SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.





FORM
10-K





ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934





For
      the fiscal year ended
            Commission
      File NumberDecember
      31, 2009
            000-51129





JAMES
RIVER COAL COMPANY


(Exact
name of registrant as specified in its charter)





Virginia
            
            54-1602012(State
      or other jurisdiction
            
            (I.R.S.
      Employerof
      incorporation or organization)
            
            Identification
      No.)901
      E. Byrd Street, Suite 1600Richmond,
      Virginia
            
            23219(Address
      of principal executive offices)
            
            (Zip
      Code)





Registrant’s
telephone number, including area code:  (804)
780-3000





Securities
      registered pursuant to Section 12(b) of the Act:
            Common Stock, par value $0.01 per shareSeries A Participating Cumulative PreferredStock Purchase
  RightsName
      of each exchange on which registered:
            The Nasdaq Global Select
    MarketSecurities
      registered pursuant to Section 12(g) of the Act:
            None





Indicate by a check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.


Yes    o             No    ý





Indicate by a check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Exchange Act.


Yes    o             No    ý





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    o             No    o





Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of Registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.


o











Indicate
by a check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See 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
            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 aggregate market value of the
common stock held by non-affiliates of the registrant, based upon the closing
sale price of Common Stock, par value $0.01 per share, on June 30, 2009 as
reported on the Nasdaq Global Market, was approximately $336,982,000 (affiliates
being, for these purposes only, directors, executive officers and holders of
more than 10% of the registrant’s Common Stock).





Indicate by check mark whether the
registrant has filed all documents and reports required to be filed by Section
12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.


Yes    ý             No    o





The number of shares of the
registrant’s Common Stock, par value $.01 per share, outstanding as of
February 15, 2010 was 27,544,878.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the Proxy Statement for the registrant’s 2010 Annual Meeting of Shareholders,
to be filed with the Securities and Exchange Commission (the “SEC”), are
incorporated by reference into Part III of this Annual Report on Form
10-K.

















































JAMES
RIVER COAL COMPANY





TABLE
OF CONTENTS


FORM
10-K ANNUAL REPORT




PART
I




Item
      1.
            Business
            2Item
      1A.
            Risk
      Factors
            16Item
      1B.
            Unresolved
      Staff Comments
            31Item
      2.
            Properties
            31Item
      3.
            Legal
      Proceedings
            32Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            32PART
      IIItem
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder
Mattersand
      Issuer Purchases of Equity Securities
            33Item
      6.
            Selected
      Financial Data
            34Item
      7.
            Management’s
      Discussion and Analysis of 
Financial
      Condition and Results ofOperation
            34Item
      7A.
            Quantitative
      and Qualitative Disclosures about Market Risk
            54Item
      8.
            Financial
      Statements and Supplementary Data
            54Item
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            54Item
      9A.
            Controls
      and Procedures
            54Item
      9B.
            Other
      Information
            55PART
      IIIItem
      10.
            Directors,
      Executive Officers and Corporate Governance
            56Item
      11.
            Executive
      Compensation
            56Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      StockholderMatters
            56Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            56Item
      14.
            Principal
      Accountant Fees and Services
            56PART
      IVItem
      15.
            Exhibits,
      Financial Statement Schedules
            57















i





PART
I







Available
Information





The
Company’s website address is http://www.jamesrivercoal.com. The Company makes
available free of charge through its website its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments
to those reports as soon as reasonably practicable after filing or furnishing
the material to the SEC.   You may read and copy documents the
Company files at the SEC’s public reference room at 100 F Street, NE,
Washington, D.C., 20549.   Please call the SEC at 1-800-SEC-0330
for information on the public reference room.   The SEC maintains
a website that contains annual, quarterly and current reports, proxy statements
and other information that issuers (including the Company) file electronically
with the SEC.   The SEC’s website is http://www.sec.gov.
















































1


Item

1.          Business





General
Business





Overview





We mine,
process and sell bituminous, steam- and industrial-grade coal through six
operating subsidiaries (“mining complexes”) located throughout eastern Kentucky
and in southern Indiana.  As of December 31, 2009, our six mining
complexes included 14 underground mines, 10 surface mines and 10 preparation
plants, five of which have integrated rail loadout facilities and three of which
use a common loadout facility at a separate location.  As of December
31, 2009, we believe that we controlled approximately 271.1 million tons of
proven and probable coal reserves.  At current production levels, we
believe these reserves would support greater than 27 years of
production.





In 2009,
we produced 9.8 million tons of coal (including 0.3 million tons of coal
produced in our mines that are operated by contract mine operators) and we
purchased another 0.1 million tons for resale.  Of the 9.5 million
tons we produced from Company-operated mines, approximately 66% came from
underground mines, while the remaining 34% came from surface
mines.  In 2009, we generated revenues of $681.6 million and had net
income of $51.0 million.  Approximately 92% of our 2009 revenues were
generated from coal sales to electric utility companies and the remainder came
from coal sales to industrial and other companies.  In 2009, Georgia
Power Company and South Carolina Public Service Authority were our largest
customers, representing approximately 39% and 37% of our revenues,
respectively.  No other customer accounted for more than 10% of our
revenues.





The coal
that we sell is obtained from three sources:  our Company-operated
mines, mines that are operated by independent contract mine operators, and other
third parties from whom we purchase coal for resale.  Contract mining
and coal purchased from other third parties provide flexibility to increase or
decrease production based on market conditions.  The table below
reflects the amount and percentage of coal obtained from those sources in
2009:








Tons
      (000s)
            
            Percentage
      of total
              coal
      obtained by the
              CompanyCoal
      produced from Company-operated mines
            9,448
            
            95.6%Coal
      obtained from mines operated by independent contractors
            322
            
            3.3%Coal
      purchased from third parties
            107
            
            1.1%9,877
            
            100%





Mining Methods




Our Company-operated and contractor mines produce coal
using different mining methods.  These methods areroom and pillar underground miningandcontour and
point removal surface mining.These methods are described in more detail
below.




Room and Pillar.  In the underground room and pillar method
of mining, continuous mining machines cut five to nine entries into the coal
seam and connect them by driving crosscuts, leaving a series of rectangular
pillars, or columns of coal, to help support the mine roof and control the flow
of air.  Generally, openings are driven 20 feet wide and the pillars
are 40 to 100 feet wide.  As mining advances, a grid-like pattern of
entries and pillars is formed.  When mining advances to the end of a
panel, or section of the mine, retreat mining may begin.  In retreat
mining, as much coal as is feasible is mined from the pillars that were created
in advancing the panel, allowing the roof to cave.




The coal face is cut with continuous mining machines and
the coal is transported from the continuous mining machine to the mine conveyor
belts using either a continuous haulage system, shuttle cars or ram
cars.  The mine conveyor system consists of a series of conveyor
belts, which transport the coal from the active face areas to the
surface.  Once on the surface, the coal is transported to the
preparation plants where it is processed to remove any
impurities.  The coal is then transported to the clean coal stockpiles
or silos from which it is loaded for shipment to our
customers.  Reserve recovery, a measure of the percentage of the total
coal in place that is ultimately produced, using this method of mining typically
depends on the shape of the reserve, the amount of low-cover areas, and the
geological characteristics of the reserve body.


2




Surface
Mining. Surface mining is used when coal is found close to the surface.This method involves the removal of overburden (earth and rock covering
the coal) with heavy earth-moving equipment and explosives, loading out the
coal, replacing the overburden and topsoil after the coal has been excavated and
reestablishing vegetation and plant life and making other improvements that have
local community and environmental benefit. Overburden is typically removed at
our mines by either hydraulic shovels or front-end loaders which place the
overburden into large trucks
  In the
Central Appalachia Region (CAPP), we use thecontour and highwall surface
mining methods. Contour and highwall mining is used where removal of all the
overburden overlying a coal seam is either uneconomical or impossible due to
property control or other issues. With contour mining, a contour cut is taken
along the outcrop of the seam and the coal is removed from the exposed pit.
Highwall mining can then take place where the seam is exposed in the highwall. A
highwall miner resembles an underground continuous miner. The highwall miner
cuts entries into the coal seam up to 10 feet wide and up to 900 feet deep. The
coal is transported to the surface through the augers and loaded into trucks
using a loader. The contour area is then reclaimed by returning overburden to
the pit and restoring the mountainside to its approximate original contour.
Reserve recovery using this method of mining is typically approximately
70%.
  As of December 31, 2009,
we had 10 surface mines one of which had a contract highwall miner operated in
connection with the surface operations .


Underground
Mine Characteristics





Underground
mines are characterized as either “drift” mines or “below drainage”
mines.  Drift mines are mines that are developed into the coal seam at
a point where the seam intersects the surface.  The area where the
seam intersects the surface is commonly known as the
“outcrop.”  Multiple entries are developed into the coal seam and are
used as airways for mine ventilation, passageways for miners and supplies, and
entries for conveyor belts that transport coal from the active production areas
of the mine to the surface.





In below
drainage mines, the coal seam does not intersect the surface in the vicinity of
the mining area.  Therefore, the coal seam must be accessed through
excavated passageways from the surface.  These passageways typically
consist of vertical shafts and angled slopes.  The shafts are
constructed with diameters ranging from 12 to 24 feet and are used as airways
for mine ventilation and passageways for miners and supplies via
elevators.  The slopes, when used to house conveyor belts to transport
the mined coal from the active production areas of the mine to the surface, are
typically driven at an angle of less than 17 degrees from the
horizontal.  In addition, the slopes provide passageways for miners
and supplies, and airways for mine ventilation.





As of
December 31, 2009, we had 14 Company-operated underground mines in operation, of
which 11 were drift mines, and the remaining three were below-drainage
mines.





Mining
Operations





Our coal
production is conducted through five mining complexes in the Central Appalachia
Region and one mining complex in the Midwest Region.  We generally do
not own the land on which we conduct our mining operations.  Rather,
our coal reserves are controlled pursuant to leases from third party
landowners.  We believe that greater than 95% and 90% of our coal
reserves in the Central Appalachia Region and Midwest Region, respectively, are
controlled pursuant to leases from third party landowners.  These
leases typically convey mining rights to the coal producer in exchange for a per
ton fee or royalty payment of a percentage of the gross sales price to the
lessor.  The average royalties for coal reserves from our producing
properties were approximately 8.7% and 3.1% of produced coal revenue for the
year ended December 31, 2009 in the Central Appalachia Region and the Midwest
Region, respectively.





All of
our operations are located on or near public highways and receive electrical
power from commercially available sources.  Existing facilities and
equipment are maintained in good working condition and are continuously updated
through capital expenditure investments.


3





The
following table provides summary information on our mining complexes as of
December 31, 2009:








Number
      and Type of Mines
            
            
            
            Quality
      of Shipments for the year ended 2009Mining
      Complex
            Underground
            
            Surface
      (S)
              and
              Highwall
              (HW)
            
            Total
            
            Tons
              Shipped
              (000’s)
            
            Average
              Sulfur
              Content
            
            Average
              Ash
              Content
            
            Average
              BTU
              ContentCentral
      AppalachiaBell
      County Coal Corporation
            2
            
            -
            
            2
            
            452
            
            1.4
            
            8.3
            
            12,973Bledsoe
      Coal Corporation
            4
            
            -
            
            4
            
            1,465
            
            1.6
            
            10.6
            
            12,543Blue
      Diamond Coal Corporation
            3
            
            1S/1HW (1)
            
            4
            
            1,704
            
            1.0
            
            8.8
            
            12,827Leeco,
      Inc.
            1
            
            2S /1HW (1)
            
            3
            
            1,281
            
            0.8
            
            9.4
            
            12,930McCoy
      Elkhorn Coal Corporation
            3
            
            1S
            
            4
            
            1,623
            
            1.6
            
            8.4
            
            12,880MidwestTriad
      Mining, Inc
            1
            
            6S
            
            7
            
            3,098
            
            3.1
            
            8.7
            
            11,294





(1)





The
following summarizes additional information concerning each of our six mining
complexes:





Bell County.  The
Bell County complex is located in Bell County in eastern Kentucky.  We
use room and pillar mining and mine the Jellico and Garmedia seams of
coal.  Coal is processed at our preparation plant and loaded into
railcars via an integrated four-hour unit train loadout that is serviced by both
the CSX and Norfolk Southern railroads.  As of December 31, 2009, we
employed 118 mining and support personnel at this complex.





Bledsoe.  The
Bledsoe complex is located in Leslie and Harlan counties in eastern
Kentucky.  We use room and pillar mining and mine the Hazard #4 and #4
Rider seams of coal at this complex.  Coal is processed at one of two
preparation plants and loaded into railcars at a separate location via a
four-hour unit train loadout on the CSX railroad.  As of December 31,
2009, we employed 334 mining and support personnel at this
complex.





Blue Diamond.  The
Blue Diamond complex is located in Leslie, Perry and Letcher counties in eastern
Kentucky.  We use room and pillar mining for our underground mine and
we use the contour and highwall method for our surface mine.  We mine
the Hazard #4 and Elkhorn #3 at this complex.  Coal is processed at
our preparation plant, and loaded into railcars via an integrated four-hour unit
train loadout on the CSX railroad.  As of December 31, 2009, we
employed 313 mining and support personnel at this complex.





Leeco.  The Leeco
complex is located in Knott and Perry counties in eastern
Kentucky.  Our underground mines use room and pillar mining and our
surface mine uses the contour and highwall mining methods.  We mine
the Amburgy seam of coal and the Hazard #4, #5, #6, #7, #8 and #9 seams at this
complex.  Coal is processed at our preparation plant and loaded into
railcars via an integrated four-hour unit train loadout on the CSX
railroad.  As of December 31, 2009, we employed 254 mining and support
personnel at this complex.





McCoy Elkhorn.  The
McCoy Elkhorn complex is located in Pike and Floyd counties in eastern
Kentucky.  Our underground mines use room and pillar mining and our
surface mine uses the contour mining methods.  We mine the Millard,
Elkhorn #2 and Elkhorn #3 seams at this complex.  Coal is processed at
one of our two preparation plants and loaded into railcars via integrated
four-hour unit train loadouts on the CSX railroad.  As of December 31,
2009, we employed 376 mining and support personnel at this
complex.


4





Triad.  The Triad
complex is located in Pike and Knox counties in southern Indiana.  We use
room and pillar mining to mine the Springfield seam of coal, and use the surface
mine  method to mine multiple seams, including the Danville, Millersburg,
Hymera, Bucktown and Springfield seams.  Coal is processed at one of three
active preparation plants and loaded into trucks for delivery to the customer or
by rail at our Switz City loadout.  The Switz City loadout is serviced by
Indiana Railroad and the Indiana Southern Railroad.  As of December
31, 2009, we employed approximately 288 mining and support personnel at this
complex.





Contract
mining represented approximately 3.3% of our coal production in the year ended
December 31, 2009. Each mining complex monitors its contract mining operations
and provides geological and engineering assistance to the contract mine
operators.  The contract mine operators generally provide their own
equipment and operate the mines using their employees.  Independent
contract mine operators are paid a fixed rate for each ton of saleable
product.  We are primarily responsible for the reclamation activities
involved with all contractor-operated mines.  Contractors that operate
surface mines, however, typically are contractually obligated to perform, on our
behalf, the reclamation activities associated with the mines they
operate.  Our relationships with contract mine operators typically can
be cancelled by either party without penalty by giving between 30 and 60 days
notice.





Reserves





We have
an ongoing mineral development drilling and exploration program on our coal
properties.  The purpose of the drilling and exploration program is to
assist us with planning our mining activities and to better assess our coal
reserves.  In April 2004, we asked Marshall Miller & Associates,
Inc. (“MM&A”) to prepare a detailed study of our reserves in Central
Appalachia as of March 31, 2004 based on all of our geologic information,
including our updated drilling and mining data.  For the Triad
properties MM&A also prepared a detailed study of Triad’s reserves as of
February 1, 2005 for the reserves obtained in the acquisition of Triad and as of
April 11, 2006 for 15.8 million tons of reserves acquired in the second quarter
of 2006 (collectively, the “MM&A studies”).   We have used
MM&A’s March 31, 2004 study as the basis for our current internal
estimate of our Central Appalachia 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 (collectively the “MM&A studies”).  However,
MM&A has not conducted a coal reserve study on our December 31, 2009
estimate.





The coal
reserve studies conducted by MM&A were planned and performed to obtain
reasonable assurance of our subject demonstrated (proven plus probable)
reserves.  In connection with the studies, MM&A prepared reserve
maps and had certified professional geologists develop estimates based on data
supplied by us and using standards accepted by government and
industry.





After
reviewing the maps and information we supplied, MM&A prepared an independent
mapping and estimate of our demonstrated reserves using methodology outlined in
U.S. Geological Survey Circular 891 and SEC Industry Guide
7.  MM&A developed reserve estimation criteria to assure that the
basic geologic characteristics of the reserves (e.g., minimum coal thickness
and wash recovery, interval between deep mineable seams, mineable area tonnage
for economic extraction, etc.) are in reasonable conformity with present and
recent mine operation capabilities on our various properties.





We
continue to have an ongoing mineral development drilling and exploration program
on our coal properties and plan to update our third party reserve study from
time to time.  Any future negative changes in our reserves could have
a material adverse impact on our depreciation, depletion and amortization
expense.  A material adverse impact could also lead to a charge for
impairment of the value of our coal property assets.





As of
December 31, 2009,we
estimated that we controlled approximately 231.2 million tons of proven
and probable coal reserves in Central Appalachia and 39.9 millions tons of
proven and probable coal reserves in the Midwest.





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 have been
prepared using industry-standard methodology to provide reasonable assurance
that the reserves are recoverable, considering technical, economic and legal
limitations.  Although the MM&A studies found our reserves to be
reasonable (notwithstanding unforeseen geological, market, labor or regulatory
issues that may affect the operations), MM&A’s did not include an economic
feasibility study of 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”.





5


The
following table provides information on our mining complexes reserves (the
quality information is based on the MM&A studies):





Approximate
      Overall
              Reserve
      Quality
              (2),
      (3)Mining Complex
            
            Proven
      & Probable
              Reserves
      As of
              December
      31,
              2009 (1),(4)
            
            Estimated
              Years
      of
              Reserve
      Life
              Based
      on 2009
              Production
              Levels
            
            Ash
              Content
              (%)
            
            Heat
      Value
              (Btu/lb.)Central
      Appalachia
            
            (millions
      of tons)Bell
      County
            
            10.2
            
            23.1
            
            5.1
            
            13,500Bledsoe
            
            54.2
            
            36.3
            
            7.8
            
            13,000Blue
      Diamond
            
            78.3
            
            44.1
            
            4.7
            
            13,700Leeco
            
            52.8
            
            40.1
            
            7.0
            
            13,200McCoy
      Elkhorn
            
            35.7
            
            20.0
            
            5.7
            
            13,300Total/Average
            
            231.2
            
            34.3
            
            6.3
            
            13,300MidwestTriad
            
            39.9
            
            12.8
            
            8.8
            
            12,000





(1)
            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.





6


(2)
            Ash
      and sulfur content is expressed as the percent by weight of those
      constituents in the coal sample compared to the total weight of the sample
      being tested.  Heat value is expressed as Btu per pound in the
      coal based on laboratory testing of coal samples.  The samples
      are typically obtained from exploratory core borings placed at strategic
      locations within the coal reserve area.  Approximately 82% of
      the reserve tons have representative samples (degree of representation
      varies from area to area) and 18% of the reserve tons have no
      site-specific samples (and are therefore not included in the overall
      quality estimate).  The samples are sent to accredited
      laboratories for testing under protocols established by the American
      Society of Testing and Materials (ASTM).  The estimated overall
      quality values are derived by a multiple step process, including: a) for
      each mine or reserve area, an arithmetic average quality (dry basis) was
      prepared to represent the coal tons within the area, based on samples from
      the area; b) the overall quality of reserves for each mine complex was
      determined by performing a tonnage-weighted average of the average quality
      of all mine and reserve areas within the division; and c) the resulting
      dry basis overall quality was converted to wet product basis to reflect
      its anticipated moisture content at the time of sale.  The
      actual quality of the shipped coal may vary from these estimates due to
      factors such as: a) the particle size of the coal fed to the plant; b) the
      specific gravity of the float media in use at the preparation plant; c)
      the type of plant circuit(s); d) the efficiency of the plant circuit(s);
      e) the moisture content of the final product; and f) customer
      requirements.





(3)
            For
      the CAPP region, represents reserve quality information for our mining
      complexes as of March 31, 2004.  For the Midwest region,
      represents weighted average reserve quality information as of February 1,
      2005 and April 11, 2006, for the reserves obtained on the acquisition of
      the Triad mining complex and for a lease entered into during 2006,
      respectively.  The reserve quality information is based on the
      MM&A studies.





(4)
            Represents
      the Company’s estimate of reserves at December 31, 2009 based on
      additional information or reserves obtained from exploration and
      acquisition 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 December
      31, 2009 estimates have not been reviewed by
  MM&A.








Processing
and Transportation





Coal from
each of our mine complexes is transported by conveyor belt or by truck to one of
our ten preparation plants or directly to one of our load-outs, all of which are
in close proximity to our mining operations.  These preparation plants
remove impurities from the run-of-mine coal (the raw coal that comes directly
from the mine) and offer the flexibility to blend various coals and coal
qualities to meet specific customer needs.  We regularly upgrade and
maintain all of our preparation plants to achieve a high level of coal cleaning
efficiency and maintain the necessary capacity.





In
Central Appalachia, substantially all of our coal is shipped by train and sold
f.o.b. the railcar at the point of loading; transportation costs are normally
borne by the purchaser.  In addition to our well-positioned unit train
loadout facilities on the CSX Corporation railroad, our Bell County mining
complex has dual service provided by the CSX and Norfolk Southern Corporation
railroads in Bell County, Kentucky.





In the
Midwest, coal is shipped by train and by truck to our customers.  The
trucked coal is primarily sold f.o.b delivery point with transportation costs
borne by either the customer or us.  Coal delivered by train is sold
f.o.b. the railcar at the point of loading, with transportation costs normally
borne by the purchaser.  Our Triad mining complex has rail service
provided by Indiana Railroad and Indiana Southern Railroad.





Our
mining complexes are supported by personnel located in London and Lexington,
Kentucky who provide engineering and permitting assistance, project management,
land management and lease administration, coal quality control and quality
reporting, accounting and purchasing support, and railroad transportation
scheduling services.


7




Customers
and Coal Contracts




As is
customary in the coal industry, we regularly enter into long-term contracts
(which we define as contracts with terms of one year or longer) with many of our
customers.  These arrangements allow customers to secure a supply for
their future needs and provide us with greater predictability of sales volume
and sales prices.  In 2009, we generated approximately 91% of our
total revenues from long-term contracts to sell coal to electric
utilities.  For the year ended December 31, 2009, Georgia Power
Company (39%) and South Carolina Public Service Authority (37%) were our largest
customers by revenues.  No other customer accounted for more than 10%
of revenues.




In 2009,
we sold approximately 6.5 million tons of coal in the CAPP region at an average
selling price of $88.75 per ton.  In the CAPP region, we currently
have approximately 5.9 million and 2.4 million tons sold in 2010 and 2011,
respectively, at average selling prices in excess of our 2009 average selling
price.  Current market prices for coal in the CAPP region are
substantially below our average 2009 sales price.  If the market does
not strengthen, our sales price for future tons sold will be adversely
impacted.




In 2009,
we sold approximately 3.1 million tons of coal in the Midwest region at an
average selling price of $33.07 per ton.  In the Midwest region, we
currently have approximately 2.9 million and 1.4 million tons sold in 2010 and
2011, respectively, at average selling prices in excess of our 2009 average
selling price.




The terms
of our contracts result from a bidding and negotiation process with our
customers.  Consequently, the terms of these contracts often vary
significantly in many respects.  Our long-term supply contracts
typically contain one or more of the following pricing mechanisms:




·
            Fixed
      price contracts;





·
            Annually
      negotiated prices that reflect market conditions at the time;
      or





·
            Base-price-plus-escalation
      methods that allow for periodic price adjustments based on fixed
      percentages or, in certain limited cases, pass-through of actual cost
      changes.





A limited
number of our contracts have features of several contract types, such as
provisions that allow for renegotiation of prices on a limited basis within a
base-price-plus-escalation agreement.  Such re-opener provisions allow
both the customer and us an opportunity to adjust prices to a level close to
then current market conditions.  Each contract is negotiated
separately, and the triggers for re-opener provisions differ from contract to
contract.  Some of our existing contracts with re-opener provisions
adjust the contract price to the market price at the time the re-opener
provision is triggered.  Re-opener provisions could result in early
termination of a contract or a reduction in the volume to be purchased if the
parties were to fail to agree on price.





Our
long-term supply contracts also typically contain force majeure provisions
allowing for the suspension of performance by the customer or us for the
duration of specified events beyond the control of the affected party, including
labor disputes.  Some contracts may terminate upon continuance of an
event of force majeure for an extended period, which are generally three to six
months.  Contracts also typically specify minimum and maximum quality
specifications regarding the coal to be delivered.  Failure to meet
these conditions could result in substantial price reductions or termination of
the contract, at the election of the customer.  Although the volume to
be delivered under a long-term contract is stipulated, we, or the buyer, may
vary the timing of delivery within specified limits.





