 17.8% of our total production was from mines operated by independent contract mine operators and from third party purchased coal sources. Operational difficulties, changes in demand for contract mine operators from our competitors and other factors beyond our control could affect the availability, pricing and quality of coal produced for us by independent contract mine operators. Disruptions in supply, increases in prices paid for coal produced by independent contract mine operators or purchased from third parties, or the availability of more lucrative direct sales opportunities for our purchased coal sources could increase our costs or lower our volumes, either of which could negatively affect our profitability.

Our operations could be adversely affected if we are unable to obtain required surety bonds.

Federal and state laws require bonds to secure our obligations to reclaim lands used for mining, to pay federal and state workers’ compensation and to satisfy other miscellaneous obligations. Certain insurance companies have informed us, along with other participants in the coal industry, that they no longer will provide surety bonds for workers’ compensation and other post-employment benefits without collateral. We have satisfied our obligations under these statutes and regulations by providing letters of credit, cash collateral or other assurances of payment. However, letters of credit can be significantly more costly to us than surety bonds. The issuance of letters of credit under our Revolver also reduces amounts that we can borrow under our Revolver. If we are unable to secure surety bonds for these obligations in the future, and are forced to secure letters of credit indefinitely, our profitability may be negatively affected.

Our work force could become unionized in the future, which could adversely affect the stability of our production and reduce our profitability.

Our company owned mines are currently operated by union-free employees. However, our subsidiaries’ employees have the right at any time under the National Labor Relations Act to form or affiliate with a union. Any unionization of our subsidiaries’ employees, or the employees of third-party contractors who mine coal for us, could adversely affect the stability of our production and reduce our profitability. The current administration has indicated that it will support legislation that may make it easier for employees to unionize.

We have significant unfunded obligations for long-term employee benefits for which we accrue based upon assumptions, which, if incorrect, could result in us being required to expend greater amounts than anticipated.

We are required by law to provide various long term employee benefits. We accrue amounts for these obligations based on the present value of expected future costs. We employed an independent actuary to complete estimates for our workers’ compensation and black lung (both state and federal) obligations.

We use a valuation method under which the total present and future liabilities are booked based on actuarial studies. Our independent actuary updates these liability estimates annually. However, if our assumptions are incorrect, we could be required to expend greater amounts than anticipated. All of these obligations are unfunded. In addition, the federal government and the governments of the states in which we operate consider changes in workers’ compensation laws from time to time. Such changes, if enacted, could increase our benefit expenses and payments.

See “Critical Accounting Estimates – Workers’ Compensation and Coal Miners’ Pneumoconiosis” for additional information regarding our workers’ compensation and black lung obligations.

We may be unable to adequately provide funding for our pension plan obligations based on our current estimates of those obligations.

We provide benefits under a defined benefit pension plan that was frozen in 2007. If future payments are insufficient to fund the pension plan adequately to cover our future pension obligations, we could incur cash expenditures and costs materially higher than anticipated. The pension obligation is calculated annually and is based on several assumptions, including then prevailing conditions, which may change from year to year. In any year, if our assumptions are inaccurate, we could be required to expend greater amounts than anticipated.

See “Critical Accounting Estimates – Defined Benefit Pension” for additional information regarding our pension plan obligations.

Substantially all of our assets are subject to security interests.

Substantially all of our cash, receivables, inventory and other assets are subject to various liens and security interests under our debt instruments. If one of these security interest holders becomes entitled to exercise its rights as a secured party, it would have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to its security interest, and the collateral accordingly would be unavailable to us and our other creditors, except to the extent, if any, that other creditors have a superior or equal security interest in the affected collateral or the value of the affected collateral exceeds the amount of indebtedness in respect of which these foreclosure rights are exercised.

The level of our indebtedness could adversely affect our financial condition and results of operations.

Our total consolidated long-term debt as of June 30, 2012 was $589.5 million (net of discounts on our convertible notes of $88.0 million). Our level of indebtedness could result in the following:

it could affect our ability to satisfy our outstanding obligations;

a substantial portion of our cash flows from operations will have to be dedicated to interest and principal payments and may not be available for operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other purposes;

it may impair our ability to obtain additional financing in the future;

it may limit our flexibility in planning for, or reacting to, changes in our business and industry; and
it may make us more vulnerable to downturns in our business, our industry or the economy in general.

Our operations may not generate sufficient cash to enable us to service our debt. If we fail to make a payment on our debt, this could cause us to be in default on our outstanding indebtedness. In addition, we may incur additional indebtedness in the future, and, as a result, the related risks that we now face, including those described above, could intensify.

We may be unable to comply with restrictions imposed by the terms of our indebtedness, which could result in a default under these instruments.