The terms
of our long-term coal supply contracts also vary significantly in other
respects, including: coal quantity parameters, flexibility and adjustment
mechanisms, permitted sources of supply, treatment of environmental constraints,
options to extend, suspension, termination and assignment provisions, and
provisions regarding the allocation between the parties of the cost of complying
with future government regulations.





Competition




The U.S.
coal industry is highly competitive, with numerous producers in all coal
producing regions.  We compete against various large producers and
hundreds of small producers.  According to the U.S. Department of
Energy, the largest producer produced approximately 17.1% (based on tonnage
produced) of the total United States production in 2008, the latest year for
which government statistics are available.  The U.S. Department of
Energy also reported 1,458 active coal mines in the United States in
2008.  Demand for our coal by our principal customers is affected
by:




8






·
            the
      price of competing coal and alternative fuel supplies, including nuclear,
      natural gas, oil and renewable energy sources, such as hydroelectric
      power;





·
            coal
      quality;





·
            transportation
      costs from the mine to the customer;
and





·
            the
      reliability of supply.





Continued
demand for our coal and the prices that we obtain are affected by demand for
electricity, environmental and government regulation, technological developments
and the availability and price of competing coal and alternative fuel
supplies.





Employees





At
December 31, 2009, we had 1,736 employees.  None of our employees are
currently represented by collective bargaining agreements.  Relations
with our employees are generally good.





Government
Regulation




The coal
mining industry is subject to extensive regulation by federal, state and local
authorities on 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.




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 generation activities, which could affect demand for our coal. The
possibility exists that new legislation or regulations may be adopted which
would have a significant impact on our mining operations or our customers’
ability to use coal and may require us or our customers to change operations
significantly or incur substantial costs.




9


Numerous
governmental permits and approvals are required for mining operations. In
connection with obtaining these permits and approvals, we are, or may be,
required to prepare and present to federal, state or local authorities data
pertaining to the effect or impact that any proposed exploration for or
production of coal may have upon the environment, the public, historical
artifacts and structures, and our employees’ health and safety. The requirements
imposed by such authorities may be costly and time-consuming and may delay
commencement or continuation of exploration or production operations. Future
legislation and administrative regulations may emphasize the protection of the
environment and health and safety and, as a consequence, our activities may be
more closely regulated. Such legislation and regulations, as well as future
interpretations of existing laws, may require substantial increases in our
equipment and operating costs and delays, interruptions or a termination of
operations, the extent of which cannot be predicted.




While it
is not possible to quantify the costs of compliance with all applicable federal
and state laws, those costs have been and are expected to continue to be
significant. We estimate that we will make expenditures of approximately $10.0
million and $3.0 million for environmental control facilities and complying with
safety regulations in 2010 and 2011, respectively. These costs are in addition
to reclamation and mine closing costs and the costs of treating mine water
discharge, when necessary. Compliance with these laws has substantially
increased the cost of coal mining, but is, in general, a cost common to all
domestic coal producers.




Mine
Health and Safety Laws




Stringent
health and safety standards were imposed by federal legislation when the Federal
Coal Mine Safety and Health Act of 1969 was adopted. The Federal Mine Safety and
Health Act of 1977, which significantly expanded the enforcement of safety and
health standards of the Coal Mine Safety and Health Act of 1969, imposes safety
and health standards on all mining operations. Regulations are comprehensive and
affect numerous aspects of mining operations, including training of mine
personnel, mining procedures, blasting, the equipment used in mining operations
and other matters. The Federal Mine Safety and Health Administration monitors
compliance with these federal laws and regulations and can impose under recently
enacted regulations maximum penalties of up to $220,000 for certain violations,
as well as closure of the mine. In addition, certain portions of the Coal Mine
Safety and Health Act of 1969 and the Federal Mine Safety and Health Act of
1977, the Black Lung Benefits Revenue Act of 1977 and the Black Lung Benefits
Reform Act of 1977, as amended in 1981, require payments of benefits to disabled
coal miners with black lung disease and to certain survivors of miners who die
from black lung disease.





In 2001,
Kentucky made significant changes to its mining laws. A new independent agency,
the Kentucky Mine Safety Review Commission, was created to assess penalties
against anyone, including owners or part owners (defined as anyone owning one
percent or more shares of publicly traded stock), whose intentional violations
or order to violate mine safety laws place miners in imminent danger of serious
injury or death. Mine safety training and compliance with state statutes and
regulations related to coal mining is monitored by the Kentucky Office of Mine
Safety and Licensing. The Commission can impose a penalty of up to $10,000 per
violation, as well as suspension or revocation of the mine license.





Increased
scrutiny of coal mining in general and underground coal mining in particular has
led to new legislation.   Legislation has been enacted at the state
and federal level that creates requirements for maintaining caches of
self-contained self-rescuers throughout underground mines; equipping all
underground miners with wireless communications devices and tracking devices;
and installing cable lifelines from the mine portal to all sections of the mine
for assistance in emergency escape.  Additionally, new requirements
for prompt reporting of accidents and increased fines and penalties for
violation of these and other regulations have been enacted.  The
Federal Mine Safety and Health Administration issued final regulations in
December 2006 that place new or amended requirements on all underground mines
relating to the storage and use of self-contained self-rescuers, evacuation
training for miners, the installment and maintenance of lifelines and
notification of MSHA in the event of an accident.  In addition, new
Federal Mine Safety and Health Administration regulations issued in December
2008 include requirements for providing refuge alternatives and improving
flame-resistant conveyor belts and other fire protection
measures.


10





It is our
responsibility to our employees to provide a safe and healthy environment
through training, communication, following and improving safety standards and
investigating all accidents, incidents and losses to avoid reoccurrence. The
combination of federal and state safety and health regulations in the coal
mining industry is, perhaps, the most comprehensive system for protection of
employee safety and health affecting any industry. Most aspects of mine
operations are subject to extensive regulation. This regulation has a
significant effect on our operating costs. However, our competitors are subject
to the same level of regulation.





Black
Lung Legislation




Under the
federal Black Lung Benefits Act (as amended) (the “Black Lung Act”), each coal
mine operator is required to make black lung benefits or contribution payments
to:




·
            current
      and former coal miners totally disabled from black lung
      disease;




·
            certain
      survivors of a miner who dies from black lung disease or pneumoconiosis;
      and




·
            a
      trust fund for the payment of benefits and medical expenses to any
      claimant whose last mine employment was before January 1, 1970, or where a
      miner’s last coal employment was on or after January 1, 1970 and no
      responsible coal mine operator has been identified for claims, or where
      the responsible coal mine operator has defaulted on the payment of such
      benefits.




Federal
black lung benefits rates are periodically adjusted according to the percentage
increase of the federal pay rate.




In
addition to the Black Lung Act, we also are liable under various state statutes
for black lung claims. To a certain extent, our federal black lung liabilities
are reduced by our state liabilities. Our total (federal and state) black lung
benefit liabilities, including the current portions, totaled approximately $32.8
million at December 31, 2009. These obligations were unfunded at December 31,
2009.




The
United States Department of Labor issued a final rule, effective January 19,
2001, amending the regulations implementing the Black Lung Act. The amendments
give greater weight to the opinion of the 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 black lung regulations could significantly increase our exposure
to federal black lung benefits liabilities. Experience to date related to these
changes is not sufficient to determine the impact of these changes. The National
Mining Association challenged the amendments but the courts, to date, with minor
exception, affirmed the rules. However, the decision left many contested issues
open for interpretation. Consequently, we anticipate increased litigation until
the various federal District Courts have had an opportunity to rule on these
issues.




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




Workers’
Compensation




We are
required to compensate employees for work-related injuries. Our accrued workers’
compensation liabilities, including the current portion, were $59.3 million at
December 31, 2009. These obligations are unfunded. Our expense for workers’
compensation was $12.3 million and $10.8 million in 2009 and 2008,
respectively.  Both the federal government and the states in which we
operate consider changes in workers’ compensation laws from time to time. Such
changes, if enacted, could adversely affect us.




11







Environmental
Laws and Regulations




We are
subject to various federal environmental laws and regulatory entities,
including:




·
            the
      Surface Mining Control and Reclamation Act of
  1977;




·
            the
      Clean Air Act;




·
            the
      Clean Water Act;




·
            the
      Toxic Substances Control Act;




·
              the
      Comprehensive Environmental Response, Compensation and Liability
      Act;




·
            the
      U.S. Army Corps of Engineers; and




·
            the
      Resource Conservation and Recovery
Act.




We are
also subject to state laws of similar scope in each state in which we
operate.




These
environmental laws require reporting, permitting and/or approval of many aspects
of coal operations. Both federal and state inspectors regularly visit mines and
other facilities to ensure compliance. We have ongoing compliance and permitting
programs designed to ensure compliance with such environmental
laws.




Given the
retroactive nature of certain environmental laws, we have incurred and may in
the future incur liabilities, including clean-up costs, in connection with
properties and facilities currently or previously owned or operated as well as
sites to which we or our subsidiaries sent waste materials.




Surface
Mining Control and Reclamation Act (SMCRA)




The
SMCRA, and its state counterparts, establish operational, reclamation and
closure standards for all aspects of surface mining as well as many aspects of
underground mining. The Act requires that comprehensive environmental protection
and reclamation standards be met during the course of and following completion
of mining activities. Permits for all mining operations must be obtained from
the Federal Office of Surface Mining Reclamation and Enforcement or, where state
regulatory agencies have adopted federally approved state programs under the
Act, the appropriate state regulatory authority.




The SMCRA
and similar state statutes, among other things, require that mined property be
restored in accordance with specified standards and approved reclamation plans.
The mine operator must submit a bond or otherwise secure the performance of
these reclamation obligations. The earliest a reclamation bond can be fully
released is five years after reclamation has been achieved. All states impose on
mine operators the responsibility for repairing or compensating for damage
occurring on the surface as a result of mine subsidence, a possible consequence
of underground mining. In addition, the Abandoned Mine Reclamation Fund, which
is part of the SMCRA, imposes a tax on all current mining operations, the
proceeds of which are used to restore unreclaimed mines closed before 1977. The
maximum tax is $0.315 per ton on surface mined coal and $0.135 per ton on coal
produced by underground mining.




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.  At December 31, 2009, we had accrued $44.8
million related to estimated mine reclamation costs.  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.




12


Our
future operating results would be adversely affected if these accruals were
determined to be insufficient. These obligations are unfunded. The amount that
was expensed for the year ended December 31, 2009 was $3.2 million, while the
related cash payment for such liability during the same period was $0.7
million.





We also
lease some of our coal reserves to third-party operators. Although specific
criteria varies from state to state as to what constitutes an “owner” or
“controller” relationship, under the federal SMCRA, responsibility for
reclamation or remediation, unabated violations, unpaid civil penalties and
unpaid reclamation fees of independent contract mine operators can be imputed to
other companies which are deemed, according to the regulations, to have “owned”
or “controlled” the contract mine operator. Sanctions against the “owner” or
“controller” are quite severe and can include being blocked, nationwide, from
receiving new permits, or amendments and revisions to existing permits, and
revocation, rescission and/or suspension of any permits that have been issued
since the time of the violations or, in the case of civil penalties and
reclamation fees, since the time such amounts became due.




Clean
Air Act




The
federal Clean Air Act and similar state laws and regulations, which regulate
emissions into the air, affect coal mining and processing operations primarily
through permitting and/or emissions control requirements. In addition, the
Environmental Protection Agency (the “EPA”) has issued certain, and is
considering further, regulations relating to fugitive dust and particulate
matter emissions that could restrict our ability to develop new mines or require
us to modify our operations. The EPA has adopted stringent National Ambient Air
Quality Standards for particulate matter, which may require some states to
change existing implementation plans for particulate matter. Because coal mining
operations and plants burning coal emit particulate matter, our mining
operations and utility customers are likely to be directly affected when the
revisions to the National Ambient Air Quality Standards are implemented by the
states. Regulations under the Clean Air Act may restrict our ability to develop
new mines or could require us to modify our existing operations, and may have a
material adverse effect on our financial condition and results of
operations.





The Clean
Air Act also indirectly affects coal mining operations by extensively regulating
the air emissions of coal-fired electric power generating plants. Coal contains
impurities, such as sulfur, mercury and other constituents, many of which are
released into the air when coal is burned. New environmental regulations
governing emissions from coal-fired electric generating plants could reduce
demand for coal as a fuel source and affect the volume of our sales. For
example, the federal Clean Air Act places limits on sulfur dioxide emissions
from electric power plants. In order to meet the federal Clean Air Act limits
for sulfur dioxide emissions from electric power plants, coal users need to
install scrubbers, use sulfur dioxide emission allowances (some of which they
may purchase), blend high sulfur coal with low sulfur coal or switch to low
sulfur coal or other fuels. The cost of installing scrubbers is significant and
emission allowances may become more expensive as their availability declines.
Switching to other fuels may require expensive modification of existing
plants.





The EPA
has also adopted new federal rules intended to reduce the interstate transport
of fine particulate matter and ozone through reductions in sulfur dioxides and
nitrogen oxides through the eastern United States.  The reductions
were to be implemented in stages, some through a market-based cap-and-trade
program. Such new regulations would likely require some power plants to install
new equipment, at substantial cost, or discourage the use of certain coals
containing higher levels of mercury.  The particular rules introduced
by the EPA in March 2005 were subsequently struck down by the U.S. Court of
Appeals for the D.C. Circuit on July 11, 2008.  On December 23, 2008,
the U.S. Court of Appeals for the D.C. Circuit remanded consolidated cases to
the EPA without vacatur of the Clean Air Interstate Rule in order that the EPA
could remedy flaws in the Rule.  The EPA continues to address the
issues raised in the Court’s opinions issued on July 11, 2008 and December 23,
2008.  New and proposed reductions in emissions of sulfur dioxides,
nitrogen oxides, particulate matter or greenhouse gases may require the
installation of additional costly control technology or the implementation of
other measures, including trading of emission allowances and switching to other
fuels.





Congress
and several states are now considering legislation, to further control air
emissions of multiple pollutants from electric generating facilities and other
large emitters. These new and proposed reductions will make it more costly to
operate coal-fired plants and could make coal a less attractive fuel alternative
in the planning and building of utility power plants in the future. To the
extent that any new and proposed requirements affect our customers, this could
adversely affect our operations and results.


13


Along
with these regulations addressing ambient air quality, 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.  These requirements could limit the demand for
coal in some locations.





The U.S.
Department of Justice, on behalf of the EPA, has filed lawsuits against several
investor-owned electric utilities and brought an administrative action against
one government-owned utility for alleged violations of the Clean Air
Act.  We supply coal to some of the currently-affected utilities, and
it is possible that other of our customers will be sued.  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.




Any
reduction in coal’s share of the capacity for power generation could have a
material adverse effect on our business, financial condition and results of
operations. The effect such regulations, or other requirements that may be
imposed in the future, could have on the coal industry in general and on us in
particular cannot be predicted with certainty.





We
believe we have obtained all necessary permits under the Clean Air Act. We
monitor permits required by operations regularly and take appropriate action to
extend or obtain permits as needed. Our permitting costs with respect to the
Clean Air Act are typically less than $100,000 per year.




Framework
Convention On Global Climate Change




The
United States and more than 160 other nations are signatories to the 1992
Framework Convention on Global Climate Change, commonly known as the Kyoto
Protocol, which is intended to limit or capture emissions of greenhouse gases,
such as carbon dioxide.  In December 1997, the signatories to the
convention established a potentially binding set of emissions targets for
developed nations.  Although the specific emissions targets vary from
country to country, the United States would be required to reduce emissions to
93% of 1990 levels over a five-year budget period from 2008 through
2012.  The U.S. Senate has not ratified the treaty
commitments.  The current administration could support the effort to
ratify the treaty.  With Russia’s ratification of the Kyoto Protocol
in 2004, it became binding on all ratifying countries.  The
implementation of the Kyoto Protocol in the United States and other countries,
and other emissions limits, such as those adopted by the European Union, could
affect demand for coal outside the United States.  If the Kyoto
Protocol or other comprehensive legislation or regulations focusing on
greenhouse gas emissions is enacted by the United States, it could have the
effect of restricting the use of coal.  Other efforts to reduce
emissions of greenhouse gases and federal initiatives to encourage the use of
natural gas also may affect the use of coal as an energy source.





Clean
Water Act




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.  We believe we have obtained or
applied for all permits required under the Clean Water Act and corresponding
state laws and are in substantial compliance with such permits. However, 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.




In
addition, the U.S. Army Corps of Engineers imposes stream mitigation
requirements on surface mining operations. These regulations require that
footage of stream loss be replaced through various mitigation processes, if any
ephemeral, intermittent, or perennial streams are impacted due to mining
operations.  The federal Office of Surface Mining Reclamation and
Enforcement has 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 also cause
us to incur significant additional operating costs.




14


Comprehensive
Environmental Response, Compensation and Liability Act




The
Comprehensive Environmental Response, Compensation and Liability Act (commonly
known as Superfund) and similar state laws create liabilities for the
investigation and remediation of releases of hazardous substances into the
environment and for damages to natural resources. Our current and former coal
mining operations incur, and will continue to incur, expenditures associated
with the investigation and remediation of facilities and environmental
conditions, including underground storage tanks, solid and hazardous waste
disposal and other matters under these environmental laws. We also must comply
with reporting requirements under the Emergency Planning and Community
Right-to-Know Act and the Toxic Substances Control Act.




The
magnitude of the liability and the cost of complying with environmental laws
with respect to particular sites cannot be predicted with certainty due to the
lack of specific information available, the potential for new or changed laws
and regulations, the development of new remediation technologies, and the
uncertainty regarding the timing of remedial work. As a result, we may incur
material liabilities or costs related to environmental matters in the future and
such environmental liabilities or costs could adversely affect our results and
financial condition. In addition, there can be no assurance that changes in laws
or regulations would not result in additional costs and affect the manner in
which we are required to conduct our operations.




Resource
Conservation and Recovery Act




The
Resource Conservation and Recovery Act and corresponding state laws and
regulations affect coal mining operations by imposing requirements for the
treatment, storage and disposal of hazardous wastes. Facilities at which
hazardous wastes have been treated, stored or disposed of are subject to
corrective action orders issued by the EPA and other potential obligations,
which could adversely affect our results of operations or financial
condition.







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
and Section 21E of the Securities Exchange Act of 1934.Examples include
statements related to our future outlook, anticipated capital expenditures,
future cash flows and borrowings, and sources of funding. These forward-looking
statements could also involve, among other things, statements regarding our
intent, belief or expectation with respect 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;





·
            governmental policies and regulatory
      actions;





·
            legal and administrative proceedings, settlements,
      investigations and claims;





·
            weather conditions or catastrophic weather-related
      damage;





·
            our production
  capabilities;





·
            availability of
    transportation;





·
            market demand for coal, electricity and
      steel;





·
            competition;





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


15





·
            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.





Any
forward-looking statements are subject to the risks 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 those
expressed or implied in such forward-looking statements. Any forward-looking
statements are also subject to a number of assumptions regarding, among other
things, future economic, competitive and market conditions generally. These
assumptions would be based on facts and conditions as they exist at the time
such statements are made as well as predictions as to future facts and
conditions, the accurate prediction of which may be difficult and involve the
assessment of events beyond our control.





We wish
to caution readers that forward-looking statements, including disclosures which
use words such as “believe,” “intend,” “expect,” “may,” “should,” “anticipate,”
“could,” “estimate,” “plan,” “predict,” “project,” or their negatives, and
similar statements, are subject to certain risks and uncertainties which could
cause actual results to differ materially from expectations. These risks and
uncertainties include, but are not limited to, the following: a change in the
demand for coal by electric utility customers; the loss of one or more of our
largest customers; inability to secure new coal supply agreements or to extend
existing coal supply agreements at market prices; our dependency on one railroad
for transportation of a large percentage of our products; failure to exploit
additional coal reserves; the risk that reserve estimates are inaccurate;
failure to diversify our operations; increased capital expenditures;
encountering difficult mining conditions; increased costs of complying with mine
health and safety regulations; bottlenecks or other difficulties in transporting
coal to our customers; delays in the development of new mining projects;
increased costs of raw materials; the effects of litigation, regulation and
competition; lack of availability of financing sources; our compliance with debt
covenants; the risk that we are unable to successfully integrate acquired assets
into our business; and the risk factors set forth in this Annual Report on Form
10-K under Item 1A “Risk Factors.” Those are representative of factors that
could affect the outcome of the forward-looking statements. These and the other
factors discussed elsewhere in this document are not necessarily all of the
important factors that could cause our results to differ materially from those
expressed in our forward-looking statements. Forward-looking statements speak
only as of the date they are made and we undertake no obligation to update
them.





Item
1A.          Risk
Factors




Risks
Related to the Coal Industry




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




We
derived 92% of our total revenues (contract and spot) in 2009 and 81% of our
total revenues in 2008, from our electric utility customers.  Fuel
cost is a significant component of the cost associated with coal-fired power
generation, with respect to not only the price of the coal, but also the costs
associated with emissions control and credits (i.e., sulfur dioxide, nitrogen
oxides, etc.), combustion by-product disposal (i.e., ash) and equipment
operations and maintenance (i.e., materials handling facilities).  All
of these costs must be considered when choosing between coal generation and
alternative methods, including natural gas, nuclear, hydroelectric and
others.




Weather
patterns also can greatly affect electricity generation.  Extreme
temperatures, both hot and cold, cause increased power usage and, therefore,
increased generating requirements from all sources.  Mild
temperatures, on the other hand, result in lower electrical demand, which allows
generators to choose the lowest-cost sources of power generation when deciding
which generation sources to dispatch.  Accordingly, significant
changes in weather patterns could reduce the demand for our coal.




16


Overall
economic activity and the associated demands for power by industrial users can
have significant effects on overall electricity demand.  Downward
economic pressures can cause decreased demands for power, by both residential
and industrial customers.




Any
downward pressure on coal prices, whether due to increased use of alternative
energy sources, changes in weather patterns, decreases in overall demand or
otherwise, would likely cause our profitability to decline.




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;
 ·
              world
      wide 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.





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.




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.  During
2009, we shipped in excess of 95% of our coal from our Central Appalachia mines
via CSX.  In the Midwest, we shipped approximately 63% of our produced
coal by truck and the remainder via rail systems.  We believe that our
2010 transportation modes will be comparable to those used in
2009.  Our dependence upon railroads and third party trucking
companies impacts our ability to deliver coal to our
customers.  Disruption of service due to weather-related problems,
strikes, lockouts, bottlenecks and other events could temporarily impair our
ability to supply coal to our customers, resulting in decreased
shipments.  Decreased performance levels over longer periods of time
could cause our customers to look elsewhere for their fuel needs, negatively
affecting our revenues and profitability.




17


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 Central Appalachian coal region may
hamper our ability to achieve high labor productivity and competitive
costs.





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





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




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




·
            employee
      health and safety;·
            permitting
      and licensing requirements;·
            air
      quality standards;·
            water
      quality standards;·
            plant,
      wildlife and wetland protection;·
            blasting
      operations;·
            the
      management and disposal of hazardous and non-hazardous materials generated
      by mining operations;·
            the
      storage of petroleum products and other hazardous
    substances;·
            reclamation
      and restoration of properties after mining operations are
      completed;·
            discharge
      of materials into the environment, including air emissions and wastewater
      discharge;·
            surface
      subsidence from underground mining; and·
            the
      effects of mining operations on groundwater quality and
      availability.







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




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




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.




18





The
passage of legislation responsive to the Framework Convention on Global Climate
Change or similar governmental initiatives could result in restrictions on coal
use.





The
United States and more than 160 other nations are signatories to the 1992
Framework Convention on Global Climate Change, commonly known as the Kyoto
Protocol, which is intended to limit or capture emissions of greenhouse gases,
such as carbon dioxide.  In December 1997, the signatories to the
convention established a potentially binding set of emissions targets for
developed nations.  Although the specific emissions targets vary from
country to country, the United States would be required to reduce emissions to
93% of 1990 levels over a five-year budget period from 2008 through
2012.  The U.S. Senate has not ratified the treaty
commitments.  The current administration could support the effort to
ratify the treaty.  With Russia’s ratification of the Kyoto Protocol
in 2004, it became binding on all ratifying countries.  The
implementation of the Kyoto Protocol in the United States and other countries,
and other emissions limits, such as those adopted by the European Union, could
affect demand for coal outside the United States.  If the Kyoto
Protocol or other comprehensive legislation or regulations focusing on
greenhouse gas emissions is enacted by the United States, it could have the
effect of restricting the use of coal.  Other efforts to reduce
emissions of greenhouse gases and federal initiatives to encourage the use of
natural gas also may affect the use of coal as an energy source.





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




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




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




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




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




Extensive
environmental laws and regulations, including those relating to greenhouse gas
emissions, affect the end-users of coal and could reduce the demand for coal as
a fuel source and cause the volume of our sales to decline.




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




19


The U.S.
Department of Justice, on behalf of the EPA, has filed lawsuits against several
investor-owned electric utilities and brought an administrative action against
one government-owned utility for alleged violations of the Clean Air
Act.  We supply coal to some of the currently-affected utilities, and
it is possible that other of our customers will be sued.  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.  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.




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 April 2009, the EPA proposed
a finding of such endangerment and has announced plans’ to soon finalize its
proposed endangerment finding.  This could result in the EPA issuing 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 do so, including, among others, a
final greenhouse gas reporting rule for certain major stationary source
permitting programs, proposed regulations to control greenhouse gas emissions
from light duty vehicles, and a proposed “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 the second quarter of 2009, a bill
passed the House that would reduce greenhouse gas emissions to 17% below 2005
levels by 2020 and 80% below 2005 levels by the middle of the century, and both
Houses of Congress are also actively considering new legislation that could
establish a national cap on, or other regulation of, carbon emissions and other
greenhouse gases.  Current proposals include a cap and trade system
that would require the purchase of emission permits, which could be traded on
the open market.  These proposals will 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-fueled power plants has also recently been contested by
state regulators and environmental organizations based on concerns relating to
greenhouse gas emissions.  In addition, in September 2009, the United
States Court of Appeals for the Second Circuit issued its decision in
Connecticut v.  AEP allowing plaintiffs’ claims that public utilities’
greenhouse gas emissions created a “public nuisance” to go to trial over
defendants’ objections based upon political question, preemption and lack of
standing.  A similar ruling was issued in October 2009 by the Fifth
Circuit in Comer v.  Murphy Oil involving a lawsuit against several
coal, chemical, oil and gas, and utility companies.  The plaintiffs in
these cases are seeking various remedies, including monetary damages and
injunctive relief.  These cases expose other significant contributors
to greenhouse gas emissions to similar litigation risk.  The effect of
these recent cases may be mitigated in the event Congress adopts greenhouse gas
legislation and the EPA finalizes 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
characteristics of coal may make it difficult for coal users to comply with
various environmental standards related to coal combustion.  As a
result, they may switch to other fuels, which would affect the volume or price
of our sales.




Coal
contains impurities, including sulfur, nitrogen oxide, mercury, chlorine and
other elements or compounds, many of which are released into the air when coal
is burned.  Stricter environmental regulations of emissions from
coal-fired electric generating plants could increase the costs of using coal
thereby reducing demand for coal as a fuel source, and the volume and price of
our coal sales.  Stricter regulations could make coal a less
attractive fuel alternative in the planning and building of utility power plants
in the future.




20


For
example, in order to meet the federal Clean Air Act limits for sulfur dioxide
emissions from electric power plants, coal users may need to install scrubbers,
use sulfur dioxide emission allowances (some of which they may purchase), blend
high sulfur coal with low sulfur coal or switch to other fuels.  Each
option has limitations.  Lower sulfur coal may be more costly to
purchase on an energy basis than higher sulfur coal depending on mining and
transportation costs.  The cost of installing scrubbers is significant
and emission allowances may become more expensive as their availability
declines.  Switching to other fuels may require expensive modification
of existing plants.




In March
2005, the EPA adopted new federal rules intended to reduce the interstate
transport of fine particulate matter and ozone through reductions in sulfur
dioxides and nitrogen oxides through the eastern United States.  The
reductions were to be implemented in stages, some through a market-based
cap-and-trade program.  Such new regulations would likely require some
power plants to install new equipment, at substantial cost, or discourage the
use of certain coals containing higher levels of mercury.  The
particular rules introduced by the EPA in March 2005 were subsequently struck
down by the U.S. Court of Appeals for the D.C. Circuit on July 11,
2008.  On December 23, 2008, the U.S. Court of Appeals for the D.C.
Circuit remanded consolidated cases to the EPA without vacatur of the Clean Air
Interstate Rule in order that the EPA could remedy flaws in the
Rule.  The EPA continues to address the issues raised in the Court’s
opinions issued on July 11, 2008 and December 23, 2008.  New and
proposed reductions in emissions of sulfur dioxides, nitrogen oxides,
particulate matter or greenhouse gases may require the installation of
additional costly control technology or the implementation of other measures,
including trading of emission allowances and switching to other
fuels.




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).  Regulatory
authorities exercise considerable discretion in the timing and scope of permit
issuance.  Requirements imposed by these authorities may be costly and
time consuming and may result in delays in the commencement or continuation of
exploration or production operations.  In addition, we often are
required to prepare and present to federal, state and local authorities data
pertaining to the effect or impact that proposed exploration for or production
of coal might have on the environment.  Further, the public may
comment on and otherwise engage in the permitting process, including through
intervention in the courts.  Accordingly, the permits we need may not
be issued, or, if issued, may not be issued in a timely fashion, or may involve
requirements that restrict our ability to conduct our mining operations or to do
so profitably.




Prior to
placing excess fill material in valleys in connection with surface mining
operations, coal mining companies are required to obtain a permit from the U.S.
Army Corps of Engineers (Corps) under Section 404 of the Clean Water Act (404
Permit).  The permit can be either a simplified Nation Wide Permit #21
(NWP 21) or a more complicated individual permit.  Litigation
respecting the validity of the NWP 21 permit program as currently administered
has been ongoing for several years.  On March 23, 2007, U.S. District
Judge Robert Chambers of the Southern District of West Virginia struck down
several 404 permits that had been issued by the Corps and found that the Corps’
decisions to issue such permits did not conform to the requirements of the Clean
Water Act or the National Environmental Policy Act because the Corps failed to
do a full assessment of all of the impacts of eliminating headwater
streams.  This ruling was subsequently reversed on appeal to the 4th
Circuit Court of Appeals.  While the lower court ruling applied only
to the permits at issue in the case before Judge Chambers and thus would have
had precedence only with respect to certain counties in southern West Virginia
(where we do not now operate), the matters at issue in that case may be
litigated in the future in jurisdictions in which we do operate and a ruling for
the plaintiffs in such litigation or the NWP 21 litigation could have an adverse
impact on our planned surface mining operations.




In
January 2005, a virtually identical claim to that filed in West Virginia was
filed in Kentucky.  The plaintiffs in this case, Kentucky
Riverkeepers, Inc., et al. v. Colonel Robert A.  Rowlette, Jr., et
al., Civil Action No 05-CV-36-JPC, seek the same relief as that sought in West
Virginia.  The court heard oral arguments on plaintiffs’ preliminary
injunction motion and/or motion for summary judgment in late 2005 and those
motions were denied as moot as the 2002 NWP being challenged had expired before
a decision was rendered in the case.  The presiding judge has allowed
the plaintiffs to renew the challenge against the 2007 permits and the case
continues to move forward.  A ruling for the plaintiffs in this matter
could have an adverse impact on our planned surface mining
operations.




21


Most
recently, the Environmental Protection Agency (EPA) has announced publicly that
it will exercise its statutory right to more actively review Section 404
Permitting actions by the Corps.  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 requiring additional
review under the Clean Water Act.  Such oversight could further delay
and/or restrict the issuance of such permits, either of which events could have
an adverse impact on our planned surface mining operations.




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.  At December 31, 2009, we
had accrued $44.8 million related to estimated mine reclamation
costs.  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.




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 and net losses in the each of the years ended
December 31, 2008 and 2007.  While we have been profitable in the year
ended December 31, 2009, we must continue to carefully manage our business,
including the balance of our long-term and short-term sales contracts and our
production costs.  Although we seek to balance our contract mix to
achieve optimal revenues over the long term, the market price of coal is
affected by many factors that are outside of our control.  Our
production costs have increased in recent years, and we expect higher costs to
continue for the next several 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.





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





For 2009,
we generated approximately 92% of our total revenues from several long-term
contracts and spot sales with electrical utilities, including 39% from Georgia
Power Company, and 37% from South Carolina Public Service
Authority.  At December 31, 2009, we had coal supply agreements with
these customers that expire in 2010 to 2012.  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.




22


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 (Btu’s);·
            sulfur
      content;·
            ash
      content;·
            grindability;
      and·
            ash
      fusion temperature.





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




The
operating profits we realize from coal sold under supply agreements depend on a
variety of factors.  In addition, price adjustment and other
provisions may increase our exposure to short-term coal price volatility
provided by those contracts.  If a substantial portion of our coal
supply agreements are modified or terminated, we could be materially adversely
affected to the extent that we are unable to find alternate buyers for our coal
at the same level of profitability.  As a result, we might not be able
to replace existing long-term coal supply agreements at the same prices or with
similar profit margins when they expire.




Our
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 federal and state laws and regulations relating to
safety in underground coal mines and enforcement activities by federal and state
regulators.  These laws and regulations, the most significant of which is
the federal MINER Act, include requirements for constructing and maintaining
caches for the storage of additional self-contained self rescuers throughout
underground mines; installing rescue chambers in underground mines; constant
tracking of and communication with personnel in the mines; utilizing carbon
dioxide monitors, installing cable lifelines from the mine portal to all
sections of the mine to assist in emergency escape; submission and approval of
emergency response plans; new and additional safety training; providing refuge
alternatives; and improving flame-resistant conveyor belts and other fire
protection measures.  In 2007, implementation of the MINER Act continued
with new penalty regulations that significantly increased regular penalty
amounts and special assessments.  In addition, a new emergency temporary
standard was issued relating to mine seal requirements.  Various states
also have enacted their own new laws and regulations addressing many of these
same subjects.  These new laws and regulations will cause us to incur
substantial additional costs, which will adversely impact our operating
performance.




23


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.  Certain of our mines have received such notices
in the past.  Upon receipt of such a notification, we conduct a
comprehensive review of the operation that received the notification and prepare
and submit to MSHA plans designed to enhance employee safety at the mine through
better education, training, mining practices, and safety management. 
Following implementation of the plans, MSHA conducts a complete inspection of
the mine and further evaluates the situation and then advises the operator
whether a pattern of violation exists and whether further action will be
taken.  No pattern of violations has been found to exist at any of our
mines that have received such notification.  The failure to remediate the
situation resulting in a finding that a pattern of violation does exists at a
mine could have a significant impact on our operations.




Unexpected
increases in raw material costs could significantly impair our operating
results.





Our coal
mining operations use significant amounts of steel, petroleum products and other
raw materials in various pieces of mining equipment, supplies and materials,
including the roof bolts required by the room and pillar method of
mining.  Recently and historically, petroleum prices and other
commodity prices have been volatile.  If the price of steel or other
of these materials increase, our operational expenses will increase, which could
have a significant negative impact on our cash flow and operating
results.





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





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




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


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





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


24


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.





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 2010, we anticipate less than
10% of our total production will come 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.





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 were initially based on studies
conducted by Marshall Miller & Associates, Inc. in 2004 for our CAPP
reserves 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.
 25


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




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


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




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





Federal
and state laws require bonds to secure our obligations to reclaim lands used for
mining, to pay federal and state workers’ compensation and to satisfy other
miscellaneous obligations.  As of December 31, 2009, we had
outstanding surety bonds with third parties for post-mining reclamation totaling
$60.2 million.  Furthermore, we have surety bonds for an additional
$43.8 million in place for our federal and state workers’ compensation
obligations and other miscellaneous obligations.  Insurance companies
have informed us, along with other participants in the coal industry, that they
no longer will provide surety bonds for workers’ compensation and other
post-employment benefits without collateral.  We have satisfied our
obligations under these statutes and regulations by providing letters of credit
or other assurances of payment.  However, letters of credit can be
significantly more costly to us than surety bonds.  The issuance of
letters of credit under our 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 he negatively affected.





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





In 2009,
our company owned mines were 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.  Legislation has been
proposed to the United States Congress to enact a law allowing our workers to
choose union representation solely by signing election cards (“Card Check”),
which would eliminate the use of secret ballots to elect union
representation.  While the impact is uncertain, if Card Check
legislation is enacted into law, it will be administratively easier to unionize
coal mines and may lead to more coal mines becoming unionized.





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





We are
required by law to provide various long-term employee benefits.  We
accrue amounts for these obligations based on the present value of expected
future costs.  We employed an independent actuary to complete
estimates for our workers’ compensation and black lung (both state and federal)
obligations.  At December 31, 2009, the current and non-current
portions of these obligations included $32.8 million for coal workers’ black
lung benefits and $59.3 million for workers’ compensation benefits.




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




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





We
provide benefits under a defined benefit pension plan that was frozen in
2007.  As of December 31, 2009, we estimated that our obligation under
the pension plan was underfunded by approximately $14.8 million.  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.




26




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.







Our
current leverage amount may harm our financial condition and results of
operations.




Our total
consolidated long-term debt as of December 31, 2009 was $278.3 million (net of a
discount on our convertible notes of $44.2 million).  Our level of
indebtedness could result in the following:




·
              it
      could effect 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.





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





Our debt
instruments impose a number of restrictions on us.  A failure to
comply with these restrictions could adversely affect our ability to borrow
under our revolving credit facility or result in an event of default under our
debt instruments.  Our debt instruments contain financial and other
covenants that create limitations on our ability to, among other things, utilize
the full amount on our revolver for borrowings or to issue letters of credit or
incur additional debt, and require us to maintain various financial ratios and
comply with various other financial covenants.  The minimum Adjusted
EBITDA and Leverage Ratio covenants are only applicable if our unrestricted cash
falls below $75 million and remain in effect until our unrestricted cash exceeds
$75 million for 90 consecutive days (the Trigger Event).  These most
restrictive covenants include the following:





·
              If
      we have a Trigger Event, our revolving credit facility requires that we
      achieve a minimum Adjusted EBITDA, which is defined in that agreement as
      “Consolidated EBITDA”.  Adjusted EBITDA is measured at the end of
      each quarter for the preceding 12 months.  If measured, the required
      minimum Adjusted EBITDA would range from $94.0 million to $105.0 million
      during 2010.  Our Adjusted EBITDA for the twelve months ended
      December 31, 2009 was $146.1 million.  The most directly comparable
      US GAAP financial measure is net income.  For the year ended December
      31, 2009, we had net income of $51.0 million.  Adjusted EBITDA is
      defined and reconciled to EBITDA and Net Loss under “Reconciliation of
      Non-GAAP Measures” in Part I – Item 2 – Management’s Discussion and
      Analysis of Financial Condition and Results of
  Operations.




·
              If
      we have a Trigger Event, our revolving credit facility requires that our
      Leverage Ratio (as defined in the revolving credit facility) not exceed a
      specified multiple at the end of each quarter.  If measured, the
      Leverage Ratio would be permitted to be 0.68X to 0.62X during 2010. 
      Our Leverage Ratio was 0.0X as of December 31,
  2009.




27


·
              Our
      revolving credit facility limits the Capital Expenditures (other than
      Mandated Capital Expenditures) (as both are defined in the revolving
      credit facility) that we may make or agree to make in any fiscal
      year.  For the fiscal year ended December 31, 2010, we cannot make
      Capital Expenditures in excess of $75.0 million (excludes Mandatory
      Capital Expenditures).




Additional
detail regarding the terms of the facilities, 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.





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





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





Inability
to satisfy contractual obligations may adversely affect our
profitability.





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





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





Our
future business plan may consider opportunities other than underground and
surface mining in eastern Kentucky and southern Indiana.  We will
consider opportunities to further increase the percentage of coal that comes
from surface mines.  We may also consider opportunities to expand both
surface and underground mining activities in areas that are outside of eastern
Kentucky and southern Indiana.  We may also consider opportunities in
other energy-related areas that are not prohibited by the Indenture governing
our senior notes due 2012 or other financing agreements.  If we
undertake these diversification strategies and fail to execute them
successfully, our financial condition and results of operations may be adversely
affected.





28


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





We may
explore opportunities to expand our operations through strategic acquisitions of
other coal mining companies.  We currently have no agreement or
understanding for any specific acquisition.  Risks associated with our
current and potential acquisitions include the disruption of our ongoing
business, problems retaining the employees of the acquired business, assets
acquired proving to be less valuable than expected, the potential assumption of
unknown or unexpected liabilities, costs and problems, the inability of
management to maintain uniform standards, controls, procedures and policies, the
difficulty of managing a larger company, the risk of becoming involved in labor,
commercial or regulatory disputes or litigation related to the new enterprises
and the difficulty of integrating the acquired operations and personnel into our
existing business.




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





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





We
believe that our cash on hand, the availability under our revolving credit
facility and cash generated from our operations will provide us with adequate
liquidity through 2010.  However, such funds, together with the
proceeds from this offering, 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.





Our
current reserve base in the Midwest is limited.





Our
southern Indiana mining complex currently has rights to proven and probable
reserves that we believe will be exhausted in approximately 13 years at 2009
levels of production, compared to our current Central Appalachia mining
complexes, which have reserves that we believe will last an average of
approximately 34 years at 2009 levels of production.  We intend to
increase our reserves in southern Indiana by acquiring rights to additional
exploitable reserves that are either adjacent to or nearby our current
reserves.  If we are unable to successfully acquire such rights on
acceptable terms, or if our exploration or acquisition activities indicate that
such coal reserves or rights do not exist or are not available on acceptable
terms, our production and revenues will decline as our reserves in that region
are depleted.  Exhaustion of reserves at particular mines also may
have an adverse effect on our operating results that is disproportionate to the
percentage of overall production represented by such mines.





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





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 U.S. Army Corps of Engineers imposes stream mitigation requirements on
surface mining operations.  These regulations require that footage of
stream loss be replaced through various mitigation processes, if any ephemeral,
intermittent, or perennial streams are 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.




29




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 the issuance of common stock in connection with the
convertible notes issued in 2009, or by the consummation of other
transactions.  As a result, if 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.





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.





Dividends
are limited by our revolving credit facility, senior notes and convertible
senior notes.





We do not
anticipate paying any cash dividends on our common stock in the near future. In
addition, covenants in our revolving credit facility, senior notes and
convertible 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.  In 2009, an amendment to the
Rights Agreement reduced, until December 5, 2010, the threshold at which a
person or group becomes an “Acquiring Person” under the Rights Agreement from
20% to 4.9% of the Company’s then-outstanding shares of common
stock.





30


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
1B.         Unresolved Staff
Comments




None.




Item
2.           
Properties




As
of December 31, 2009, we owned approximately 11,400 acres of land.  Our mineral rights are
primarily controlled through leases.  In a mining context, control of
a property is typically divided into three categories:





·
              mineral
      rights, which allows the controlling party to remove the minerals on the
      property;





·
              surface
      rights, which allows the controlling party to use and disturb the surface
      of the property; and





·
              fee
      control, which includes both mineral and surface
  rights.





Our rights
with respect to properties that we lease vary from lease to lease, but encompass
mineral rights, surface rights, or both.





The coal
properties that we control in Central Appalachia are located in the Big Sandy,
Hazard and Upper Cumberland coal districts of the Central Appalachian coal basin
in eastern Kentucky and north central Tennessee.These three coal
districts are located in the Appalachian Plateau structural and physiographic
province.  The coal properties that we control in the Midwest are part
of the Illinois Coal basin and are located in southwest Indiana.  The
terms of our leases can vary significantly, including the following
provisions:





·
            length
      of term;





·
            renewal
      requirements;





·
            minimum
      royalties;





·
            recoupment
      provisions;





·
            tonnage
      royalty rates;





·
            minimum
      tonnage royalty rates;





·
            wheelage
      rates;





·
            usage
      fees; and





·
            other
      factors.





Our
leases typically provide for periodic royalty payments, subject to specified
annual minimums.  The annual minimums are typically based on the
forecasted tonnage of coal to be produced on the leased property over the term
of the lease.  Payments made pursuant to these minimums for years in
which periodic royalty payments do not meet the minimums are typically
recoupable against future periodic production royalties paid within a fixed
period of time.  We typically are responsible for the payment of
property taxes due on the properties we have under lease.





31


For a
discussion of our coal reserves see Item 1 Business “Reserves.”





Our
corporate headquarters are located in Richmond, Virginia and are occupied
pursuant to a lease that expires in 2014.





Item
3.            Legal
Proceedings




We
are parties 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
4.            Submission
of Matters to a Vote of Security Holders




There
were no matters submitted to a vote of security holders of the Company through a
solicitation of proxies or otherwise during the fourth quarter of the Company’s
year ended December 31, 2009.












































32


PART
II




Item
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities







Market
Information





Ourcommon stock trades on the Nasdaq Global Select Market under the tickersymbol “JRCC”. The table below sets forth the high and low closing sales prices for our common stock for the periods indicated, as reported by
Nasdaq.





First
              Quarter
            Second
              Quarter
            Third
      Quarter
            Fourth
      QuarterFiscal year ended December 31, 2009High
            
            $18.30
            24.11
            21.15
            22.31Low
            
            $9.09
            12.62
            13.50
            17.20Fiscal year ended December 31,
      2008High
            
            $19.65
            62.14
            58.79
            21.25Low
            
            $8.57
            17.22
            20.34
            5.09





Recent Sales of Unregistered
Securities




We issued
common stock and options to purchase common stock to the following persons or
classes of persons, in reliance upon the exemption contained in Section 4(2) of
the Securities Act of 1933, as follows:


Recipient
              
              No.
                Shares
              
              No.
                Options
              
              Date of
                Issuance
              
              Consideration
              
              Option
                Exercise
                PriceOperating
      and senior management
              
              213,708
              
              -
              
              April
      6, 2009
              
              Services
      rendered
              
              N/ANon-employee
      directors (aggregate)
              
              5,000
              
              20,000
              
              April
      6, 2009
              
              Services
      rendered
              
              $13.87





Please
refer to note 7 of our December 31, 2009 consolidated financial statements for
securities authorized to be issued under our 2004 Equity Incentive
Plan.





Holders





As of
December 31, 2009, there were 135 record holders of our common
stock.





Dividends





We did
not pay any cash dividends on our common stock during the years ended December
31, 2009, 2008 or 2007.  We do not anticipate paying cash dividends in
the foreseeable future.  Any future determination as to the payment of
cash dividends will depend upon such factors as earnings, capital requirements,
our financial condition, restrictions in financing agreements and other factors
deemed relevant by the Board of Directors.  The payment of cash
dividends is also currently prohibited by our revolving credit facility, our
convertible senior notes and our senior notes.





33


Stock
Performance Graph





Set forth
below is a line graph comparing the percentage change in the cumulative total
shareholder return of James River Coal Company’s Common Stock against the
cumulative total return of the NASDAQ Global Market (U.S.) Index and the Dow
Jones U.S. Coal Index for the period commencing on January 25, 2005 (the date
the Company’s Common Stock began trading on the Nasdaq Global Market) and ending
on December 31, 2009.









Item  6.           Selected
Financial Data




The
following table presents our selected consolidated financial and operating data
as of and for each of the periods indicated.  The selected
consolidated financial data is derived from our audited consolidated financial
statements.  The selected consolidated financial and operating data
should be read in conjunction with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our consolidated financial
statements and related notes.