Our debt instruments impose a number of restrictions on us. A failure to comply with these restrictions could adversely affect our ability to borrow under our Revolver or result in an event of default under our other debt instruments. Our Revolver contains financial covenants that require us to maintain a minimum Consolidated Fixed Charge Coverage Ratio and limits on our capital expenditures. The Consolidated Fixed Charge Coverage Ratio covenant under our Revolver is only applicable if the sum of our unrestricted cash plus our availability under our Revolver falls below $35 million and would remain in effect until the sum of our unrestricted cash and availability under our Revolver exceeds $35 million for 90 consecutive days. Our Revolver limits the capital expenditures that we may make or agree to make in any fiscal year, but such limitation only will apply if the sum of our unrestricted cash plus our availability under our Revolver falls below $50 million for a period of 5 consecutive days and would remain in effect until the sum of our unrestricted cash and availability under our Revolver exceeds $50 million for 90 consecutive days. As of June 30, 2012, our unrestricted cash was $164.8 million and the unused availability under our Revolver was $27.1 million.

Additional detail regarding the terms of our Revolver, including these covenants and the related definitions, can be found in our debt agreements, as amended, that have been filed as exhibits to our SEC filings.

In the event of a default, our lenders could terminate their commitments to us and declare all amounts borrowed, together with accrued interest and fees, immediately due and payable. If this were to occur, we might not be able to pay these amounts or we might be forced to seek amendments to our debt agreements which could make the terms of these agreements more onerous for us and require the payment of amendment or waiver fees. Failure to comply with these restrictions, even if waived by our lenders, also could adversely affect our credit ratings, which could increase our costs of debt financings and impair our ability to obtain additional debt financing. While the lenders have, to date, waived any covenant violations and amended the covenants, there is no guarantee they will continue to do so if future violations occur.

Changes in our credit ratings could adversely affect our costs and expenses.

Any downgrade in our credit ratings could adversely affect our ability to borrow and result in more restrictive borrowing terms, including increased borrowing costs, more restrictive covenants and the extension of less open credit. This, in turn, could affect our internal cost of capital estimates and therefore impact operational decisions.

Inability to satisfy contractual obligations may adversely affect our profitability.

From time to time, we have disputes with our customers over the provisions of long term contracts relating to, among other things, coal quality, pricing, quantity and delays in delivery. In addition, we may not be able to produce sufficient amounts of coal to meet our commitments to our customers. Our inability to satisfy our contractual obligations could result in our need to purchase coal from third party sources to satisfy those obligations or may result in customers initiating claims against us. We may not be able to resolve all of these disputes in a satisfactory manner, which could result in substantial damages or otherwise harm our relationships with customers.

We may be unable to exploit opportunities to diversify our operations.

Our future business plan may consider opportunities other than underground and surface mining in eastern Kentucky, southern West Virginia and southern Indiana. We may consider opportunities to expand both surface and underground mining activities in areas that are outside of eastern Kentucky, southern West Virginia and southern Indiana. We may also consider opportunities in other energy-related areas that are not prohibited by our debt instruments. If we undertake these diversification strategies and fail to execute them successfully, our financial condition and results of operations may be adversely affected.

There are risks associated with our acquisition strategy, including our inability to successfully complete acquisitions, our assumption of liabilities, dilution of your investment, significant costs and additional financing required.

We may explore opportunities to expand our operations through strategic acquisitions of other coal mining companies. Risks associated with our current and potential acquisitions, including the recent acquisition of IRP, include the disruption of our ongoing business, problems retaining the employees of the acquired business, assets acquired proving to be less valuable than expected, the potential assumption of unknown or unexpected liabilities, costs and problems, the inability of management to maintain uniform standards, controls, procedures and policies, the difficulty of managing a larger company, the risk of becoming involved in labor, commercial or regulatory disputes or litigation related to the new enterprises and the difficulty of integrating the acquired operations and personnel into our existing business.

We may choose to use shares of our common stock or other securities to finance a portion of the consideration for future acquisitions, either by issuing them to pay a portion of the purchase price or selling additional shares to investors to raise cash to pay a portion of the purchase price. If shares of our common stock do not maintain sufficient market value or potential acquisition candidates are unwilling to accept shares of our common stock as part of the consideration for the sale of their businesses, we will be required to raise capital through additional sales of debt or equity securities, which might not be possible, or forego the acquisition opportunity, and our growth could be limited. In addition, securities issued in such acquisitions may dilute the holdings of our current or future shareholders.

Our currently available cash may not be sufficient to finance any additional acquisitions.

We believe that our cash on hand, the availability under our Revolver and cash generated from our operations will provide us with adequate liquidity through 2012. However, such funds may not provide sufficient cash to fund any future acquisitions. Accordingly, we may need to conduct additional debt or equity financings in order to fund any such additional acquisitions, unless we issue shares of our common stock as consideration for those acquisitions. If we are unable to obtain any such financings, we may be required to forego future acquisition opportunities.

Surface mining is subject to increased regulation, and may require us to incur additional costs.