34




Year
      Ended December 31,2009
              
              
              2008
              
              
              2007
              
              
              2006
              
              
              2005Consolidated
      Statement of Operations:Revenues
              
              $
              681,558
              
              
              
              568,507
              
              
              
              520,560
              
              
              
              564,791
              
              
              
              453,999Cost
      of coal sold
              
              
              508,888
              
              
              
              527,888
              
              
              
              473,347
              
              
              
              496,799
              
              
              
              389,222Gain
      on curtailment of pension plan
              
              
              -
              
              
              
              -
              
              
              
              (6,091
              )
              
              
              -
              
              
              
              -Depreciation,
      depletion, and amortization
              
              
              62,078
              
              
              
              70,277
              
              
              
              71,856
              
              
              
              74,562
              
              
              
              51,822Gross
      profit (loss)
              
              
              110,592
              
              
              
              (29,658
              )
              
              
              (18,552
              )
              
              
              (6,570
              )
              
              
              12,955Selling,
      general, and administrative expenses
              
              
              39,720
              
              
              
              34,992
              
              
              
              32,191
              
              
              
              30,867
              
              
              
              25,453Operating
      income (loss)
              
              
              70,872
              
              
              
              (64,650
              )
              
              
              (50,743
              )
              
              
              (37,437
              )
              
              
              (12,498
              )Interest
      expense
              
              
              17,057
              
              
              
              17,746
              
              
              
              19,764
              
              
              
              16,782
              
              
              
              12,892Interest
      income
              
              
              (60
              )
              
              
              (469
              )
              
              
              (471
              )
              
              
              (366
              )
              
              
              (226
              )Charges
      associated with repayment of debt
              
              
              1,643
              
              
              
              15,618
              
              
              
              2,421
              
              
              
              -
              
              
              
              2,524Miscellaneous
      income, net
              
              
              (281
              )
              
              
              (1,279
              )
              
              
              (598
              )
              
              
              (533
              )
              
              
              (1,067
              )Income
      tax expense (benefit)
              
              
              1,559
              
              
              
              (273
              )
              
              
              (17,844
              )
              
              
              (27,151
              )
              
              
              (14,283
              )Net
      income (loss)
              
              $
              50,954
              
              
              
              (95,993
              )
              
              
              (54,015
              )
              
              
              (26,169
              )
              
              
              (12,338
              )Basic
      earnings (loss) per common share:
              
              $
              1.85
              
              
              
              (3.91
              )
              
              
              (3.29
              )
              
              
              (1.65
              )
              
              
              (0.83
              )Diluted
      earnings (loss) per common share:
              
              
              1.85
              
              
              
              (3.91
              )
              
              
              (3.29
              )
              
              
              (1.65
              )
              
              
              (0.83
              )




























35





December
      31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005(in
      thousands, except per share, per ton and number of employees
      information)Consolidated
      Balance Sheet Data:Working
      capital (deficit)
            
            $
            109,998
            
            
            
            (54,961
            )
            
            
            (8,471
            )
            
            
            (2,589
            )
            
            
            6,123Property,
      plant, and equipment, net
            
            
            354,088
            
            
            
            344,848
            
            
            
            319,204
            
            
            
            337,780
            
            
            
            360,000Total
      assets
            
            
            669,312
            
            
            
            463,546
            
            
            
            439,287
            
            
            
            451,254
            
            
            
            472,669Long
      term debt, including current portion
            
            
            278,268
            
            
            
            168,000
            
            
            
            188,800
            
            
            
            167,493
            
            
            
            150,000Total
      shareholders’ equity
            
            
            170,342
            
            
            
            65,238
            
            
            
            69,774
            
            
            
            86,397
            
            
            
            111,267





Year
      Ended December 312009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005Consolidated
      Statement of Cash Flow Data:Net
      cash provided by (used in) operating activities
            
            $
            27,559
            
            
            
            (1,576
            )
            
            
            4,022
            
            
            
            31,680
            
            
            
            48,990Net
      cash used in investing activities
            
            
            (72,010
            )
            
            
            (73,589
            )
            
            
            (49,201
            )
            
            
            (54,738
            )
            
            
            (135,362
            )Net
      cash provided by financing activities
            
            
            149,058
            
            
            
            73,076
            
            
            
            48,785
            
            
            
            15,929
            
            
            
            91,429Supplemental
      Operating Data:Tons
      sold
            
            
            9,623
            
            
            
            11,383
            
            
            
            12,049
            
            
            
            13,128
            
            
            
            11,091Tons
      produced
            
            
            9,877
            
            
            
            11,355
            
            
            
            12,051
            
            
            
            13,054
            
            
            
            11,155Revenue
      per ton sold (excluding synfuel)
            
            $
            70.83
            
            
            
            49.94
            
            
            
            42.63
            
            
            
            42.67
            
            
            
            40.19Number
      of employees
            
            
            1,736
            
            
            
            1,751
            
            
            
            1,681
            
            
            
            1,742
            
            
            
            1,429Capital
      expenditures
            
            $
            72,159
            
            
            
            74,697
            
            
            
            49,343
            
            
            
            62,507
            
            
            
            84,987


















































36


Item
7.            

Management’s Discussion and Analysis of 
Financial Condition and
Results ofOperation


The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the accompanying notes and "Selected Financial Data" included
elsewhere in this filing.  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.





Overview





We mine,
process and sell bituminous, steam- and industrial-grade coal through six
operating subsidiaries (“mining complexes”) located throughout eastern Kentucky
and in southern Indiana.  We have two reportable business segments
based on the coal basins in which we operate (Central Appalachia (CAPP) and the
Midwest (Midwest)).  In 2009, our mines produced 9.8 million tons of
coal(including 0.3 million tons of contract coal)andwe purchased another 0.1 million
tons for resale.  Of the 9.5 million tons we produced from Company
operated mines, approximately 66% came from underground mines, while the
remaining 34% came from surface mines.  In 2009, we generated revenues of $681.6 million and net
income of $51.0 million.





CAPP
Segment





In
Central Appalachia, the majority of our coal is primarily sold 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.  According to the most recent information available
from the US Energy Information Administration (EIA), in 2008 the South
Atlantic region consumed 180.4 million tons of coal or about 17% of all coal for
electric generation in the United States.  We have been providing coal to customers in the South
Atlantic region since our formation in 1988.  In 2009, Georgia Power
Company and South Carolina Public Service Authority were our largest customers,
representing approximately 39% and 37% of our total revenues,
respectively.  No other customer accounted for more than 10% of our
revenues.





According
to the EIA, coal production for Eastern Kentucky and West Virginia was 248
million tons in 2008.  During 2009, our CAPP segment shipped 6.5
million tons of coal at an average selling price of $88.75 per
ton.  As of December 31, 2009, we
estimate that we controlled approximately 231 million tons of proven and
probable coal reserves in our CAAP segment.  Based on our most recent
analysis prepared by Marshall Miller &Associates, Inc. (“MM&A”)
as of March 31, 2004, we estimate that these
reserves have an average heat content of 13,300 Btu per pound and an average
sulfur content of 1.3%.  At current production levels, we believe
these reserves would support approximately 34 years of
production.





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.  According to the  EIA, in 2008 the East North
Central Region consumed about 239.2 million tons of coal or 23% of all coal
consumed for electric generation in the United States.  In 2009, our Midwest segment’s largest customer
represented approximately 6% of our total revenues.





During
2009, our Midwest segment shipped 3.1 million tons of coal at an average selling
price of $33.07 per ton.  We believe
that coal-fired electric utilities and industrial customers value the high
energy coal that comprises the majority of our Midwest reserves.  As
of December 31, 2009, we estimate that we controlled approximately 40 million
tons of proven and probable coal reserves in our Midwest
segment.  Based on our most recent analyses prepared byMM&A as of February 1, 2005 and April 11, 2006, we estimate that
these reserves have an average heat content of
12,000 Btu per pound and average sulfur content of 3.2%.  At current
production levels, we believe these reserves would support approximately 13
years of production.


37




Reserves




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.  For the Triad properties, MM&A also prepared a detailed
study of Triad’s 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.  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 and Triad using standards accepted by government and
industry.  We have used MM&A’s March 31, 2004 study as the basis
for our current internal estimate of our Central Appalachia 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 December 31, 2009, we estimate that, as of December 31, 2009, we
controlled approximately 231.2 million tons of proven and probable coal reserves
in the CAPP region and 39.9 millions tons in the Midwest region.  The
following table provides additional information regarding changes to our
reserves since December 31, 2009 (in millions of tons):




CAPP
                
                
                Midwest
                
                
                TotalProven
      and Probable Reserves, as of December 31, 2008 (1)
                
                
                235.1
                
                
                
                42.0
                
                
                
                277.1Coal
      Extracted
                
                
                (6.7
                )
                
                
                (3.1
                )
                
                
                (9.8
                )Acquisitions
      (2)
                
                
                0.7
                
                
                
                0.9
                
                
                
                1.6Adjustments
      (3)
                
                
                2.5
                
                
                
                0.1
                
                
                
                2.6Divestures
      (4)
                
                
                (0.4
                )
                
                
                -
                
                
                
                (0.4
                )Proven
      and Probable Reserves, as of December 31, 2009 (1)
                
                
                231.2
                
                
                
                39.9
                
                
                
                271.1





1)
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.





38


(2)
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.





(3)
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.





(4)
Represents changes in reserves due to expired 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 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 and certain bank
fees.  See “Other Supplemental Information  — 
Reconciliation of Non-US GAAP Measures.”





In the
selling, general and administrative area, we closely monitor the gross dollars
spent per mine operation and in support functions. We also regularly measure our
performance against our internally-prepared budgets.





Trends
In Our Business





Near-term,
the global economic slowdown has lowered demand for coal which has resulted in a
decline in spot coal prices.  The price of spot coal has also been
impacted by a decrease in the price of competing fuel sources including oil and
natural gas.  The coal industry has made cutbacks in supply in
response to decrease in demand for coal.  Due to the uncertainties in
the global market place, we are unable to forecast the price or demand for coal
over the next few years.  Long-term, we believe that the demand for
coal worldwide will continue to be strong as supply challenges will continue in
the regions that we mine coal.  We also believe that in the United
States coal will continue to be one of the most economical energy
sources.   A number of factors beyond our control impact coal
prices, including:





·
              the
      supply of domestic and foreign
coal;


·
              the
      demand for electricity;


·
              the
      demand for steel and the continued financial viability of the domestic and
      foreign steel industries;


·
              the
      cost of transporting coal to the
customer;


·
              domestic
      and foreign governmental regulations and
taxes;


·
              world
      economic conditions


·
              air
      emission standards for coal-fired power plants;
  and


·
              the
      price and availability of alternative fuels for electricity
      generation.


39





As
discussed previously, our costs of production 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.





Our
business is very sensitive to changes in supply and demand for coal and we
carefully manage our mines to maximize operating results.  As our current
long term contracts are fulfilled, our profitability in the future will be
impacted by the price levels that we achieve on future long term
contracts.  Events beyond our control could impact our profit
margins.





Results
of Operations





Year
Ended December 31, 2009 Compared with the Year Ended December 31,
2008





The
following table shows selected operating results for 2009 and 2008 (in
thousands, except per ton amounts):





Year
      Ended December 31,2009
              
              
              2008
              
              
              ChangeTotal
              
              
              Per
      Ton
              
              
              Total
              
              
              Per
      Ton
              
              
              TotalVolume
      Shipped (tons)
              
              
              9,623
              
              
              
              
              
              
              11,383
              
              
              
              
              
              
              -15%Coal
      sales revenue
              
              $
              681,558
              
              
              $
              70.83
              
              
              $
              568,507
              
              
              $
              49.94
              
              
              
              20%Cost
      of coal sold
              
              
              508,888
              
              
              
              52.88
              
              
              
              527,888
              
              
              
              46.38
              
              
              
              -4%Depreciation,
      depletion and amortization
              
              
              62,078
              
              
              
              6.45
              
              
              
              70,277
              
              
              
              6.17
              
              
              
              -12%Gross
      profit (loss)
              
              
              110,592
              
              
              
              11.49
              
              
              
              (29,658
              )
              
              
              (2.61
              )
              
              
              N/ASelling,
      general and administrative
              
              
              39,720
              
              
              
              4.13
              
              
              
              34,992
              
              
              
              3.07
              
              
              
              14%





Volume
and Revenues by Segment





Year
      Ended December 31,2009
              
              
              2008CAPP
              
              
              Midwest
              
              
              CAPP
              
              
              MidwestVolume
      Shipped (tons)
              
              
              6,525
              
              
              
              3,098
              
              
              
              8,271
              
              
              
              3,112Coal
      sales revenue
              
              $
              579,108
              
              
              $
              102,450
              
              
              $
              467,609
              
              
              $
              100,898Average
      sales price per ton
              
              
              88.75
              
              
              
              33.07
              
              
              
              56.54
              
              
              
              32.42





In 2009,
we shipped 9.6 million tons of coal compared to 11.4 million tons in
2008.  Coal sales revenue increased from $568.5 million in 2008 to
$681.6 million in 2009. This increase was due to an increase in the average
sales price per ton in the CAPP region, which was partially offset by a decrease
in tons shipped in the CAPP region.





40


In 2009,
the CAPP region sold approximately 6.0 million tons of coal under long-term
contracts (92% of total CAPP sales volume) at an average selling price of $89.55
per ton.  In 2008, the CAPP region sold approximately 4.6 million tons
of coal under long-term contracts (56% of total CAPP sales volume) at an average
selling price of $52.52 per ton. In 2009, the CAPP region sold 0.5 million tons
of coal (8% of total CAPP sales volume) under short term contracts (includes
spot sales) at an average selling price of $79.31 per ton. In 2008, the CAPP
region sold 3.7 million tons of coal (44% of total CAPP sales volume) under
short term contracts (includes spot sales) at an average selling price of $61.62
per ton.





The
Midwest’s region sales of coal were primarily sold under long term contracts for
both the 2009 and 2008. In 2009, the Midwest region sold 3.1 million tons at an
average sales price of $33.07 per ton.  In 2008, the Midwest region
sold 3.1 million tons at an average sales price of $32.42 per ton.





Cost
of Coal Sold





Year
      Ended December 31,2009
              
              
              2008CAPP
              
              
              Midwest
              
              
              Corporate
              
              
              CAPP
              
              
              Midwest
              
              
              CorporateCost
      of Coal Sold
              
              $
              416,721
              
              
              $
              92,167
              
              
              $
              -
              
              
              $
              433,781
              
              
              $
              94,107
              
              
              $
              -Per
      ton
              
              
              63.87
              
              
              
              29.75
              
              
              
              -
              
              
              
              52.45
              
              
              
              30.24
              
              
              
              -Depreciation,
      depletion, and amortization
              
              
              49,380
              
              
              
              12,646
              
              
              
              52
              
              
              
              55,979
              
              
              
              14,218
              
              
              
              80Per
      ton
              
              
              7.57
              
              
              
              4.08
              
              
              
              -
              
              
              
              6.77
              
              
              
              4.57
              
              
              
              -




The cost
of coal sold, excluding depreciation, depletion and amortization, decreased from
$527.9 million in 2008 to $508.9 million in 2009 due to less tons
sold.  Our cost per ton of coal sold in the CAPP region increased from
$52.45 per ton in 2008 to $63.87 per ton in 2009.  This $11.42
increase in cost per ton of coal sold was primarily the result of lower
productivity due to increased federal and state regulatory scrutiny which caused
an increase in labor costs as compared to prior year, a decrease in tons
produced in response to market conditions, an increase in machine parts and
repairs costs, and the impact of increased average sales prices on our sales
related costs (primarily royalties and severance taxes). The major components of
this increase include an increase in the Company’s sales related costs of $4.32
per ton, labor and benefit costs of $2.74 per ton, preparation and loading costs
of $1.86 per ton and variable mine costs of $1.45 per
ton.    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 $0.49 per ton from $30.24 per ton
in 2008 period to $29.75 per ton in 2009.  The decrease in cost per
ton of coal sold was due to a $1.63 per ton decrease in variable costs, offset
by a $0.91 per ton increase in preparation plant costs.  The
decrease in the variable costs was primarily due to a decrease in diesel and
explosives costs.





Depreciation,
depletion and amortization





Depreciation,
depletion and amortization decreased from $70.3 million in 2008 to $62.1 million
in 2009.  In the CAPP region, depreciation, depletion and amortization
decreased $6.6 million to $49.4 million or $7.57 per ton.  In the
Midwest, depreciation, depletion and amortization decreased $1.6 million to
$12.6 million or $4.08 per ton.





Selling,
general and administrative





Selling,
general and administrative expenses increased from $35.0 million in 2008 to
$39.7 million in 2009.  The increase was primarily due to higher
letter of credit fees, and an increase in certain salary and benefit amounts.
The increase in the letter of credit fees is due to an increase in the usage fee
under our Letter of Credit Facility.





41


Charges
associated with repayment and amendment of debt





In 2009,
we expensed $1.6 million in 2009 in connection with a fee to terminate a letter
of credit facility.





In 2008,
we expensed approximately $13.3 million of costs associated with the various
credit amendments.  Additionally, we wrote-off approximately $2.4
million of unamortized financing charges.





Income
Taxes





Our
effective tax (benefit) rates for 2009 and 2008 were 3.0% and (0.3)%,
respectively.  Our effective income tax rate is impacted primarily by
the amount of the valuation allowance recorded against our deferred tax assets
including our net operating loss carryforwards and percentage
depletion.  For 2009 our effective tax rate was decreased by 25.8% for
percentage depletion.  In 2008, our effective tax benefit rate was
increased by 3.8% for percentage depletion.  For 2009 our effective
rate was decreased by 6.2% and our effective tax benefit rate 39.2%, for a
change in the valuation allowance.     As of December 31,
2009, we had a $33.2 million valuation allowance against gross deferred tax
assets based on the conclusion that the net operating loss is not more
likely than not to be realized. The criteria for recording a valuation allowance
are described in “Critical Accounting Estimates – Income Taxes.  In
2009, the effective tax rate was positively impacted by a reduction in the
valuation allowance due to the generation of taxable income and the utilization
of a portion of the net operating loss carryforwards.  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.





Year
Ended December 31, 2008 Compared with the Year Ended December 31,
2007





The
following table shows selected operating results for 2008 and 2007 (in
thousands, except per ton amounts):





Year
      Ended December 31,2008
              
              
              2007
              
              
              ChangeTotal
              
              
              Per
      Ton
              
              
              Total
              
              
              Per
      Ton
              
              
              TotalVolume
      Shipped (tons)
              
              
              11,383
              
              
              
              
              
              
              12,049
              
              
              
              
              
              
              -6%Coal
      sales revenue
              
              $
              568,507
              
              
              $
              49.94
              
              
              $
              513,706
              
              
              $
              42.63
              
              
              
              11%Synfuel
      handling
              
              
              -
              
              
              
              
              
              
              
              6,854
              
              
              
              
              
              
              
              N/ACost
      of coal sold
              
              
              527,888
              
              
              
              46.38
              
              
              
              473,347
              
              
              
              39.29
              
              
              
              12%Gain
      on curtailment of pension plan
              
              
              -
              
              
              
              -
              
              
              
              (6,091
              )
              
              
              (0.51
              )
              
              
              N/ADepreciation,
      depletion and amortization
              
              
              70,277
              
              
              
              6.17
              
              
              
              71,856
              
              
              
              5.96
              
              
              
              -2%Gross
      profit (loss)
              
              
              (29,658
              )
              
              
              (2.61
              )
              
              
              (18,552
              )
              
              
              (1.54
              )
              
              
              60%Selling,
      general and administrative
              
              
              34,992
              
              
              
              3.07
              
              
              
              32,191
              
              
              
              2.67
              
              
              
              9%


42


Volume
and Revenues by Segment





Year
      Ended December 31,2008
              
              
              2007CAPP
              
              
              Midwest
              
              
              CAPP
              
              
              MidwestVolume
      Shipped (tons)
              
              
              8,271
              
              
              
              3,112
              
              
              
              8,893
              
              
              
              3,156Coal
      sales revenue
              
              $
              467,609
              
              
              $
              100,898
              
              
              $
              422,429
              
              
              $
              91,277Average
      sales price per ton
              
              
              56.54
              
              
              
              32.42
              
              
              
              47.50
              
              
              
              28.92





In 2008,
we shipped 11.4 million tons of coal compared to 12.0 million tons in
2007.  Coal sales revenue increased from $513.7 million in 2007 to
$568.5 million in 2008. This increase was due to an increase in the average
sales price per ton in both the CAPP and Midwest regions, partially offset by a
decrease in the volume of tons shipped.





In 2008,
the CAPP region sold approximately 4.6 million tons of coal under long-term
contracts (56% of total CAPP sales volume) at an average selling price of $52.52
per ton. In 2007, the CAPP region sold approximately 7.7 million tons of coal
under long-term contracts (86% of total CAPP sales volume) at an average selling
price of $46.30 per ton. In 2008, the CAPP region sold 3.7 million tons of coal
(44% of total CAPP sales volume) under short term contracts (includes spot
sales) at an average selling price of $61.62 per ton. In 2007, the CAPP region
sold 1.2 million tons of coal (14% of total CAPP sales volume) under short term
contracts (includes spot sales) at an average selling price of $54.94 per
ton.





Prior to
2008, we received revenues from coal supplied to a third party synfuel plant and
received fees for the handling, shipping and marketing of the synfuel
product.  After January 1, 2008, we no longer received any revenues
related to synfuel.





The
Midwest’s region sales of coal were primarily sold under long term contracts for
both the 2008 and 2007. In 2008, the Midwest region sold 3.1 million tons at an
average sales price of $32.42.  In 2007, the Midwest region sold 3.2
million tons at an average sales price of $28.92.





Cost
of Coal Sold





Year
      Ended December 31,2008
              
              
              2007CAPP
              
              
              Midwest
              
              
              Corporate
              
              
              CAPP
              
              
              Midwest
              
              
              CorporateCost
      of Coal Sold
              
              $
              433,781
              
              
              $
              94,107
              
              
              $
              -
              
              
              $
              396,639
              
              
              $
              76,708
              
              
              $
              -Per
      ton
              
              
              52.45
              
              
              
              30.24
              
              
              
              -
              
              
              
              44.60
              
              
              
              24.31
              
              
              
              -Depreciation,
      depletion, and amortization
              
              
              55,979
              
              
              
              14,218
              
              
              
              80
              
              
              
              56,506
              
              
              
              15,199
              
              
              
              151Per
      ton
              
              
              6.77
              
              
              
              4.57
              
              
              
              -
              
              
              
              6.35
              
              
              
              4.82
              
              
              
              -





The cost
of coal sold, excluding depreciation, depletion and amortization increased from
$473.3 million in 2007 to $527.9 million in 2008.  Our cost per ton of
coal sold in the CAPP region increased from $44.60 per ton in the 2007 period to
$52.45 per ton in the 2008 period.  This $7.85 increase in cost per
ton of coal sold was primarily the result of lower productivity due to increased
federal and state regulatory scrutiny, adverse geological conditions, a tight
labor market, rising commodity prices including diesel fuel and steel, and the
impact of increased average sales prices on our sales related costs. The major
components of this increase include an increase in the Company’s labor and
benefit costs of $2.53 per ton, variable costs of $1.61 per ton and sales
related costs of $1.13 per ton.    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.”





43


Our cost
per ton of coal sold in the Midwest region increased from $24.31 in 2007 to
$30.24 in 2008.  The increase in cost per ton of coal sold was
primarily due to an increase of $3.59 per ton in variable costs.  The
increase in the variable costs was due to increased costs for diesel fuel and
explosives. Our labor and benefit costs and trucking costs also increased $0.61
and $0.62 per ton, respectively.  The increase in labor costs was due
to an increase in wages as compared to prior year and trucking costs increased
due to an increase in rates.





Depreciation,
depletion and amortization





Depreciation,
depletion and amortization decreased from $71.9 million in 2007 to $70.3 million
in 2008.  In
the CAPP region, depreciation, depletion and amortization decreased $0.5 million
to $56.0 million or $6.77 per ton.  In the Midwest, depreciation,
depletion and amortization decreased $1.0 million to $14.2 million or $4.57 per
ton.





Selling,
general and administrative





Selling,
general and administrative expenses increased from $32.2 million for 2007 to
$35.0 million for 2008. The increase was primarily due to increases in employee
stock compensation, bank service costs including letter of credit fees, and
bonding and permitting costs.





Charges
associated with repayment and amendment of debt





In 2008,
we expensed approximately $13.3 million of costs associated with the various
credit amendments.  Additionally, we wrote-off approximately $2.4
million of unamortized financing charges.





In 2007,
we wrote off $2.4 million of financing charges in connection with the repayment
of the Prior Senior Secured Credit Facility. The write off of the financing
charges is classified as charges associated with repayment of debt.





Income
Taxes





Our
effective income tax rate is impacted primarily by the amount of the valuation
allowance recorded and percentage depletion.  For 2008, we had a 0.3%
effective tax rate primarily based on the conclusion that the benefit of
the expected 2008 net operating loss is not more likely than not to be
realized.  The criteria for recording a valuation allowance are
described in “Critical Accounting Estimates – Income Taxes.”  As of
December 31, 2008, we had a $54.3 million valuation allowance against gross
deferred tax assets.   Our effective tax rate for 2007 was
24.8%.  We recorded an $8.8 million valuation allowance for tax
purposes for the year ended December 31, 2007, which reduced our effective tax
rate for 2007 by 13.2%.  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.





44


Liquidity
and Capital Resources





The
following chart reflects the components of our debt as of December 31, 2009 and
2008 (in thousands):




2009
            
            
            2008Senior
      Notes
            
            $
            150,000
            
            
            
            150,000Convertible
      Senior Notes, net of discount
            
            
            128,268
            
            
            
            -Revolver
            
            
            -
            
            
            
            18,000Total
      long-term debt
            
            
            278,268
            
            
            
            168,000Less
      amounts classified as current
            
            
            -
            
            
            
            18,000Total
      long-term debt, less current maturities
            
            $
            278,268
            
            
            
            150,000





Senior
Notes





The
Senior Notes are due on June 1, 2012.  The Senior Notes are unsecured
and accrue interest at 9.375% per annum. Interest payments on the Senior Notes
are required semi-annually. We may redeem the Senior Notes, in whole or in part,
at any time at redemption prices from 102.34% in 2010 to 100% in 2011. The
Senior Notes limit our 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 Senior Notes will have the right to require us to repurchase all
or a part of the Senior Notes at a price equal to 101% of their principal
amount, plus any accrued interest to the date of repurchase.





Convertible
Senior Notes





During
the fourth quarter of 2009, we issued $172.5 million of 4.5% Convertible Senior
Notes due on December 1, 2015 (the “Convertible Senior Notes”).   We
recorded a discount on the Convertible Senior Notes of $44.8 million related to
the portion of the proceeds that were allocated to the equity component of the
Convertible Senior Notes.  The 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 Convertible Senior Notes, representing an initial
conversion price of approximately $25.78 per share of the Company’s
stock.  Interest payments on the Convertible Senior Notes are required
semi-annually.  The Convertible Senior Notes are shown net of a $44.2
million discount on the consolidated financials statements as of December 31,
2009.





In
connection with the Convertible Senior Notes, we terminated a prior letter of
credit facility and secured 105% of the letters of credit that were outstanding
under the prior letter of credit facility with approximately $62.0 million in
cash.  We expensed $1.6 million in 2009 in connection with a fee to
terminate the Prior Facility.  The remaining proceeds from the
Convertible Senior Notes will be used for working capital and general corporate
purposes.  We incurred approximately $5.5 million of costs in
connection with the issuance of the Convertible Senior Notes.





None of
the Convertible Senior Notes are currently eligible for
conversion.  The Convertible Senior Notes are convertible at the
option of the holders (with the length of time the 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 Convertible Senior Notes in effect on
      the last trading day of the immediately preceding calendar
      quarter;




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




45


Revolving
Credit Agreement





In
January 2010, we amended and restated our existing Revolving Credit Agreement
(as amended and restated the Revolving Credit Agreement is referred to as the
Revolver).  The following is a summary of significant terms of the
Revolver.





Maturity
            February
      2012Interest/Usage
      Rate
            Company’s
      option of Base Rate(a)
      plus 3.0% or LIBOR plus 4.0% per annumMaximum
      Availability
            Lesser
      of $65.0 million or the borrowing base (b)Periodic
      Principal Payments
            None





(a)
            Base
      rate is the higher of (1) the Federal Fund Rate plus 3.0%, (2) the prime
      rate and (3) a LIBOR rate plus 1.0%.(b)
            The
      Revolver’s borrowing base is based on the sum 85% of our eligible accounts
      receivable plus 65% of the eligible inventory minus reserves from time to
      time set by administrative agent.  The eligible accounts
      receivable and inventories are further adjusted as specified in the
      agreement.  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 we can use the Revolver availability to issue letters of
credit. The Revolver provides for a 4.25% 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 us to maintain a minimum Adjusted EBITDA and a
maximum Leverage Ratio and limit capital expenditures, each as defined by the
agreement. The minimum EBITDA and maximum Leverage Ratio are only measured if
our unrestricted cash balance is less than $75.0 million.





We expect
to use the Revolver to secure our outstanding letters of credit.  We
intend to place cash in a restricted account to provide us with the maximum
borrowing base under the Revolver.





We were
in compliance with all of the financial covenants under our outstanding debt
instruments as of December 31, 2009.  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
December 31, 2009, we had total liquidity of approximately $142.9 million,
consisting of $35.0 million of borrowing capacity under our Revolver and $107.9
million of cash and cash equivalents.  As discussed above, in January 2010,
we increased the borrowing capacity of the Revolver to $65.0
million.  Our intention is to use the Revolver to support our existing
letters of credit.   As we secure the letters of credit with our
Revolver, our cash that is currently being held as security for the letters of
credit will become unrestricted and be available to us for use.  A
portion of this cash may be used to ensure that we have adequate capacity under
the Revolver to support our outstanding letters of credit.





Our
primary source of cash is expected to be sales of coal to our utility and
industrial customers. 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 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.





46


We
believe that cash generated from operations, borrowings under our credit
facilities and future debt and equity offerings, if any, will be sufficient to
meet working capital requirements, anticipated capital expenditures and
scheduled debt payments throughout 2010 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 Convertible Senior Notes, Senior
Notes and 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.





Currently,
our primary use of cash during the next several years is expected to be ordinary
course of business expenses and capital expenditures for existing mines. We
currently project that our capital expenditures for 2010 will be approximately
$85 million. Our projected capital expenditures primarily consist of
capital expenditure for normal mining activities including new and replacement
mine equipment.  Our projected capital expenditures for 2010 also
include approximately $10.0 million for safety mandates and $6.0 million for
mine development. We expect that such expenditures will be funded through cash
on hand and cash generated by operations.





Net cash
provided by or used in operating activities reflects net income or net 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 $27.6 million for the year ended December 31, 2009 and
net cash used in operating activities was $1.6 million for the year ended
December 31, 2008.  We had net income in 2009 of $51.0 million as
compared to a net loss of $96.0 million in 2008.  In reconciling our
net income (loss) to cash provided by or used in operating activities, $73.2
million was added for non cash charges during 2009 as compared to $81.8
million during 2008.   During 2009, our net income, as adjusted
for non cash charges was decreased by a $96.6 million decrease in cash from our
operating assets and liabilities.  The $96.6 million change in our
operating assets and liabilities for 2009, includes a $56.8 increase in
restricted cash to secure our letters of credit, a $10.0 million increase in
accounts receivables, a $15.0 million increase in inventories and a $10.6
million decrease in accounts payable.  During 2008, our net loss, as
adjusted for non cash charges, was increased by a $12.6 million increase in cash
from our operating assets and liabilities.  The $12.6 million change
in our operating assets and liabilities for 2008, includes a $7.7 million
decrease in accounts receivable, a $9.8 million increase in accounts payables, a
$9.6 million increase in other assets and an $8.7 million increase in other
current liabilities.


Net cash
used by investing activities decreased $1.6
million to $72.0 million for 2009, as compared to 2008.  Capital
expenditures were $72.2 million in 2009 and $74.7 million in 2008.  In
2008, capital expenditures included $20.0 million paid by the Company for a
mineral rights acquisition.  Excluding the mineral rights acquisition,
capital expenditures primarily consisted of new and replacement mine equipment
and various projects to improve the production and efficiency of our mining
operations.





Net cash
provided by financing activities was $149.1 million 2009. During 2009 our
primary financing activities were the receipt of $167.0 of net proceeds from our
Convertible Senior Notes and $18.0 million of payments on our revolving credit
facility.  During 2008 our primary financing activities were the
receipt of $93.8 million of net proceeds from the issuance of our common stock,
net borrowings of $18.0 million on our Revolver and the repayment $38.8 million
under our Term Loan.


47





Contractual
Obligations





The
following is a summary of our contractual obligations and commitments as of
December 31, 2009:





Payment
      Due by Period (in thousands)Contractual Obligations
              
              Total
              
              
              2010
              
              
              
              2011-2012
              
              
              
              2013-2014
              
              
              ThereafterLong
      term debt (1)
              
              $
              322,500
              
              
              
              -
              
              
              
              150,000
              
              
              
              -
              
              
              
              172,500Interest
      on long term debt and fees under our Revolver for letters of credit (2)
              
              
              87,715
              
              
              
              24,587
              
              
              
              39,841
              
              
              
              15,525
              
              
              
              7,762Operating
      lease obligations (3)
              
              
              10,664
              
              
              
              6,817
              
              
              
              3,445
              
              
              
              402
              
              
              
              -Royalty
      obligations (4)
              
              
              203,356
              
              
              
              24,957
              
              
              
              43,367
              
              
              
              41,124
              
              
              
              93,908Purchase
      obligations (5)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -$
              624,235
              
              
              
              56,361
              
              
              
              236,653
              
              
              
              57,051
              
              
              
              274,170





(1)
              Consists
      of our Senior Notes and our Convertible Senior Notes as of December 31,
      2009.





(2)
              Consists
      of interest payments on our Senior Notes and Convertible Senior
      Notes.  Also includes a charge associated with outstanding letter of
      credit fees under the Revolver through the Revolver’s maturity (assume the
      full amount of the Revolver capacity is used for letters of
      credit).





(3)
              See
      Note 11 in the notes to the consolidated financial statements for
      additional information on
leases.





(4)
              Royalty
      obligations include minimum royalties payable on leased coal rights. 
      Certain coal leases do not have set expiration dates but extend until
      completion of mining of all merchantable and mineable coal reserves. 
      For purposes of this table, we have generally assumed that minimum
      royalties on such leases will be paid for a period of ten years. 
      Certain coal leases require payment based on minimum tonnage, for these
      contracts an average sales price of $80.00 per ton was used to project the
      future commitment.





(5)
              Purchase
      obligations do not include agreements to purchase coal with vendors that
      do not include quantities or minimum tonnages, or monthly purchase
      orders.





Additionally,
we have liabilities relating to pension, workers compensation, black lung, and
mine reclamation and closure. As of December 31, 2009, the undiscounted payments
related to these items are estimated to be:





Payments
      Due by Years (In Thousands)Within
      1 Year
            
            2
      - 3
              Years
            
            4
      - 5
              Years$18,880
            
            31,125
            
            36,797





Our
determination of these noncurrent liabilities 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. Moreover, in
particular for periods after 2010, our estimates may change from the amounts
included in the table, and may change significantly, if our assumptions change
to reflect changing conditions. These assumptions are discussed in the Notes to
the Consolidated Financial Statements and in the Critical Accounting Estimates
in Management’s Discussion and Analysis.





48


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 December 31, 2009, we had $104.0 million of
outstanding surety bonds with third parties. These bonds were in place to secure
obligations as follows: post-mining reclamation bonds of $60.2 million, workers’
compensation bonds of $40.3 million, wage payment, collection bonds, and other
miscellaneous obligation bonds of $3.5 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 bank letters of credit to secure our obligations for workers’ compensation
programs, various insurance contracts and other obligations. As of December
31, 2009, we had $59.1 million of letters of credit outstanding.  The
letters of credit were secured by $62.0 million of cash.





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 consolidated financial statements lists and 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.





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 5.3% at
December 31, 2009.  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 5.3% to 4.8%, all other things
being equal, the present value of our workers’ compensation obligation would
increase by approximately $1.9 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 December 31, 2009 was $59.3
million.





49


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
Central Appalachia operations.   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.





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 5.8% at December 31, 2009. 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 5.3%, all other things being equal, the present value of our black
lung obligation would increase by approximately $2.2 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 December 31, 2009 was $32.8
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, 2009, the discount rate used to determine the obligation was 5.9%.
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 5.9% to 5.4%, all other things being equal, the present value
of our projected benefit obligation would increase by approximately $4.5
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, 2009.
Significant changes to these rates would introduce volatility to our pension
expense.  Our accrued pension obligation as of December 31, 2009 was $14.8
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 December 31, 2009 was $44.8 million.





50


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. Unless otherwise noted,
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
recorded a $33.2 million valuation allowance against our gross deferred tax
assets as of December 31, 2009 for the portion of the gross deferred tax asset
that does not meet the more likely than not criteria to be
realized.  In 2009, we recorded an income tax benefit for the
reduction in our valuation allowance related to the net operating loss
carryforwards that will be utilized.





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.





51


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.”





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 Rate – 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 15 of Part IV, “Financial Statements — Note 1 — Summary of Significant
Accounting Policies and Other Information — Recent Accounting
Pronouncements.”


52





Other
Supplemental Information





Reconciliation
of Non-GAAP Measures





EBITDA is
a measure used by management to measure operating performance.  We define
EBITDA as net income or loss plus interest expense (net), income tax expense
(benefit) and depreciation, depletion and amortization (EBITDA), to better
measure our operating performance.  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.





Adjusted
EBITDA and the leverage ratio are the amounts used in our current debt
covenants.  Adjusted EBITDA is defined as EBITDA further adjusted for
certain cash and non-cash charges and the leverage ratio limits are debt to a
multiple of adjusted EBITDA.  Adjusted EBITDA and the leverage ratio
are used to determine compliance with financial covenants and our ability to
engage in certain activities such as incurring additional debt and making
certain payments.





EBITDA,
Adjusted EBITDA, and the leverage ratio are not recognized terms under US GAAP
and are 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. 
Because not all companies use identical calculations, this presentation of
EBITDA, Adjusted EBITDA and the leverage ratio may not be comparable to other
similarly titled measures of other companies.  Additionally, EBITDA or
Adjusted EBITDA are not intended to be a measure of free cash flow for
management’s discretionary use, as they do not reflect certain cash requirements
such as tax payments, interest payments and other contractual
obligations.





The
leverage ratio is calculated as the Company’s Senior Funded Indebtedness divided
by annualized adjusted EBITDA as calculated below.  The Senior Funded
Indebtedness includes the amounts outstanding under our revolver and the amount
of letters of credits issued under our revolver.  As of December 31, 2009,
we had no Senior Funded Indebtedness outstanding.





Year
      EndedDecember
      31
              
              
              December
      312009
              
              
              2008Net
      income (loss)
              
              $
              50,954
              
              
              
              (95,993
              )Income
      tax expense (benefit)
              
              
              1,559
              
              
              
              (273
              )Interest
      expense
              
              
              17,057
              
              
              
              17,746Interest
      income
              
              
              (60
              )
              
              
              (469
              )Depreciation,
      depletion, and amortization
              
              
              62,078
              
              
              
              70,277EBITDA
      (before adjustments)
              
              
              131,588
              
              
              
              (8,712
              )Other
      adjustments specifiedin
      our current debt agreement:Charges
      associated with repayment of debt
              
              
              1,643
              
              
              
              15,618Other
      adjustments
              
              
              12,868
              
              
              
              10,665Adjusted
      EBITDA
              
              $
              146,099
              
              
              
              17,571





53


Item
7a.          Quantitative and
Qualitative Disclosures about Market Risk





Our $150
million Senior Notes and $172.5 million Convertible Senior Notes have a fixed
interest rate and are 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 December 31, 2009, 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 94% for the year ended
December 31, 2009.





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
8.            Financial
Statements and Supplementary Data




See
Financial Statements beginning on page F-1.




Item
9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures




None.





Item
9A.         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.





Management’s Report on
Internal Control over Financial Reporting





Internal
control over financial reporting is a process to provide reasonable assurance
regarding the reliability of consolidated financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles.  There has been no change in
the Company’s internal control over financial reporting during the year ended
December 31, 2009 that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.





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.





54


Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, management concluded that the
Company’s internal control over financial reporting was effective as of December
31, 2009.








Item
9B.         Other
Information





None.

































































55


PART
III





Item
10.          Director,
Executive Officers and Corporate Governance of the Registrant





The information contained under the headings
“Election ofDirectors”, “Section 16(a)
Beneficial Ownership Reporting Compliance” "Board Matters" and
"Management" in the definitive Proxy Statement used in connection with the
solicitation of proxies for the Company’s 2010 Annual Meeting of Shareholders,
to be filed with the Commission, is hereby incorporated herein by
reference.




Item
11.          Executive
Compensation




The information contained under the headings
“Compensation Committee Report,” “Executive Compensation,” “Equity Compensation Plans,” and “Compensation
Committee Interlocks and Insider Participation” in
the definitive Proxy Statement used in connection with the solicitation of
proxies for the Company’s 2010 Annual Meeting of Shareholders, to be filed with the Commission,is hereby incorporated herein by
reference.




Item
12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters




The information contained under the headings
“Principal Shareholdersand Securities
Ownership of Management,” and “Equity
Compensation Plans” in the definitive Proxy
Statement used in connection with the solicitation of proxies for the Company’s
2010 Annual Meeting of Shareholders, to be filed with the Commission, is hereby
incorporated herein by reference.




Item
13.         Certain Relationships
and Related Transactions




The information contained under the heading “Compensation Committee Interlocks and
Insider Participation” in the definitive Proxy
Statement used in connection with the solicitation of proxies for the Company’s
2010 Annual Meeting of Shareholders, to be filed with the Commission, is hereby
incorporated herein by reference.




Item
14.          Principal
Accountant Fees and Services




The information contained under the heading “Independent
Registered Public Accountants” in the definitive Proxy Statement used in
connection with the solicitation of proxies for the Company’s 2010 Annual
Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by
reference.








56


PART
IV









Item
15. Exhibits,
Financial Statement Schedules





(a)           The
following documents are filed as part of this Report:




1.
            Financial
      Statements





The
following financial statements and related report of Independent Registered
Public Accounting Firm are incorporated in Item 8 of this
report:





Report of
Independent Registered Public Accounting Firm





Consolidated
Balance Sheets as of December 31, 2009 and 2008





Consolidated
Statements of Operations for the years ended December 31, 2009, 2008 and
2007





Consolidated
Statements of Changes in Shareholders’ Equity and Comprehensive Income (Loss)
for the years ended December 31, 2009, 2008 and 2007





Consolidated
Statements of Cash Flows for the years ended December 31, 2009, 2008 and
2007


Notes to
Consolidated Financial Statements





2.
            Financial
      Statement Schedules




None.




3.
            Exhibits




The
following exhibits are required to be filed with this Report by Item 601 of
Regulation S-K:





Exhibit
              Number
            Description2.1
            Second
      Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy
      Code of the Registrant and its Subsidiaries, dated as of April 20, 2004,
      incorporated herein by reference to Exhibit 2 to the Registrant’s
      Registration Statement on Form S-1 filed August 13,
20042.2
            Stock
      Purchase Agreement by and among James River Coal Company, Triad Mining,
      Inc. and the Stockholders of Triad Mining, Inc. dated as of March 30,
      2005, incorporated herein by reference to Exhibit 2.2 to the
      Registrant’s Registration Statement on Form S-1 filed April 19,
      20053.1
            Amended
      and Restated Articles of Incorporation of the Registrant, as Amended,
      incorporated herein by reference to Exhibit 3.1 to the Registrant’s
      Registration Statement on Form S-1 filed August 13,
20043.2
            Amended
      and Restated Bylaws of the Registrant, incorporated herein by reference to
      Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q filed August
      9, 2007


57





4.1
            Specimen
      common stock certificate, incorporated herein by reference to Exhibit 4.1
      to the Registrant’s Registration Statement on Form S-1 filed August 13,
      20044.2
            Rights
      Agreement between the Registrant and SunTrust Bank as Rights Agent, dated
      as of May 25, 2004, incorporated herein by reference to Exhibit 4.2 to the
      Registrant’s Registration Statement on Form S-1 filed August 13,
      20044.3
            Amendment
      No. 1 to Rights Agreement between the Registrant and Computershare Trust
      Company, N.A., successor to SunTrust Bank, as Rights Agent, dated as of
      November 3, 2006, incorporated herein by reference to Exhibit 4.2 to the
      Registrant’s Quarterly Report on Form 10-Q filed November 9,
      20064.4
            Amendment
      No. 2 to Rights Agreement between the Registrant and Computershare Trust
      Company, N.A., successor to SunTrust Bank, as Rights Agent, dated as of
      August 2, 2007, incorporated herein by reference to Exhibit 4.2 to the
      Registrant’s Quarterly Report on Form 10-Q filed August 9,
      20074.5
            Amendment No. 3 to Rights Agreement between
      Registrant and Computershare Trust Company, N.A., successor to SunTrust
      Bank, as Rights Agent, dated as of November 3, 2009, incorporated herein
      by reference to Exhibit 4.1 to the Registrant’s Amendment No. 1 to Form
      8-K filed November 3, 20094.6
            Form
      of rights certificate, incorporated herein by reference to Exhibit 4.3 to
      the Registrant’s Registration Statement on Form 8-A filed January 24,
      20054.7
            Indenture
      among the Registrant, certain of its subsidiaries and U.S. Bank, National
      Association, as Trustee, dated as of May 31, 2005, incorporated herein by
      reference to Exhibit 4.3 to the Registrant’s Registration Statement on
      Form S-1/A filed May 24, 20054.8
            Form
      of Senior Debt Indenture, incorporated herein by reference to Exhibit 4.8
      to the Registrant’s Registration Statement on Form S-3 filed June 7,
      20074.9
            Form
      of Subordinated Debt Indenture, incorporated herein by reference to
      Exhibit 4.10 to the Registrant’s Registration Statement on Form S-3 filed
      June 7, 20074.10
            Indenture related to the 4.50% Convertible Senior
      Notes due 2015, dated as of November 20, 2009, between James River Coal
      Company and U.S. Bank National Association, as trustee (including the form
      of 4.50% Convertible Senior Notes due 2015), incorporated herein by
      reference to Exhibit 4.1 to the Registrant’s Form 8-K filed November 25,
      200910.1
            Registration
      Rights Agreement by and among the Registrant and the Shareholders
      identified therein, dated May 6, 2004, incorporated herein by reference to
      Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1 filed
      August 13, 200410.2
            Loan
      and Security Agreement by and among the Registrant and its Subsidiaries,
      the Lenders that are Signatories thereto, Wells Fargo Foothill, Inc. and
      Morgan Stanley Senior Funding, Inc., dated as of May 6, 2004, incorporated
      herein by reference to Exhibit 10.2 to the Registrant’s Registration
      Statement on Form S-1 filed August 13, 200410.3
            $75,000,000
      Term Loan Agreement by and among the Registrant and its Subsidiaries, the
      Lenders from time to time party thereto and BNY Asset Solutions LLC, dated
      as of May 6, 2004, incorporated herein by reference to Exhibit 10.3 to the
      Registrant’s Registration Statement on Form S-1 filed August 13,
      200410.4*
            Employment
      Agreement between the Registrant and Peter T. Socha, dated as of May 7,
      2004, incorporated herein by reference to Exhibit 10.4 to the Registrant’s
      Registration Statement on Form S-1 filed August 13,
  2004


58





10.4a*
            Amendment
      to Employment Agreement between the Registrant and Peter T. Socha, dated
      as of December 31, 200810.5*
            2004
      Equity Incentive Plan of the Registrant, incorporated herein by reference
      to Exhibit 10.5 to the Registrant’s Registration Statement on Form S-1
      filed August 13, 200410.6
            Form
      of Indemnification Agreement between the Registrant and its officers and
      directors, incorporated herein by reference to Exhibit 10.6 to the
      Registrant’s Registration Statement on Form S-1 filed August 13,
      200410.7**
            Agreement
      for Purchase and Sale of Coal among Georgia Power Company, the Registrant
      and James River Coal Sales, Inc., dated as of March 11, 2004, incorporated
      herein by reference to Exhibit 10.7 to the Registrant’s Registration
      Statement on Form S-1 filed August 13, 200410.8**
            Agreement
      No. 2 for Purchase and Sale of Coal among Georgia Power Company, the
      Registrant and James River Coal Sales, Inc., dated as of May 15,
      200810.8a**
            First
      Amendment to Agreement No. 2 for Purchase and Sale of Coal among
      Georgia Power Company, the Registrant and James River Coal Sales,
      Inc., dated as of July 21, 200810.9**
            Fuel
      Supply Agreement #141944 between South Carolina Public Service Authority
      and the Registrant, dated as of March 1, 2004, incorporated herein by
      reference to Exhibit 10.8 to the Registrant’s Registration Statement on
      Form S-1 filed August 13, 200410.9a**
            Amendment
      to Fuel Supply #141944 between South Carolina Public Service Authority,
      the Registrant and James River Coal Sales, Inc., dated April 7,
      2009.10.10
            Credit
      Agreement between Registrant and PNC Bank, National Association and Morgan
      Stanley Senior Funding, Inc. dated as of May 31, 2005, incorporated herein
      by reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form
      10-Q filed November 14, 200510.11
            Amendment
      No. 1 and Waiver to the Credit Agreement between the Registrant and PNC
      Bank, National Association and Morgan Stanley Senior Funding, Inc., dated
      as of February 22, 2006, incorporated herein by reference to Exhibit 10.11
      to the Registrant’s Annual Report on Form 10-K filed March 16,
      200610.12
            Amendment
      No. 2 and Waiver to the Credit Agreement between the Registrant and PNC
      Bank, National Association and Morgan Stanley Senior Funding, Inc., dated
      as of May 30, 2006, incorporated herein by reference to Exhibit 10.13 to
      the Registrant’s Quarterly Report on Form 10-Q filed August 9,
      200610.13
            Amendment
      No. 3 and Waiver to the Credit Agreement between the Registrant and PNC
      Bank, National Association and Morgan Stanley Senior Funding, Inc., dated
      as of November 7, 2006, incorporated herein by reference to Exhibit 10.13
      to the Registrant’s Annual Report on Form 10-K filed March 16,
      200710.14
            Amendment
      No. 4 to the Credit Agreement between the Registrant and PNC Bank,
      National Association and Morgan Stanley Senior Funding, Inc., dated as of
      December 27, 2006, incorporated herein by reference to Exhibit 10.14 to
      the Registrant’s Annual Report on Form 10-K filed March 16,
      200710.15
            Registration
      Rights Agreement between the Registrant and the Shareholders named
      therein, dated as of May 31, 2005, incorporated herein by reference to
      Exhibit 10.9 to the Registrant’s Annual report on Form 10-K filed March
      16, 200610.16*
            Severance
      and Retention Plan, effective as of March 13, 2006, incorporated herein by
      reference to Exhibit 10.12 to the Registrant’s Quarterly Report on Form
      10-Q filed August 9, 200610.16a*
            Amendment
      to Severance and Retention Plan dated as of December 31,
    200810.17
            $100,000,000
      Term Credit Agreement by and among the Registrant, certain of its
      subsidiaries, the Lenders thereto, Morgan Stanley Senior Funding, Inc., as
      Administrative Agent, Sole Bookrunner and Lead Arranger, and Morgan
      Stanley & Co. Incorporated, as Collateral Agent, dated as of February
      26, 2007, incorporated herein by reference to Exhibit 10.15 to the
      Registrant’s Annual Report on Form 10-K filed March 16,
    2007