Surface mining is subject to numerous regulations related, among others, to blasting activities that can result in additional costs. For example, when blasting in close proximity to structures, additional costs are incurred in designing and implementing more complex blast delay regimens, conducting pre-blast surveys and blast monitoring, and the risk of potential blast-related damages increases. Since the nature of surface mining requires ongoing disturbance to the surface, environmental compliance costs can be significantly greater than with underground operations. In addition, the COE imposes stream mitigation requirements on surface mining operations. These regulations require that footage of stream loss be replaced through various mitigation processes, if any ephemeral, intermittent, or perennial streams are filled due to mining operations. In 2008, the U.S. Department of Interior’s Office of Surface Mining imposed regulatory requirements applicable to excess spoil placement, including the requirement that operators return as much spoil as possible to the excavation created by the mine. These regulations may cause us to incur significant additional costs, which could adversely impact our operating performance.

We are subject to various legal proceedings, which may have an adverse effect on our business.

We are party to a number of legal proceedings incidental to our normal business activities, including a large number of workers’ compensation claims. While we cannot predict the outcome of the proceedings, there is always the potential that the costs of defending 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.

Our ability to use net operating loss carryforwards may be subject to limitation

Section 382 of the U.S. Internal Revenue Code of 1986, as amended, imposes an annual limit on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in its stock ownership or equity structure. Our ability to use net operating losses is limited by prior changes in our ownership, and may be further limited by issuances of common stock, in connection with the conversion of the existing convertible senior notes or by the consummation of other transactions. As a result, as we earn net taxable income, our ability to use net operating loss carryforwards to offset U.S. federal taxable income may become subject to limitations, which could potentially result in increased future tax liabilities for us.

Changes in federal or state income tax laws, particularly in the area of percentage depletion, could cause our financial position and profitability to deteriorate.

The federal government has been reviewing the income tax laws relating to the coal industry regarding percentage depletion benefits. If the percentage depletion tax benefit was reduced or eliminated, our cash flows, results of operations or financial condition could be materially impacted.

Risks Relating to our Common Stock

The market price of our common stock has been volatile and difficult to predict, and may continue to be volatile and difficult to predict in the future, and the value of your investment may decline.

The market price of our common stock has been volatile in the past and may continue to be volatile in the future. The market price of our common stock will be affected by, among other things:

	·	variations in our quarterly operating results;
	·	changes in financial estimates by securities analysts;
	·	sales of shares of our common stock by our officers and directors or by our shareholders;
	·	changes in general conditions in the economy or the financial markets;
	·	changes in accounting standards, policies or interpretations;
	·	other developments affecting us, our industry, clients or competitors; and
	·	the operating and stock price performance of companies that investors deem comparable to us.

Any of these factors could have a negative effect on the price of our common stock on the Nasdaq Global Select Market, make it difficult to predict the market price for our common stock in the future and cause the value of your investment to decline.

We do not intend to pay cash dividends on our common stock in the foreseeable future.

We do not anticipate paying cash dividends on our common stock in the foreseeable future. In addition, covenants in our Revolver and our 2019 Senior Notes restrict our ability to pay cash dividends and may prohibit the payment of dividends and certain other payments.

Provisions of our articles of incorporation, bylaws and shareholder rights agreement could discourage potential acquisition proposals and could deter or prevent a change in control.

Some provisions of our articles of incorporation and bylaws, as well as Virginia statutes, may have the effect of delaying, deferring or preventing a change in control. These provisions may make it more difficult for other persons, without the approval of our Board of Directors, to make a tender offer or otherwise acquire substantial amounts of our common stock or to launch other takeover attempts that a shareholder might consider to be in such shareholder’s best interest. These provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock.

We have a shareholder rights agreement which, in certain circumstances, including a person or group acquiring, or the commencement of a tender or exchange offer that would result in a person or group acquiring, beneficial ownership of more than 20% of the outstanding shares of our common stock, would entitle each right holder, other than the person or group triggering the plan, to receive, upon exercise of the right, shares of our common stock having a then-current fair value equal to twice the exercise price of a right.

This shareholder rights agreement provides us with a defensive mechanism that decreases the risk that a hostile acquirer will attempt to take control of us without negotiating directly with our Board of Directors. The shareholder rights agreement may discourage acquirers from attempting to purchase us, which may adversely affect the price of our common stock.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UNDER SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Information concerning mine safety and health violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this report.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit Number	Description

10.1	James River Coal Company 2012 Equity Incentive Plan
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
31.2	Certification of Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
95	Mine Safety and Health Data
101.INS	XBRL Instance Document
101.SCH	XBRL Schema Document
101.CAL	XBRL Calculation Linkbase Document
101.DEF	XBRL Definition Linkbase Document
101.LAB	XBRL Label Linkbase Document
101.PRE	XBRL Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	James River Coal Company





	By: /s/ Peter T. Socha
	Peter T. Socha
	Chairman, President and
	Chief Executive Officer




	By: /s/ Samuel M. Hopkins II
	Samuel M. Hopkins, II
	Vice President and
	Chief Accounting Officer



August 9, 2012

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