59





10.18
            $35,000,000
      Revolving Credit Agreement by and among the Registrant, certain of
      its subsidiaries, the Lenders thereto, and General Electric Capital
      Corporation, as Co-Lead Arranger, Administrative Agent and Collateral
      Agent, with Morgan Stanley Senior Funding, Inc., having acted as Co-Lead
      Arranger, dated as of February 26, 2007, incorporated herein by reference
      to Exhibit 10.16 to the Registrant’s Annual Report on Form 10-K filed
      March 16, 200710.19
            Waiver,
      Consent and Second Amendment to Term Credit Agreement by and among
      the Registrant, certain of its subsidiaries, the Lenders thereto,
      Morgan Stanley Senior Funding, Inc., as Administrative Agent, Sole
      Bookrunner and Lead Arranger, and Morgan Stanley & Co. Incorporated,
      as Collateral Agent, dated as of August 7, 2007, incorporated herein by
      reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
      filed August 8, 200710.19a
            Fifth Amendment to Term Credit Agreement by and
      among the Registrant, certain of its subsidiaries, and the other credit
      parties thereto, as guarantors, the lenders party thereto, Morgan Stanley
      Senior Funding, Inc., as Administrative Agent and as Sole-Bookrunner and
      Lead Arranger, and Morgan Stanley & Co. Incorporated, as Collateral
      Agent, dated as of November 20, 2009, incorporated by reference to Exhibit
      10.1 to the Registrant’s Form 8-K filed November 25,
      200910.20
            Waiver,
      Consent and First Amendment to Revolving Credit Agreement by and among
      the Registrant, certain of its subsidiaries, the Lenders thereto, and
      General Electric Capital Corporation, as Co-Lead Arranger, Administrative
      Agent and Collateral Agent, with Morgan Stanley Senior Funding, Inc.,
      having acted as Co-Lead Arranger, dated as of August 7, 2007, incorporated
      herein by reference to Exhibit 10.2 to the Registrant’s Current Report on
      Form 8-K filed August 8, 200710.21*
            Annual
      Incentive Compensation Plan, incorporated herein by reference to Exhibit
      10.1 to the Registrant’s Quarterly Report on Form 10-Q filed August 9,
      200710.21a*
            Amendment
      to Annual Incentive Compensation Plan, dated December 31,
    200810.22
            Amended and Restated Revolving Credit Agreement by
      and among the Registrant, James River Coal Service Company, Leeco, Inc.,
      Triad Mining, Inc., Triad Underground Mining, LLC, Bledsoe Coal
      Corporation,  Johns Creek Elkhorn Coal Corporation, Bell County
      Coal Corporation, James River Coal Sales, Inc., Bledsoe Coal Leasing
      Company, Blue Diamond Coal Company, and McCoy Elkhorn Coal Corporation, as
      Borrowers, the other Credit Parties thereto from time to time, as
      Guarantors, the Lenders party thereto from time to time, and General
      Electric Capital Corporation, as Administrative Agent  and
      Collateral Agent, GE Capital Markets, Inc., and UBS Securities LLC, as
      Joint Lead Arrangers and Joint Bookrunners, and UBS Securities LLC, as
      Documentation Agent, dated as of January 28, 2010, incorporated by
      reference to Exhibit 10.1 to the Registrant’s Form 8-K, dated February 3,
      201012.1
            Computation
      of Ratio of Earnings to Fixed Charges21
            Subsidiaries
      of the Registrant, incorporated herein by reference to Exhibit 21 to the
      Registrant’s Annual Report on Form 10-K filed March 16,
    200623.1
            Consent
      of Marshall Miller & Associates, Inc. (filed
      herewith)23.2
            Consent
      of KPMG LLP (filed herewith)24
            Power
      of Attorney (see signature
page)


60





31.1
              Certification of Peter T. Socha, President and
      Chief Executive Officer of James River Coal Company, pursuant to rule
      13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002(filed
    herewith)31.2
              Certification of Samuel M. Hopkins, II, Vice
      President and Chief Accounting Officer of James River Coal Company,
      pursuant to rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(filed
      herewith)32.1
              Certification of Peter T. Socha, President and
      Chief Executive Officer of James River Coal Company, pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002(filed herewith)32.2
              Certification of Samuel M. Hopkins, II, Vice
      President and Chief Accounting Officer of James River Coal Company,
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002(filed
  herewith)
  *
            Management
      contract or compensatory plan or arrangement.**
            Portions
      of these documents have been omitted and filed separately with the
      Securities and Exchange Commission pursuant to a request for confidential
      treatment of the omitted portions.









61





INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS





Audited
      Financial Statements
            PageReport
      of Independent Registered Public Accounting Firm
            F-2Consolidated
      Balance Sheets as of December 31, 2009 and 2008
            F-3Consolidated
      Statements of Operations for the years ended December 31, 2009, 2008 and
      2007
            F-5Consolidated
      Statements of Changes in Shareholders’ Equity and
      Comprehensive Income (Loss)for
      the years ended December 31, 2009, 2008 and 2007
            F-6Consolidated
      Statements of Cash Flows for the years ended December 31, 2009, 2008 and
      2007
            F-7Notes
      to Consolidated Financial Statements
            F-8
















































F-1







Report of
Independent Registered Public Accounting Firm







The Board
of Directors


James
River Coal Company:





We have
audited the accompanying consolidated balance sheets of James River Coal Company
and subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of operations, changes in shareholders’ equity and
comprehensive income (loss), and cash flows for each of the years in the
three-year period ended December 31, 2009. We also have audited the
Company’s internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible for these
consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on these consolidated financial
statements and an opinion on the Company’s internal control over financial
reporting based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.




A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of James River Coal Company and
subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2009, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.









Richmond,
VA


February
25, 2010













F-2





JAMES RIVER COAL
COMPANY


AND
SUBSIDIARIES


Consolidated
Balance Sheets


(in
thousands, except share data)





December
      31, 2009
              
              
              December
      31, 2008AssetsCurrent
      assets:Cash
      and cash equivalents
              
              $
              107,931
              
              
              
              3,324Receivables:Trade
              
              
              43,289
              
              
              
              33,086Other
              
              
              260
              
              
              
              475Total
      receivables
              
              
              43,549
              
              
              
              33,561Inventories:Coal
              
              
              22,727
              
              
              
              6,847Materials
      and supplies
              
              
              10,462
              
              
              
              9,581Total
      inventories
              
              
              33,189
              
              
              
              16,428Prepaid
      royalties
              
              
              6,045
              
              
              
              2,803Other
      current assets
              
              
              3,292
              
              
              
              5,094Total
      current assets
              
              
              194,006
              
              
              
              61,210Property,
      plant, and equipment, at cost:Land
              
              
              7,194
              
              
              
              6,693Mineral
      rights
              
              
              231,919
              
              
              
              229,841Buildings,
      machinery and equipment
              
              
              362,654
              
              
              
              320,982Mine
      development costs
              
              
              41,069
              
              
              
              39,596Total
      property, plant, and equipment
              
              
              642,836
              
              
              
              597,112Less
      accumulated depreciation, depletion, and amortization
              
              
              288,748
              
              
              
              252,264Property,
      plant and equipment, net
              
              
              354,088
              
              
              
              344,848Goodwill
              
              
              26,492
              
              
              
              26,492Restricted
      cash (note 12)
              
              
              62,042
              
              
              
              5,222Other
      assets
              
              
              32,684
              
              
              
              25,774Total
      assets
              
              $
              669,312
              
              
              
              463,546See
      accompanying notes to consolidated financial statements.





F-3





JAMES
RIVER COAL COMPANY


AND
SUBSIDIARIES


Consolidated
Balance Sheets


(in
thousands, except share data)




December
      31, 2009
              
              
              December
      31, 2008Liabilities
      and Shareholders' EquityCurrent
      liabilities:Current
      maturities of long-term debt
              
              $
              -
              
              
              
              18,000Accounts
      payable
              
              
              46,472
              
              
              
              57,068Accrued
      salaries, wages, and employee benefits
              
              
              6,982
              
              
              
              6,642Workers'
      compensation benefits
              
              
              8,950
              
              
              
              9,300Black
      lung benefits
              
              
              1,782
              
              
              
              1,539Accrued
      taxes
              
              
              4,383
              
              
              
              4,457Other
      current liabilities (note 3)
              
              
              15,439
              
              
              
              19,165Total
      current liabilities
              
              
              84,008
              
              
              
              116,171Long-term
      debt, less current maturities
              
              
              278,268
              
              
              
              150,000Other
      liabilities:Noncurrent
      portion of workers' compensation benefits
              
              
              50,385
              
              
              
              46,477Noncurrent
      portion of black lung benefits
              
              
              31,017
              
              
              
              29,029Pension
      obligations
              
              
              14,827
              
              
              
              19,693Asset
      retirement obligations
              
              
              39,843
              
              
              
              36,409Other
              
              
              622
              
              
              
              529Total
      other liabilities
              
              
              136,694
              
              
              
              132,137Total
      liabilities
              
              
              498,970
              
              
              
              398,308Commitments
      and contingencies (note 12)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 27,544,878 and 27,393,493 sharesas
      of December 31, 2009 and 2008, respectively
              
              
              275
              
              
              
              274Paid-in-capital
              
              
              320,079
              
              
              
              272,366Accumulated
      deficit
              
              
              (136,758
              )
              
              
              (187,712
              )Accumulated
      other comprehensive loss
              
              
              (13,254
              )
              
              
              (19,690
              )Total
      shareholders' equity
              
              
              170,342
              
              
              
              65,238Total
      liabilities and shareholders' equity
              
              $
              669,312
              
              
              
              463,546See
      accompanying notes to consolidated financial statements.





F-4





JAMES
RIVER COAL COMPANY


AND
SUBSIDIARIES


Consolidated
Statements of Operations


(in
thousands, except per share data)




Year
              
              
              Year
              
              
              YearEnded
              
              
              Ended
              
              
              EndedDecember
      31,
              
              
              December
      31,
              
              
              December
      31,2009
              
              
              2008
              
              
              2007Revenues
              
              $
              681,558
              
              
              
              568,507
              
              
              
              520,560Cost
      of sales:Cost
      of coal sold
              
              
              508,888
              
              
              
              527,888
              
              
              
              473,347Gain
      on curtailment of pension plan
              
              
              -
              
              
              
              -
              
              
              
              (6,091
              )Depreciation,
      depletion, and amortization
              
              
              62,078
              
              
              
              70,277
              
              
              
              71,856Total
      cost of sales
              
              
              570,966
              
              
              
              598,165
              
              
              
              539,112Gross
      profit (loss)
              
              
              110,592
              
              
              
              (29,658
              )
              
              
              (18,552
              )Selling,
      general, and administrative expenses
              
              
              39,720
              
              
              
              34,992
              
              
              
              32,191Total
      operating income (loss)
              
              
              70,872
              
              
              
              (64,650
              )
              
              
              (50,743
              )Interest
      expense
              
              
              17,057
              
              
              
              17,746
              
              
              
              19,764Interest
      income
              
              
              (60
              )
              
              
              (469
              )
              
              
              (471
              )Charges
      associated with repayment and amendment of debt (note 4)
              
              
              1,643
              
              
              
              15,618
              
              
              
              2,421Miscellaneous
      income, net
              
              
              (281
              )
              
              
              (1,279
              )
              
              
              (598
              )Total
      other expenses, net
              
              
              18,359
              
              
              
              31,616
              
              
              
              21,116Income
      (loss) before income taxes
              
              
              52,513
              
              
              
              (96,266
              )
              
              
              (71,859
              )Income
      tax expense (benefit)
              
              
              1,559
              
              
              
              (273
              )
              
              
              (17,844
              )Net
      income (loss)
              
              $
              50,954
              
              
              
              (95,993
              )
              
              
              (54,015
              )Income
      (loss) per common share (note 13)Basic
      income (loss) per common share
              
              $
              1.85
              
              
              
              (3.91
              )
              
              
              (3.29
              )Diluted
      income (loss) per common share
              
              $
              1.85
              
              
              
              (3.91
              )
              
              
              (3.29
              )See
      accompanying notes to consolidated financial statements.





F-5





JAMES
RIVER COAL COMPANY


AND
SUBSIDIARIES


Consolidated
Statements of Changes in Shareholders’


Equity
and Comprehensive Income (Loss)


(in
thousands)








Predecessor
      Company
              
              Common
                stock
                shares
              
              
              Common
                stock
      par
                value
              
              
              Paid-in-
                capital
              
              
              Retained
                earnings
                (accumulated
                deficit)
              
              
              Accumulated
      other comprehensive
                income
      (loss)
              
              
              TotalBalances,
      December 31, 2006
              
              
              16,669
              
              
              $
              167
              
              
              
              124,191
              
              
              
              (37,704
              )
              
              
              (257
              )
              
              
              86,397Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (54,015
              )
              
              
              -
              
              
              
              (54,015
              )Amortization
      of black lung liability
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (180
              )
              
              
              (180
              )Black
      lung obligation adjustment, net of $(812) of tax
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4,909
              
              
              
              4,909Pension
      liability adjustment, net of $969 of tax
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,601
              )
              
              
              (2,601
              )Comprehensive
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (51,887
              )Issuance
      on common stock net of offering costs of $213
              
              
              5,175
              
              
              
              52
              
              
              
              32,337
              
              
              
              -
              
              
              
              -
              
              
              
              32,389Issuance
      of restricted stock awards, net of forfeitures
              
              
              135
              
              
              
              1
              
              
              
              (1
              )
              
              
              -
              
              
              
              -
              
              
              
              -Repurchase
      of shares for tax withholding
              
              
              (73
              )
              
              
              (1
              )
              
              
              (977
              )
              
              
              -
              
              
              
              -
              
              
              
              (978
              )Stock
      based compensation
              
              
              -
              
              
              
              -
              
              
              
              3,853
              
              
              
              -
              
              
              
              -
              
              
              
              3,853Balances,
      December 31, 2007
              
              
              21,906
              
              
              
              219
              
              
              
              159,403
              
              
              
              (91,719
              )
              
              
              1,871
              
              
              
              69,774Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (95,993
              )
              
              
              -
              
              
              
              (95,993
              )Amortization
      of black lung liability
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (562
              )
              
              
              (562
              )Black
      lung obligation adjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (5,334
              )
              
              
              (5,334
              )Pension
      liability adjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (15,665
              )
              
              
              (15,665
              )Comprehensive
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (117,554
              )Issuance
      on common stock, net of offering costs of $421
              
              
              4,913
              
              
              
              49
              
              
              
              93,771
              
              
              
              -
              
              
              
              -
              
              
              
              93,820Common
      stock issued for acquisition of mineral rights (note 2)
              
              
              388
              
              
              
              4
              
              
              
              15,996
              
              
              
              -
              
              
              
              -
              
              
              
              16,000Issuance
      of restricted stock awards, net of forfeitures
              
              
              238
              
              
              
              2
              
              
              
              (2
              )
              
              
              -
              
              
              
              -
              
              
              
              -Repurchase
      of shares for tax withholding
              
              
              (72
              )
              
              
              -
              
              
              
              (2,474
              )
              
              
              -
              
              
              
              -
              
              
              
              (2,474
              )Exercise
      of stock options
              
              
              20
              
              
              
              -
              
              
              
              542
              
              
              
              -
              
              
              
              -
              
              
              
              542Stock
      based compensation
              
              
              -
              
              
              
              -
              
              
              
              5,130
              
              
              
              -
              
              
              
              -
              
              
              
              5,130Balances,
      December 31, 2008
              
              
              27,393
              
              
              
              274
              
              
              
              272,366
              
              
              
              (187,712
              )
              
              
              (19,690
              )
              
              
              65,238Net
      Income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              50,954
              
              
              
              -
              
              
              
              50,954Amortization
      of pension actuarial amount
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,606
              
              
              
              1,606Black
      lung obligation adjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (574
              )
              
              
              (574
              )Pension
      liability adjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,404
              
              
              
              5,404Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              57,390Equity
      component of convertible debt offering, net of offeringcosts
      of $1,433 (note 4)
              
              
              
              
              
              
              
              
              
              
              43,385
              
              
              
              -
              
              
              
              -
              
              
              
              43,385Issuance
      of restricted stock awards, net of forfeitures
              
              
              234
              
              
              
              2
              
              
              
              (2
              )
              
              
              -
              
              
              
              -
              
              
              
              -Repurchase
      of shares for tax withholding
              
              
              (87
              )
              
              
              (1
              )
              
              
              (1,712
              )
              
              
              -
              
              
              
              -
              
              
              
              (1,713
              )Exercise
      of stock options
              
              
              5
              
              
              
              -
              
              
              
              75
              
              
              
              -
              
              
              
              -
              
              
              
              75Stock
      based compensation
              
              
              -
              
              
              
              -
              
              
              
              5,967
              
              
              
              -
              
              
              
              -
              
              
              
              5,967Balances,
      December 31, 2009
              
              
              27,545
              
              
              $
              275
              
              
              
              320,079
              
              
              
              (136,758
              )
              
              
              (13,254
              )
              
              
              170,342See
      accompanying notes to consolidated financial statements.





F-6





JAMES
RIVER COAL COMPANY


AND
SUBSIDIARIES


Consolidated
Statements of Cash Flows


(in
thousands)






Year
              
              
              Year
              
              
              YearEnded
              
              
              Ended
              
              
              EndedDecember
      31,
              
              
              December
      31,
              
              
              December
      31,2009
              
              
              2008
              
              
              2007Cash
      flows from operating activities:Net
      income (loss)
              
              $
              50,954
              
              
              
              (95,993
              )
              
              
              (54,015
              )Adjustments
      to reconcile net income (loss) to net cash provided byoperating
      activitiesDepreciation,
      depletion, and amortizationof
      property, plant, and equipment
              
              
              62,078
              
              
              
              70,277
              
              
              
              71,856Accretion
      of asset retirement obligations
              
              
              3,212
              
              
              
              2,768
              
              
              
              2,270Amortization
      of debt discount and issue costs
              
              
              1,813
              
              
              
              1,411
              
              
              
              1,569Stock-based
      compensation
              
              
              5,967
              
              
              
              5,130
              
              
              
              3,853Deferred
      income tax benefit
              
              
              180
              
              
              
              4
              
              
              
              (18,572
              )Loss
      on sale or disposal of property, plant, and equipment
              
              
              (61
              )
              
              
              (163
              )
              
              
              (87
              )Write-off
      of deferred financing costs
              
              
              -
              
              
              
              2,383
              
              
              
              2,421Gain
      on curtailment of pension plan
              
              
              -
              
              
              
              -
              
              
              
              (6,091
              )Changes
      in operating assets and liabilities:Receivables
              
              
              (9,988
              )
              
              
              7,745
              
              
              
              6,930Inventories
              
              
              (15,025
              )
              
              
              (2,236
              )
              
              
              (1,232
              )Prepaid
      royalties and other current assets
              
              
              (1,440
              )
              
              
              100
              
              
              
              (58
              )Restricted
      cash
              
              
              (56,820
              )
              
              
              (5,222
              )
              
              
              -Other
      assets
              
              
              (4,233
              )
              
              
              (4,403
              )
              
              
              (2,929
              )Accounts
      payable
              
              
              (10,596
              )
              
              
              9,762
              
              
              
              4,576Accrued
      salaries, wages, and employee benefits
              
              
              340
              
              
              
              632
              
              
              
              1,277Accrued
      taxes
              
              
              (1,787
              )
              
              
              (2,251
              )
              
              
              (2,772
              )Other
      current liabilities
              
              
              (3,626
              )
              
              
              8,702
              
              
              
              (1,030
              )Workers'
      compensation benefits
              
              
              3,558
              
              
              
              2,185
              
              
              
              8Black
      lung benefits
              
              
              1,657
              
              
              
              538
              
              
              
              1,435Pension
      obligations
              
              
              2,144
              
              
              
              (1,395
              )
              
              
              (3,129
              )Asset
      retirement obligations
              
              
              (861
              )
              
              
              (1,082
              )
              
              
              (1,457
              )Other
      liabilities
              
              
              93
              
              
              
              (468
              )
              
              
              (801
              )Net
      cash provided by (used in) operating activities
              
              
              27,559
              
              
              
              (1,576
              )
              
              
              4,022Cash
      flows from investing activities:Additions
      to property, plant, and equipment
              
              
              (72,159
              )
              
              
              (74,697
              )
              
              
              (49,343
              )Proceeds
      from sale of property, plant and equipment
              
              
              149
              
              
              
              1,108
              
              
              
              142Net
      cash used in investing activities
              
              
              (72,010
              )
              
              
              (73,589
              )
              
              
              (49,201
              )Cash
      flows from financing activities:Proceeds
      from issuance of long-term debt
              
              
              172,500
              
              
              
              -
              
              
              
              40,000Repayment
      of long-term debt
              
              
              -
              
              
              
              (38,800
              )
              
              
              (1,200
              )Proceeds
      from Revolver
              
              
              12,500
              
              
              
              26,500
              
              
              
              31,043Repayments
      of Revolver
              
              
              (30,500
              )
              
              
              (8,500
              )
              
              
              (48,536
              )Net
      proceeds from issuance of common stock
              
              
              -
              
              
              
              93,820
              
              
              
              32,389Principal
      payments under capital lease obligations
              
              
              -
              
              
              
              -
              
              
              
              (262
              )Debt
      issuance costs
              
              
              (5,517
              )
              
              
              (486
              )
              
              
              (4,649
              )Proceeds
      from exercise of stock options
              
              
              75
              
              
              
              542
              
              
              
              -Net
      cash provided by financing activities
              
              
              149,058
              
              
              
              73,076
              
              
              
              48,785Increase
      (decrease) in cash
              
              
              104,607
              
              
              
              (2,089
              )
              
              
              3,606Cash
      and cash equivalents at beginning of period
              
              
              3,324
              
              
              
              5,413
              
              
              
              1,807Cash
      and cash equivalents at end of period
              
              $
              107,931
              
              
              
              3,324
              
              
              
              5,413See
      accompanying notes to consolidated financial statements.





F-7
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements







(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 bituminous, steam- and industrial-grade coal through five
operating complexes located throughout eastern Kentucky and one in southern
Indiana. Substantially all coal sales and account receivables relate to the
electric utility and industrial markets.





The
consolidated financial statements include the accounts of James River Coal
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.


Cash
and Cash Equivalents and Restricted Cash




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.  The restricted cash is held in an account to
secure the Company’s letters of credit (note 12).
  Trade
Receivables




Trade
receivables are recorded at the invoiced amount and do not bear interest. The
Company evaluates the need for an allowance for doubtful accounts based on
review of historical write off experience. The Company has determined that no
allowance is necessary for trade receivables as of December 31, 2009 and 2008.
The Company does not have any off-balance sheet credit exposure related to its
customers.




Inventories




Inventories
of coal and materials and supplies are stated at the lower of cost or market.
Cost is determined using the average cost for coal inventories and the first-in,
first-out method for materials and supplies. Coal inventory costs include labor,
supplies, equipment cost, depletion, royalties, black lung tax, reclamation tax
and preparation plant cost.




Asset
Retirement Obligations




The
Company’s asset retirement obligation liabilities primarily 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. Asset retirement obligations are initially recorded as a liability based
on fair value, which is calculated as the present value of the estimated future
cash flows, in the period in which it is incurred. The estimate of ultimate
reclamation liability and the expected period in which reclamation work will be
performed is reviewed periodically by the Company’s management and engineers. In
estimating future cash flows, the Company considers the estimated current cost
of reclamation and applies 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 behalf of the Company. When the liability is
initially recorded, the offset is capitalized by increasing the carrying amount
of the related long-lived asset. Over time, the liability is accreted to its
present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Accretion expense is included in cost of
produced coal. To the extent there is a difference between the liability
recorded and the cost incurred, a gain or loss upon settlement is
recognized.  The following table sets forth the changes in the
Company’s asset retirement obligations at December 31, 2009 and 2008 (in
thousands):





F-8
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements










2009
              
              
              2008Asset
      retirement obligations at beginning of year
              
              $
              41,509
              
              
              $
              34,318Liabilities
      incurred
              
              
              1,246
              
              
              
              5,508Liabilities
      disposed
              
              
              (621
              )
              
              
              -Revisions
      in estimated cash flows
              
              
              190
              
              
              
              -Accretion
      expense
              
              
              3,212
              
              
              
              2,768Liabilities
      settled
              
              
              (693
              )
              
              
              (1,085
              )Asset
      retirement obligations at end of year
              
              
              44,843
              
              
              
              41,509Less
      amount included in other current liabilities
              
              
              (5,000
              )
              
              
              (5,100
              )Total
      non-current liability
              
              $
              39,843
              
              
              $
              36,409




Property,
Plant, and Equipment




Expenditures
for maintenance and repairs are charged to expense, and the costs of mining
equipment rebuilds and betterments that extend the useful life are capitalized.
Depreciation is provided principally using the straight-line method based upon
estimated useful lives, generally ten to 20 years for buildings and one to
seven years for machinery and equipment. Equipment held under capital
leases is amortized using the straight line method over the lesser of the lease
term or the estimated useful life of the asset. Mine development costs are
capitalized and amortized by the units of production method over estimated total
recoverable proven and probable reserves. Amortization of mineral rights is
provided by the units of production method over estimated total recoverable
proven and probable reserves.





Impairment
of Long-Lived Assets




Long-lived
assets, such as property, plant, and equipment are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset or asset group 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.  Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset.  If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge
is recognized for the amount by which the carrying amount of the asset exceeds
the fair value of the asset.  The Company did not recognize any
impairment charges during the periods presented.




Goodwill




Goodwill
represents the excess of purchase price and related costs over the value
assigned to the net tangible and identifiable intangible assets of businesses
acquired.  Goodwill is not amortized but is tested for impairment
annually, or if certain circumstances indicate a possible impairment may exist.
Impairment testing is performed at a reporting unit level. An impairment loss
generally would be recognized when the carrying amount of the reporting unit
exceeds the fair value of the reporting unit, with the fair value of the
reporting unit determined using a discounted cash flow
analysis.




Prepaid
Royalties




Mineral
rights are often acquired in exchange for advance royalty payments. Royalty
payments representing prepayments recoupable against future production are
capitalized, and amounts expected to be recouped within one year are
classified as a current asset. As mining occurs on these leases, the prepayment
is offset against earned royalties and is included in the cost of coal sold.
Amounts determined to be nonrecoupable are charged to expense.







F-9
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements










Revenue
Recognition




Revenues
include sales to customers of Company-produced coal and coal purchased from
third parties. The Company recognizes revenue from the sale of Company-produced
coal and coal purchased from third parties at the time delivery occurs
and risk of loss passes to the customer, which is either upon shipment
or upon customer receipt of coal based on contractual terms. Also, the sales
price must be determinable and collection reasonably assured.





Income
Taxes




Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.





The
Company evaluates its deferred tax assets to determine the necessity of a
valuation allowance.  A valuation allowance is required 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, the Company takes
into account various factors, including the expected level of future taxable
income. The Company also considers tax planning strategies in determining the
deferred tax asset that will ultimately be realized.





Our
effective income tax rate is impacted by the amount of the valuation allowance
recorded and 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 the
cost bases of the properties, it creates a permanent difference and directly
impacts the effective tax rate. Fluctuations in the effective tax rate may occur
between fiscal periods due to the varying levels of profitability (and thus,
taxable income and percentage depletion) at each of our mine
locations.





The
Company records interest and penalties, if any, associated with income taxes as
a component of income tax expense.




Accumulated
Other Comprehensive Income (Loss)




The
accumulated other comprehensive income (loss) at December 31, 2009, includes a
$12.8 million actuarial loss on the Company’s pension plan and a $0.4 million
actuarial loss on its black lung obligation.  The accumulated other
comprehensive loss at December 31, 2008, includes a $19.9 million actuarial loss
on the Company’s pension plan and a $0.2 million actuarial gain on its black
lung obligation.




Workers’
Compensation




The
Company is liable for workers’ compensation benefits for traumatic injuries
under state workers’ compensation laws in which it has operations. Except as
indicated, the Company is self insured for workers’ compensation for its
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.  The Company’s operations in Indiana are
insured through a third party insurance company using a large risk rating
plan.





The
Company accrues for workers’ compensation benefits by recognizing a liability
when it is probable that the liability has been incurred and the cost can be
reasonably estimated. The Company provides information to independent actuaries,
who after review and consultation with the Company with regards to actuarial
assumptions, including the discount rate, prepare an estimate of the liabilities
for workers’ compensation benefits.





F-10
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements








Black
Lung Benefits




The
Company is responsible under the Federal Coal Mine Health and Safety Act of
1969, as amended, and various states’ statutes for the payment of medical and
disability benefits to employees and their dependents resulting from occurrences
of coal worker’s pneumoconiosis disease (black lung). The Company provides
coverage for federal and state black lung claims through its self-insurance
programs for its Central Appalachia operations.  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.  The
Company’s operations in Indiana are insured through a third party insurance
company using a large risk rating plan. The Company uses the service cost method
to account for its self-insured black lung obligation. The liability measured
under the service cost method represents the discounted future estimated cost
for former employees either receiving or projected to receive benefits, and the
portion of the projected liability relative to prior service for active
employees projected to receive benefits.





The
periodic expense for black lung claims under the service cost method represents
the service cost, which is the portion of the present value of benefits
allocated to the current year, interest on the accumulated benefit obligation,
and amortization of unrecognized actuarial gains and losses. Actuarial gains and
losses are included as a component of accumulated other comprehensive income
(loss) and are amortized over the average remaining work life of the
workforce.





Annual
actuarial studies are prepared by independent actuaries using certain
assumptions to determine the liability. The calculation is based on assumptions
regarding disability incidence, medical costs, mortality, death benefits,
dependents, and interest rates. These assumptions are derived from actual
Company experience and industry sources.





Health
Claims




Company
is self-insured for certain health care coverage. The cost of this
self-insurance program is accrued based upon estimates of the costs for known
and anticipated claims. The Company recorded an estimated amount to cover known
claims and claims incurred but not reported of $2.2 million and $2.8 million as
of December 31, 2009 and 2008, respectively, which is included in accrued
salaries, wages, and employee benefits.





Equity-Based
Compensation Plan




The
Company’s stock compensation expense is based on estimated grant-date fair
values. Compensation expense is adjusted for estimated forfeitures and is
recognized on a straight-line basis over the requisite service period of the
award.  The Company’s estimated future forfeiture rates are based on
its historical experience.





Use
of Estimates




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
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.




Recent
Accounting Pronouncements





In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard (“SFAS”) No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162.  This statement modifies the
Generally Accepted Accounting Principles (“GAAP”) hierarchy by establishing only
two levels of GAAP, authoritative and nonauthoritative accounting literature.
Effective July 2009, the FASB Accounting Standards Codification (“ASC”), also
known collectively as the “Codification,” is considered the single source of
authoritative U.S. accounting and reporting standards, except for additional
authoritative rules and interpretive releases issued by the SEC. 
Nonauthoritative guidance and literature would include, among other things, FASB
Concepts Statements, American Institute of Certified Public Accountants Issue
Papers and Technical Practice Aids and accounting textbooks. The Codification
was developed to organize GAAP pronouncements by topic so that users can more
easily access authoritative accounting guidance.  It is organized by topic,
subtopic, section, and paragraph, each of which is identified by a numerical
designation.  All accounting references have been updated, and
therefore SFAS references have been replaced with ASC references.








F-11
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements





The
guidance in Earnings Per Share
Topic, ASC 260-10-45, addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting,
and therefore need to be included in the earnings allocation in computing
earnings per share under the two-class method. Unvested share-based payment
awards that contain non-forfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in
the computation of earnings per share pursuant to the two-class method. The
Company’s unvested restricted stock awards are considered “participating
securities” because they contain non-forfeitable rights to
dividends.  The guidance in ASC 260-10-45-59(A) is effective for the
Company’s financial statements January 1, 2009, and all prior-period earnings
per share data presented has been adjusted retrospectively (note
13).





(2)
            Acquisition
      of Mineral Rights




In July
2008, the Company closed a transaction under an Asset Purchase Agreement to
acquire certain coal reserves and permits from Cheyenne Resources,
Inc.  The acquired assets include approximately 10.2 million tons of
proven and probable surface reserves and 3.6 million tons of proven and probable
underground reserves, plus additional surface resources.  The purchase
price for the acquisition was $36 million, comprised of $16 million in cash at
closing, a short term promissory note for $4 million that was paid in full
September 2008 and 387,973 shares of newly issued common stock of the Company,
valued at $16 million (shares valued based on the most recent closing price
prior to closing).





(3)
            Other
      Current Liabilities




Other
current liabilities at December 31, 2009 and 2008 are as follows (in
thousands):





2009
              
              
              2008Accrued
      interest and amendment fees
              
              $
              2,069
              
              
              
              6,689Current
      portion of asset retirement obligation
              
              
              5,000
              
              
              
              5,100Accrued
      royalties
              
              
              7,746
              
              
              
              5,508Other
              
              
              624
              
              
              
              1,868$
              15,439
              
              
              
              19,165




(4)
            Long
      Term Debt and Interest Expense






Long-term
debt is as follows at December 31, 2009 and 2008 (in thousands):




2009
            
            
            2008Senior
      Notes
            
            $
            150,000
            
            
            
            150,000Convertible
      Senior Notes, net of discount
            
            
            128,268
            
            
            
            -Revolver
      / Prior Revolver
            
            
            -
            
            
            
            18,000Total
      long-term debt
            
            
            278,268
            
            
            
            168,000Less
      amounts classified as current
            
            
            -
            
            
            
            18,000Total
      long-term debt, less current maturities
            
            $
            278,268
            
            
            
            150,000












F-12
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements







Scheduled
maturities of long-term debt are as follows (in thousands):




Year
      ended December 31:2010
              
              $
              -2011
              
              
              -2012
              
              
              150,0002013
              
              
              -2014
              
              
              -Thereafter
              
              
              172,500$
              322,500






Senior
Notes




The $150
million of Senior Notes are due on June 1, 2012 (the Senior Notes).  The
Senior Notes are unsecured and accrue interest at 9.375% per annum. 
Interest payments on the Senior Notes are required semi-annually.  The
Company may redeem the Senior Notes, in whole or in part, at any time at
redemption prices ranging from 102.34% in 2010 to 100% in 2011.





The
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 Senior Notes will have the right to require the
Company to repurchase all or a part of the Senior Notes at a price equal to 101%
of their principal amount, plus any accrued interest to the date of
repurchase.





Convertible
Senior Notes





During
the fourth quarter of 2009, the Company issued $172.5 million of 4.5%
Convertible Senior Notes due on December 1, 2015 (the “Convertible Senior
Notes”).   The Company recorded a discount on the Convertible Senior
Notes of $44.8 million related to the portion of the proceeds that were
allocated to the equity component of the Convertible Senior
Notes.  The 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 Convertible Senior Notes, representing an initial conversion price of
approximately $25.78 per share of the Company’s stock.  Interest
payments on the Convertible Senior Notes are required
semi-annually.  The Convertible Senior Notes are shown net of a $44.2
million discount on the consolidated financials statements as of December 31,
2009.





The
Company used approximately $62.0 million of the net proceeds in connection with
the termination of its Prior Letter of Credit Facility (see below), and the
remaining for working capital and general corporate purposes.  The
Company incurred approximately $5.5 million of costs in connection with the
issuance of the Convertible Senior Notes issuance.  The issuance costs
allocated to the debt are being amortized using the effective interest rate
method over the life of the Convertible Senior Notes.





None of
the Convertible Senior Notes are currently eligible for
conversion.  The Convertible Senior Notes are convertible at the
option of the holders (with the length of time the 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 Notes in effect on the last trading
      day of the immediately preceding calendar
  quarter;




·
              If
      the trading price of the 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 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.







F-13
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements







Revolver




In
January 2010, the Company amended and restated its existing Revolving Credit
Agreement (as amended and restated the Revolving Credit Agreement is referred to
as the Revolver).  The following is a summary of significant terms of
the Revolver.





Maturity
            February
      2012Interest/Usage
      Rate
            Company’s
      option of Base Rate(a)
      plus 3.0% or LIBOR plus 4.0% per annumMaximum
      Availability
            Lesser
      of $65.0 million or the borrowing base(b)Periodic
      Principal Payments
            None





(a)
            Base
      rate is the higher of (1) the Federal Fund Rate plus 3.0%, (2) the prime
      rate and (3) a LIBOR rate plus 1.0%.(b)
            The
      Revolver’s borrowing base is based on the sum 85% of the Company’s
      eligible accounts receivable plus 65% of the eligible inventory minus
      reserves from time to time set by administrative agent.  The
      eligible accounts receivable and inventories are further adjusted as
      specified in the agreement.  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 4.25% 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 Adjusted EBITDA and a maximum Leverage Ratio and limit capital
expenditures, each as defined by the agreement. However, the minimum EBITDA and
maximum Leverage Ratio covenants are only applicable if the Company’s
unrestricted cash balance falls below $75.0 million and remain in effect until
the Company’s unrestricted cash exceeds $75 million for 90 consecutive
days.





The
Company expects to use the Revolver to secure its outstanding letters of
credit.  The Company intends to place cash in a restricted account to
provide it with the maximum borrowing base under the revolver.




Prior
Revolver and Prior Term Credit Agreement




In 2007,
the Company entered into a $35.0 million Revolving Credit Agreement (the Prior
Revolver) and a Prior Term Credit Agreement (collectively the Facilities). The
Prior Term Credit Agreement consisted of a term facility (the Prior Term
Facility) and a $60.0 million letter of credit facility (the Prior Letter of
Credit Facility).





As
discussed above, the terms of the Prior Revolver were amended and restated in
January 2010.  There were no amounts outstanding on the Prior Revolver
as of December 31, 2009.





The
Company repaid the outstanding balance of the Prior Term Facility in October
2008 and used $5.2 million of the Company’s cash to secure letters of credit
under the Prior Letter of Credit Facility.  The Companies fees under
the Prior Letter of Credit Facility were 10.0% effective January 1, 2009 and
12.5% effective April 1, 2009.  In December 2009, the Company
terminated the Prior Letter of Credit Facility and secured 105% of the letters
of credit that were outstanding under the Prior Letter of Credit Facility with
approximately $62.0 million in cash.  The cash used to secure the
letters of credit is shown as restricted cash on the Company’s consolidated
balance sheets.   The Company expensed $1.6 million in 2009 in
connection with a fee to terminate the Prior Letter of Credit Facility and
included the fee in charges associated with the repayment and amendment of debt
in the consolidated financials statements for the year ended December 31,
2009.








F-14
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements





In
connection with repayment of the Prior Term Facility, the Company expensed
approximately $2.4 million of unamortized financing charges on the Prior Term
Facility in the year ended December 31, 2008.   In 2008, the
Company expensed and paid approximately $7.8 million of costs associated with
the two credit amendments to the Facilities.  In 2008, the Company
also expensed and had unpaid fees of approximately $5.5 million of costs
associated with the amendments that were paid in 2009.  The write-off
of the unamortized financing charges and the expenses associated with the
amendments to the Credit Amendments are included in charges associated with the
repayment and amendment of debt in the consolidated financials statements for
the year ended December 31, 2008.




Prior
Senior Secured Credit




During
the year ended December 31, 2007, the Company wrote off $2.4 million of
financing charges in connection with the repayment of a Prior Senior Secured
Credit Facility.  The write off of the financing charges is classified
as charges associated with repayment and amendment of debt in the accompanying
consolidated statements of operations.





Interest
Expense





During
the years ended December 31, 2009, 2008 and 2007, the Company paid $14.4
million, $16.8 million, and $18.2 million in interest,
respectively.





Other





The
Convertible Senior Notes rank equally with all of the Company’s existing and
future senior unsecured indebtedness, including the Company’s unsecured
Senior Notes.  The Convertible Senior Notes are not guaranteed by any of
James River Coal Company’s subsidiaries, while the Company’s unsecured
Senior Notes are guaranteed by certain of James River Coal Company’s
subsidiaries.  The Convertible Senior Notes are effectively subordinated to
all of the Company’s existing and future secured indebtedness (to the extent of
the assets securing such indebtedness) and structurally subordinated to all
existing and future liabilities of James River Coal Company’s subsidiaries,
including their trade payables.  The Revolver is secured by
substantially all of the Company’s assets.





The
Company was in compliance with all of the financial covenants under its
outstanding debt instruments as of December 31, 2009.





(5)
            Workers’
      Compensation Benefits




As of
December 31, 2009 and 2008, workers’ compensation benefit obligation consisted
of the following (in thousands):




2009
              
              
              2008Workers'
      compensation benefits
              
              $
              59,335
              
              
              
              55,777Less
      current portion
              
              
              8,950
              
              
              
              9,300Noncurrent
      portion of workers' compensation benefits
              
              $
              50,385
              
              
              
              46,477




Actuarial
assumptions used in the determination of the liability for the self-insured
portion of workers’ compensation benefits included a discount rate of 5.3%,
6.0%, and 6.0% at December 31, 2009, 2008 and 2007, respectively.







F-15
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements





(6)
            Pneumoconiosis
      (Black Lung) Benefits




As of
December 31, 2009 and 2008, black lung benefits obligation consisted of the
following (in thousands):




2009
              
              
              2008Black
      lung benefits
              
              $
              32,799
              
              
              
              30,568Less
      current portion
              
              
              1,782
              
              
              
              1,539Noncurrent
      portion of black lung benefits
              
              $
              31,017
              
              
              
              29,029




A
reconciliation of the changes in the black lung benefit obligation is as follows
(in thousands):





2009
              
              
              2008Beginning
      of the year black lung obligation
              
              $
              30,568
              
              
              
              24,134Black
      lung actuarial liability adjustment
              
              
              575
              
              
              
              5,334Service
      cost
              
              
              1,225
              
              
              
              480Interest
      cost
              
              
              1,712
              
              
              
              1,962Benefit
      payments
              
              
              (1,281
              )
              
              
              (1,342
              )End
      of year accumulated black lung obligation
              
              $
              32,799
              
              
              
              30,568




The
actuarial assumptions used in the determination of accumulated black lung
obligations as of December 31, 2009 and 2008 included a discount rate of 5.8%
and 5.8%, respectively. A 1.0% decrease in the discount rate used at December
31, 2009, would increase the black lung obligation by approximately $4.6
million.  For purposes of determining net periodic expense related to
such obligations, the Company used a discount rate of 5.8%, 6.5%, and 5.5% for
the years ended December 31, 2009, 2008 and 2007.




The
components of net periodic benefit cost are as follows (in
thousands):




2009
              
              
              2008
              
              
              2007Service
      cost
              
              $
              1,225
              
              
              
              480
              
              
              
              388Interest
      cost
              
              
              1,712
              
              
              
              1,962
              
              
              
              1,589Amortization
      of actuarial amount
              
              
              -
              
              
              
              (562
              )
              
              
              (180
              )Net
      periodic benefit cost
              
              $
              2,937
              
              
              
              1,880
              
              
              
              1,797




As of
December 31, 2009, the Company has a $0.4 million actuarial loss recorded in
accumulated other comprehensive income (loss) on its black lung
obligation.  The Company expects that it will not recognize any of
this actuarial loss during the year ended December 31, 2010.




(7)
            Equity




Preferred
Stock and Shareholder Rights Agreement




The
Company has authorized 10,000,000 shares of preferred stock, $1.00 par value per
share, the rights and preferences of which are established by the Board of the
Directors. The Company has reserved 500,000 of these shares as Series A
Participating Cumulative Preferred Stock for issuance under a shareholder rights
agreement (the Rights Agreement).








F-16
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements





On May
25, 2004, the Company’s shareholders approved the Rights Agreement and declared
a dividend of one preferred share purchase right (Right) for each two shares of
common stock outstanding.  Each Right entitles the registered holder to
purchase from the Company one one-hundredth (1/100) of a share of our Series A
Participating Cumulative Preferred Stock, par value $1.00 per share, at a price
of $200 per one one-hundredth of a Series A preferred share.  The Rights
are not exercisable until a person or group of affiliated or associated persons
(an Acquiring Person) has acquired or announced the intention to acquire 20% or
more of the Company’s outstanding common stock.





In 2009,
an amendment to the Rights Agreement reduced, until December 5, 2010, the
threshold at which a person or group becomes an “Acquiring Person” under the
Rights Agreement from 20% to 4.9% of the Company’s then-outstanding shares of
common stock.  The Rights Agreement, as amended, exempts shareholders
whose beneficial ownership as of November 3, 2009 exceeded 4.9% of the Company’s
then-outstanding shares of common stock so long as they do not acquire more than
an additional 0.5% of the Company’s then-outstanding shares of common stock
without the advance approval of the Company’s board of directors.





In the
event that the Company is acquired in a merger or other business combination
transaction or 50% or more of the Company’s consolidated assets or earning power
is sold after a person or group has become an Acquiring Person, each holder of a
Right, other than the Rights beneficially owned by the Acquiring Person (which
will thereafter be void), will receive, upon the exercise of the Right, that
number of shares of common stock of the acquiring company which at the time of
such transaction will have a market value of two times the exercise price of the
Right.  In the event that any person becomes an Acquiring Person, each
Right holder, other than the Acquiring Person (whose Rights will become void),
will have the right to receive upon exercise that number of shares of common
stock having a market value of two times the exercise price of the
Right.





The
rights will expire May 25, 2014, unless that expiration date is extended. The
Board of Directors may redeem the Rights at a price of $0.001 per Right at any
time prior to the time that a person or group becomes an Acquiring
Person.





Equity
Based Compensation




Under the
2004 Equity Incentive Plan (the Plan), participants may be granted stock options
(qualified and nonqualified), stock appreciation rights (SARs), restricted
stock, restricted stock units, and performance shares. The total number of
shares that may be awarded under the Plan is 2,400,000, and no more than
1,000,000 of the shares reserved under the Plan may be granted in the form of
incentive stock options.  The Company currently has the following
types of equity awards outstanding under the Plan.





Restricted
Stock Awards





Pursuant
to the Plan certain directors and employees have been awarded restricted common
stock with such shares vesting over two to five years. The related expense is
amortized over the vesting period.





Stock
Option Awards





Pursuant
to the Plan certain directors and employees have been awarded options to
purchase common stock with such options vesting ratably over three to five
years. The Company’s stock options have been issued at exercise prices equal to
or greater than the fair value of the Company’s stock at the date of
grant.





Shares
awarded or subject to purchase under the Plan that are not delivered or
purchased, or revert to the Company as a result of forfeiture or termination,
expiration or cancellation of an award or that are used to exercise an award or
for tax withholding, will be again available for issuance under the Plan. At
December 31, 2009, there were 843,816 shares available under the Plan for future
awards.





F-17
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements








The
following table highlights the expense related to share-based payment for the
periods ended December 31 (in thousands):




2009
              
              
              2008
              
              
              2007Restricted
      stock
              
              $
              5,655
              
              
              
              4,813
              
              
              
              3,535Stock
      options
              
              
              312
              
              
              
              317
              
              
              
              318Stock
      based compensation
              
              $
              5,967
              
              
              
              5,130
              
              
              
              3,853







The fair
value of the restricted stock issued and outstanding is equal to the value of
shares at the grant date.  At this time, the Company does not expect
any of its restricted shares or options to be forfeited before vesting. The fair
value of stock options was estimated using the Black-Scholes option pricing
model.  The Company used the following assumptions to value the stock
options issued during the periods indicated below:





Year
      Ended
              Year
      Ended
              Year
      EndedDecember
      31, 2009
              December
      31, 2008
              December
      31, 2007Dividend
      yield
              0.0%
              0.0%
              0.0%Expected
      volatility factor(1)
              90.0%
              70.0%
              50.0%Weighted
      average expected volatility
              90.0%
              70.0%
              50.0%Risk-free
      interest rate(2)
              2.6%
              3.4%
              4.8%Expected
      term (in years)
              6.5
              6.5
              6.5





(1)
            The
      Company used historical experience to estimate its
    volatility.


(2)
            The
      risk-free interest rate for periods is based on U.S. Treasury yields in
      effect at the time of grant.





The
following is a summary of restricted stock and stock option awards:




Restricted
      Stock
              
              
              Stock
      OptionsWeighted
              
              
              
              
              
              WeightedNumber
      of
              
              
              Average
              
              
              Number
      of
              
              
              AverageShares
              
              
              Fair
      Value
              
              
              Shares
              
              
              ExerciseOutstanding
              
              
              at
      Issue
              
              
              Outstanding
              
              
              PriceJanuary
      1, 2007
              
              
              739,720
              
              
              $
              18.25
              
              
              
              261,001
              
              
              $
              16.07Granted
              
              
              148,036
              
              
              
              4.65
              
              
              
              25,000
              
              
              
              14.60Exercised/Vested
              
              
              (198,509
              )
              
              
              16.37
              
              
              
              -
              
              
              
              -Canceled
              
              
              (12,940
              )
              
              
              17.39
              
              
              
              (21,667
              )
              
              
              17.72December
      31, 2007
              
              
              676,307
              
              
              
              15.84
              
              
              
              264,334
              
              
              
              15.79Granted
              
              
              244,140
              
              
              
              35.68
              
              
              
              20,000
              
              
              
              36.30Exercised/Vested
              
              
              (212,598
              )
              
              
              15.62
              
              
              
              (20,000
              )
              
              
              27.12Canceled
              
              
              (5,800
              )
              
              
              19.16
              
              
              
              (3,334
              )
              
              
              14.84December
      31, 2008
              
              
              702,049
              
              
              
              22.78
              
              
              
              261,000
              
              
              
              16.51Granted
              
              
              234,311
              
              
              
              13.87
              
              
              
              20,000
              
              
              
              13.87Exercised/Vested
              
              
              (218,708
              )
              
              
              16.27
              
              
              
              (5,000
              )
              
              
              15.00Canceled
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -December
      31, 2009
              
              
              717,652
              
              
              $
              21.86
              
              
              
              276,000
              
              
              $
              16.34







F-18
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements







The
following table summarizes additional information about the stock options
outstanding at December 31, 2009.




Range
      of
                  Exercise
      Price
                
                
                Shares
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Weighted
                  Average
                  Remaining
                  Contractual
      Life
                  (Years)
                
                
                Aggregate
                  Intrinsic
                  Value
      (1)
                  (in
      000's)Outstanding
      at December 31, 2009
                
                $10.80-$36.30
                
                
                276,000
                
                
                $
                16.34
                
                
                5.5
                
                
                $
                1,404Exercisable
      at December 31, 2009
                
                $10.80-$36.30
                
                
                236,004
                
                
                $
                15.47
                
                
                4.9
                
                
                $
                1,286Vested
      and expected to vest at December 31, 2009
                
                
                276,000
                
                
                $
                16.34
                
                
                5.5
                
                
                $
                1,404
  (1)
      The difference between a stock award's exercise price and the underlying
      stock's market price at December 31, 2009No
      value is assigned to stock awards whose option price exceeds the stock's
      market price at December 31,
2009.




The
following table summarizes the Company’s total unrecognized compensation cost
related to stock based compensation as of December 31, 2009.




Weighted
      AverageRemaining PeriodUnearned
              
              
              Of
      ExpenseCompensation
              
              
              Recognition(in
      000's)
              
              
              (in
      years)Stock
      Options
              
              $
              414
              
              
              
              1.7Restricted
      Stock
              
              
              9,850
              
              
              
              2.7Total
              
              $
              10,264






(8)
            Income
      Taxes




Income
tax expense (benefit) consists of the following (in thousands):




2009
              
              
              2008
              
              
              2007Current:Federal
              
              $
              1,354
              
              
              
              -
              
              
              
              -State
              
              
              25
              
              
              
              (277
              )
              
              
              7281,379
              
              
              
              (277
              )
              
              
              728Deferred:Federal
              
              
              165
              
              
              
              53
              
              
              
              (16,320
              )State
              
              
              15
              
              
              
              (49
              )
              
              
              (2,252
              )180
              
              
              
              4
              
              
              
              (18,572
              )$
              1,559
              
              
              
              (273
              )
              
              
              (17,844
              )







F-19
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements





A
reconciliation of income taxes computed at the statutory federal income tax rate
to the expense (benefit) for income taxes included in the consolidated
statements of operations is presented below:




2009
              
              
              2008
              
              
              2007Federal
      income taxes at statutory rates
              
              
              34.0
              %
              
              
              (34.0
              )
      %
              
              
              (34.0
              )
      %Percentage
      depletion
              
              
              (25.8
              )
              
              
              (3.8
              )
              
              
              (3.8
              )Effect
      of state tax rate change, net
              
              
              (0.2
              )
              
              
              (0.1
              )
              
              
              -Change
      in valuation allowance
              
              
              (6.2
              )
              
              
              39.2
              
              
              
              13.2State
      income taxes, net of federal
              
              
              0.4
              
              
              
              (2.4
              )
              
              
              (1.9
              )Other,
      net
              
              
              0.8
              
              
              
              0.8
              
              
              
              1.73.0
              %
              
              
              (0.3
              )
      %
              
              
              (24.8
              )
      %




The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2009 and
2008 are presented below (in thousands):




2009
              
              
              2008Deferred
      tax assets:Accruals
      for financial reporting purposes, principallyworkers'
      compensation and black lung obligations
              
              $
              55,001
              
              
              
              50,523Net
      operating loss carryforwards
              
              
              73,504
              
              
              
              84,930Accumulated
      comprehensive income, principally pension
              
              
              4,718
              
              
              
              7,012Other
              
              
              1,405
              
              
              
              -Total
      gross deferred tax assets
              
              
              134,628
              
              
              
              142,465Less
      valuation allowance
              
              
              33,247
              
              
              
              54,299Net
      deferred tax asset
              
              
              101,381
              
              
              
              88,166Deferred
      tax liabilities:Discount
      on Senior Convertible Notes
              
              
              15,824
              
              
              
              -Other
      - principally property, plant and equipmentdue
      to differences in depreciation, depletionand
      amortization
              
              
              80,486
              
              
              
              82,915Total
      gross deferred tax liability
              
              
              96,310
              
              
              
              82,915Net
      deferred tax asset
              
              $
              5,071
              
              
              
              5,251




The net
deferred tax asset is included in other assets.  The valuation
allowance is based on an assumption that not all of the gross deferred tax
asset recorded will more likely than not be realized.




At
December 31, 2009, the Company has consolidated NOLs for federal income tax
purposes of approximately $204 million that expire beginning in 2023 and
consolidated Kentucky net operating loss carryforwards of approximately $98
million which expire beginning in 2023. Approximately $88 million of the federal
NOLs and $54 million of the state NOLs are limited in the amount that can be
used in a given year by Section 382 of the Internal Revenue
Code.  Prior to application of the valuation allowance, these net
operating loss carryforwards generate a combined federal and state tax benefit
of approximately $73.5 million.




The
Company has analyzed filing positions in all of the federal and state
jurisdictions where it is required to file income tax returns, as well as all
open tax years in these jurisdictions.  The Company has identified its
federal tax return and its state tax returns in Virginia, Kentucky and Indiana
as “major” tax jurisdictions. The only periods subject to examination for the
Company’s federal return are the 2006 through 2009 tax years. The periods
subject to examination for the Company’s state returns in Virginia are years
2006 through 2009; Kentucky are years 2005 through 2009 and Indiana are years
2006 through 2009. The Company believes that its income tax filing positions and
deductions will be sustained on audit and does not anticipate any adjustments
that will result in a material change to its consolidated financial
position.  Therefore, no reserves for uncertain income tax
positions have been recorded.








F-20
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements





During
the year ended December 31, 2009, the Company paid income taxes of $1.6
million.  The Company received $0.1 million of income tax refunds
during 2008.  The Company received no income tax refunds during
2007.  The income tax benefit (expense) includes no interest and
penalties for the year ended December 31, 2009 and 2008 and $0.2 million of
interest and penalties for the year ended December 31, 2007.




(9)
            Employee
      Benefit Plans




Defined
Benefit Pension Plan




In 2007,
the Company froze pension plan benefit accruals for all employees covered under
its qualified non-contributory defined benefit pension plan.  The
Company’s funding policy is to contribute annually an amount at least equal to
the minimum funding requirements actuarially determined in accordance with the
Employee Retirement Income Security Act of 1974.




The plan
assets for the qualified defined benefit pension plan are held by an independent
trustee. The plan’s assets include investments in cash and cash equivalents and
mutual funds holding corporate and government bonds and preferred and common
stocks. The Company has an internal investment committee that sets investment
policy, selects and monitors investment managers and monitors asset
allocation.




The
investment policy for the pension plan assets includes the objectives of
providing growth of capital and income while achieving a target annual rate of
return of 7.5% over a full market cycle, approximately 5 to 7 years.
Diversification of assets is employed to reduce risk. The current target asset
allocation is 70% for equity securities (including 45% Large Cap, 15% Small Cap,
10% International) and 30% for cash and interest bearing securities. The
investment policy is based on the assumption that the overall portfolio
volatility will be similar to that of the target allocation.  Given
the volatility of the capital markets, strategic adjustments in various asset
classes may be required to rebalance asset allocation back to its target policy.
Investment fund managers are not permitted to invest in certain securities and
transactions as outlined by the investment policy statements specific to each
investment category without prior investment committee approval.




To
develop the expected long-term rate of return on assets assumption, the Company
performs a periodic analysis which considers the historical returns and the
future expectations for returns for each asset class, as well as the target
asset allocation of the pension portfolio.  This evaluation resulted
in the selection of the 7.5% long-term rate of return on assets assumption for
the year ended December 31, 2009.




The
Company utilizes a fair value hierarchy, which maximizes the use of observable
inputs and minimizes the use of unobservable inputs when measuring fair
value.  The plan assets are valued at level 1 of the fair value
hierarchy by using unadjusted quoted prices in active markets that are
accessible at the measurement date for identical, unrestricted assets or
liabilities.  The fair value of the major categories of qualified
defined benefit pension plan assets includes the following (in
thousands):





2009
              
              
              2008Amount
              
              
              Percentage
              
              
              Amount
              
              
              PercentageMutual
      funds - equity
              
              $
              28,987
              
              
              
              57.6%
              
              
              $
              21,754
              
              
              
              51.1%Mutual
      funds - international equity
              
              
              4,980
              
              
              
              9.9%
              
              
              
              4,062
              
              
              
              9.6%Mutual
      funds - fixed taxable
              
              
              16,097
              
              
              
              32.0%
              
              
              
              16,462
              
              
              
              38.7%Money
      market funds and cash
              
              
              270
              
              
              
              0.5%
              
              
              
              271
              
              
              
              0.6%$
              50,334
              
              
              
              100.0%
              
              
              $
              42,549
              
              
              
              100.0%












F-21
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements





The
following table sets forth changes in the plan’s benefit obligations, changes in
the fair value of plan assets, and funded status at December 31, 2009 and
2008 (in thousands):




2009
              
              
              2008Change
      in benefit obligation:Projected
      benefit obligation at beginning of year
              
              $
              62,242
              
              
              
              63,974Interest
      cost
              
              
              3,660
              
              
              
              3,645Actuarial
      (gain) loss
              
              
              1,582
              
              
              
              (2,530
              )Benefits
      paid
              
              
              (2,323
              )
              
              
              (2,847
              )Projected
      benefit obligation at end of year
              
              $
              65,161
              
              
              
              62,242Change
      in plan assets:Fair
      value of plan assets at beginning of year
              
              $
              42,549
              
              
              
              58,550Actual
      return on plan assets
              
              
              10,085
              
              
              
              (13,837
              )Employer
      contributions
              
              
              23
              
              
              
              683Benefits
      paid
              
              
              (2,323
              )
              
              
              (2,847
              )Fair
      value of plan assets at end of year
              
              $
              50,334
              
              
              
              42,549Reconciliation
      of funded status:Funded
      status
              
              $
              (14,827
              )
              
              
              (19,693
              )Net
      amount recognized
              
              $
              (14,827
              )
              
              
              (19,693
              )Amounts
      recognized in the consolidated balance sheetsconsist
      of:Accrued
      benefit liability
              
              $
              (14,827
              )
              
              
              (19,693
              )




The
accumulated benefit obligation of the plan was $65.2 million and $62.2 million
as of December 31, 2009 and 2008, respectively. Company contributions in
2010 are expected to be approximately $3.1 million.




The
components of net periodic benefit cost and benefits paid by period are as
follows (in thousands):




2009
              
              
              2008
              
              
              2007Service
      cost
              
              $
              -
              
              
              
              -
              
              
              
              2,173Interest
      cost
              
              
              3,660
              
              
              
              3,645
              
              
              
              3,611Expected
      return on plan assets
              
              
              (3,099
              )
              
              
              (4,358
              )
              
              
              (4,203
              )Recognized
      net actuarial loss
              
              
              1,606
              
              
              
              -
              
              
              
              -Gain
      on curtailment
              
              
              -
              
              
              
              -
              
              
              
              (6,110
              )Net
      periodic benefit cost
              
              $
              2,167
              
              
              
              (713
              )
              
              
              (4,529
              )Benefits
      paid
              
              $
              2,323
              
              
              
              2,847
              
              
              
              2,777




As of
December 31, 2009 and 2008 the Company had a $12.8 million and a $19.9 million
net actuarial loss recorded in accumulated other comprehensive loss on its
defined benefit plan.  The Company expects to recognize $0.8 million
of the net actuarial loss in the year ended December 31, 2010.







F-22
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements





The
weighted-average assumptions used to determine the pension benefit obligations
are as follows:




2009
              
              2008Discount
      rate
              
              5.9%
              
              6.0%Expected
      return on plan assets
              
              7.5%
              
              7.5%Measurement
      date
              
              December
      31, 2009
              
              December
      31, 2008




The
weighted-average assumptions used to determine the net periodic benefit cost are
as follows:




Three
      months
              
              Nine
      monthsEnded
              
              EndedDecember
      31,
              
              September
      30,2009
              
              2008
              
              2007
              
              2007Discount
      rate
              6.0%
              
              5.8%
              
              6.0%
              
              5.6%Expected
      return on plan assets
              7.5%
              
              7.5%
              
              7.5%
              
              7.5%Rate
      of compensation increase
              Not
      applicable
              
              Not
      applicable
              
              Not
      applicable
              
              4.0%Measurement
      date
              December
      31, 2008
              
              December
      31, 2007
              
              September
      30, 2007
              
              October
      1, 2006




The
following benefit payments are expected to be paid (based on the assumptions
described above (in thousands)).




Year
      ended December 31:2010
              
              $
              2,7632011
              
              
              2,9652012
              
              
              3,1432013
              
              
              3,2962014
              
              
              3,5272015-2019
              
              
              19,959




Savings
and Profit Sharing Plan




The
Company sponsors defined contribution pension plans and profit sharing
plans.  All U.S. employees are eligible for at least one of the
Company’s plans. The Company’s contributions vary depending on the plan and
cannot exceed the maximum allowable for tax purposes.  The Company
recognized approximately $3.3 million, $3.7 million and $3.6 million of expense
relating to these plans for the years ended December 31, 2009, 2008 and 2007,
respectively.





(10)
            Major
      Customers




During
2009, approximately 76% of total revenues were from two customers, the largest
of which represented 39% of revenues.  During 2008, approximately 48%
of total revenues were from two customers, the largest of which represented 36%
of revenues.  During 2007, approximately 47% of total revenues were
from two customers, the largest of which represented 28% of
revenues.  The revenues from these customers for 2009, 2008 and 2007
are included in the CAPP segment in Note 15.







F-23
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements










(11)
            Leases




The
Company leases equipment and various other properties under non-cancelable
long-term leases, expiring at various dates. Certain leases contain options that
would allow the Company to extend the lease or purchase the leased asset at the
end of the base lease term. Future minimum lease payments under noncancelable
operating leases (with initial or remaining lease terms in excess of
one year) as of December 31, 2009 were as follows (in
thousands):




OperatingleasesYear
      ended December 31:2010
              
              $
              6,8172011
              
              
              2,6032012
              
              
              8422013
              
              
              2392014
              
              
              163Thereafter
              
              
              -$
              10,664





The
Company incurred rent expense on equipment and offices space of approximately
$10.8 million, $10.7 million and $7.3 million for the years ended December 31,
2009, 2008 and 2007, respectively.




(12)
            Commitments
      and Contingencies




Future
minimum royalty commitments under coal lease agreements at December 31,
2009 were as follows (in thousands):




RoyaltycommitmentsYear
      ended December 31:2010
              
              $
              24,9572011
              
              
              21,9662012
              
              
              21,4012013
              
              
              21,3792014
              
              
              19,7452015
      and thereafter
              
              
              93,908$
              203,356




(a)
            Certain
      coal leases do not have set expiration dates but extend until completion
      of mining of all merchantable and mineable coal reserves.  For
      purposes of this table, we have generally assumed that minimum royalties
      on such leases will be paid for a period of ten
  years.




(b)
            Certain
      coal leases require payment based on minimum tonnage, for these contracts
      an average sales price of $80.00 per ton was used to project the future
      commitment.




The
Company has established irrevocable letters of credit totaling $59.1 million as
of December 31, 2009 to guarantee performance under certain contractual
arrangements.  The letters of credit are secured by $62.0 million of
cash that is included in restricted cash on the accompanying consolidated
balance sheets.




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.







F-24
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements





(13)
            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 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):




2009
              
              
              2008
              
              
              2007Basic
      earnings per common share:Net
      income (loss)
              
              $
              50,954
              
              
              
              (95,993
              )
              
              
              (54,015
              )Income
      allocated to participating securities
              
              
              (1,395
              )
              
              
              -
              
              
              
              -Net
      income (loss) available to common shareholders
              
              $
              49,559
              
              
              
              (95,993
              )
              
              
              (54,015
              )Weighted
      average number of common andcommon
      equivalent shares outstanding:Basic
      number of common shares outstanding
              
              
              26,765
              
              
              
              24,520
              
              
              
              16,412Dilutive
      effect of unvested restricted stock(participating
      securities)
              
              
              754
              
              
              
              -
              
              
              
              -Dilutive
      effect of stock options
              
              
              49
              
              
              
              -
              
              
              
              -Diluted
      number of common shares andcommon
      equivalent shares outstanding
              
              
              27,568
              
              
              
              24,520
              
              
              
              16,412Basic
      earnings (loss) per common share
              
              $
              1.85
              
              
              
              (3.91
              )
              
              
              (3.29
              )Diluted
      net income per common share:Net
      income (loss)
              
              $
              50,954
              
              
              
              (95,993
              )
              
              
              (54,015
              )Income
      allocated to participating securities
              
              
              -
              
              
              
              -
              
              
              
              -Net
      income (loss) available to potential commonshareholders
              
              $
              50,954
              
              
              
              (95,993
              )
              
              
              (54,015
              )Diluted
      net earnings (loss) per share
              
              $
              1.85
              
              
              
              (3.91
              )
              
              
              (3.29
              )




For
periods in which there was a loss, the Company has excluded from its diluted
loss per 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 share.  The excluded instruments would have
increased the diluted weighted average number of common and common equivalent
shares outstanding by approximately 0.8 million and 0.7 million for the years
ended December 31, 2008 and 2007, 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 share calculation as
such participating securities holders are not contractually obligated to fund
such losses.





F-25
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements







(14)
              Fair
      Value of Financial
Instruments




The
estimated fair value of financial instruments has been determined by the Company
using available market information. As of December 31, 2009 and 2008, except for
long-term debt obligations, the carrying amounts of all financial instruments
approximate their fair values due to their short maturities.




The
      carrying value and fair value of our Senior Notes and Convertible Notes
      are as follows (in thousands)





2009
            
            2008Carrying
      Value
            Fair
      Value
            
            Carrying
      Value
            Fair
      ValueSenior
      Notes and Convertible Senior Notes
            $322,500
            $325,400
            
            $150,000
            $112,100




The
carrying amounts and fair values 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 of $172.5 million, which has been
adjusted in the Consolidated Balance Sheets for a discount related to its
convertible feature (Note 4).




The
Company believes that the carrying amount of the Revolver approximated the fair
value at December 31, 2008, due to the variable interest rate and a recent
amendment to that facility.




(15)
            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 are located in eastern Kentucky and the
Company’s Midwest operations are located in southern Indiana. Coal quality, coal
seam height, transportation methods and regulatory issues are generally
consistent within a basin. Accordingly, market and contract pricing have been
developed by coal basin. 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).





F-26
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements










Years
      EndedDecember
      31,2009
              
              
              2008
              
              
              2007RevenuesCAPP
              
              $
              579,108
              
              
              
              467,609
              
              
              
              429,283Midwest
              
              
              102,450
              
              
              
              100,898
              
              
              
              91,277Corporate
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              $
              681,558
              
              
              
              568,507
              
              
              
              520,560Depreciation,
      depletion and amortizationCAPP
              
              $
              49,380
              
              
              
              55,979
              
              
              
              56,506Midwest
              
              
              12,646
              
              
              
              14,218
              
              
              
              15,199Corporate
              
              
              52
              
              
              
              80
              
              
              
              151Total
              
              $
              62,078
              
              
              
              70,277
              
              
              
              71,856Total
      operating income (loss)CAPP
              
              $
              98,485
              
              
              
              (35,861
              )
              
              
              (30,841
              )Midwest
              
              
              (4,909
              )
              
              
              (10,296
              )
              
              
              (3,276
              )Corporate
      (2)
              
              
              (22,704
              )
              
              
              (18,493
              )
              
              
              (16,626
              )Total
              
              $
              70,872
              
              
              
              (64,650
              )
              
              
              (50,743
              )Interest
      Income (1)Corporate
              
              $
              (60
              )
              
              
              (469
              )
              
              
              (471
              )Total
              
              $
              (60
              )
              
              
              (469
              )
              
              
              (471
              )Interest
      Expense (1)Corporate
              
              $
              17,057
              
              
              
              17,746
              
              
              
              19,764Total
              
              $
              17,057
              
              
              
              17,746
              
              
              
              19,764Income
      tax expense (benefit) (1)Corporate
              
              $
              1,559
              
              
              
              (273
              )
              
              
              (17,844
              )Total
              
              $
              1,559
              
              
              
              (273
              )
              
              
              (17,844
              )Net
      earnings (loss) (1)CAPP
              
              $
              98,485
              
              
              
              (35,861
              )
              
              
              (30,841
              )Midwest
              
              
              (4,909
              )
              
              
              (10,296
              )
              
              
              (3,276
              )Corporate
      (2)
              
              
              (42,622
              )
              
              
              (49,836
              )
              
              
              (19,898
              )Total
              
              $
              50,954
              
              
              
              (95,993
              )
              
              
              (54,015
              )




(1)
              The
      Company does not allocate interest income, interest expense or income
      taxes to its segments.
 (2)
              Corporate
      includes a $6.1 million gain on curtailment of the pension plan (note 9)
      in the yearended
      December 31, 2007.





F-27
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements














December
      31,2009
              
              
              2008Total
      AssetsCAPP
              
              $
              421,825
              
              
              $
              336,631Midwest
              
              
              88,815
              
              
              
              89,792Corporate
              
              
              158,672
              
              
              
              37,123Total
              
              $
              669,312
              
              
              $
              463,546GoodwillCAPP
              
              $
              -
              
              
              $
              -Midwest
              
              
              26,492
              
              
              
              26,492Corporate
              
              
              -
              
              
              
              -Total
              
              $
              26,492
              
              
              $
              26,492Years
      EndedDecember
      31,Capital
      Expenditures
              
              
              2009
              
              
              
              2008
              
              
              
              2007CAPP
              
              $
              58,147
              
              
              $
              66,467
              
              
              $
              42,379Midwest
              
              
              13,840
              
              
              
              8,167
              
              
              
              6,564Corporate
              
              
              172
              
              
              
              63
              
              
              
              400Total
              
              $
              72,159
              
              
              $
              74,697
              
              
              $
              49,343




F-28
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
  (16)  Quarterly
Information (Unaudited)
  Set forth
below is the Company’s quarterly financial information for the previous two
fiscal years (in thousands):
 
 Three
      Months EndedMarch
      31,
                    
                    
                    June
      30,
                    
                    
                    September 30,
                    
                    
                    December 31,2009
                    
                    
                    2009
                    
                    
                    2009
                    
                    
                    2009Total
      revenue
                    
                    $
                    192,121
                    
                    
                    
                    171,649
                    
                    
                    
                    168,320
                    
                    
                    
                    149,468Gross
      profit
                    
                    
                    44,941
                    
                    
                    
                    28,006
                    
                    
                    
                    24,387
                    
                    
                    
                    13,258Income
      from operations
                    
                    
                    35,654
                    
                    
                    
                    17,447
                    
                    
                    
                    14,121
                    
                    
                    
                    3,650Income
      (loss) before taxes
                    
                    
                    31,680
                    
                    
                    
                    13,748
                    
                    
                    
                    10,246
                    
                    
                    
                    (3,161
                    )Net
      income (loss)
                    
                    
                    28,171
                    
                    
                    
                    16,178
                    
                    
                    
                    9,808
                    
                    
                    
                    (3,203
                    )Earning
      (loss) per share (Basic and Diluted):
                    
                    $
                    1.03
                    
                    
                    
                    0.59
                    
                    
                    
                    0.36
                    
                    
                    
                    (0.12
                    )
  Three
      Months EndedMarch
      31,
                    
                    
                    June
      30,
                    
                    
                    September 30,
                    
                    
                    December 31,2008
                    
                    
                    2008
                    
                    
                    2008
                    
                    
                    2008Total
      revenue
                    
                    $
                    138,188
                    
                    
                    
                    137,703
                    
                    
                    
                    151,842
                    
                    
                    
                    140,774Gross
      profit (loss)
                    
                    
                    (4,832
                    )
                    
                    
                    (8,716
                    )
                    
                    
                    (4,189
                    )
                    
                    
                    (11,921
                    )Loss
      from operations
                    
                    
                    (12,166
                    )
                    
                    
                    (17,448
                    )
                    
                    
                    (13,246
                    )
                    
                    
                    (21,790
                    )Loss
      before taxes
                    
                    
                    (16,688
                    )
                    
                    
                    (24,006
                    )
                    
                    
                    (21,712
                    )
                    
                    
                    (33,860
                    )Net
      loss
                    
                    
                    (16,688
                    )
                    
                    
                    (24,006
                    )
                    
                    
                    (21,712
                    )
                    
                    
                    (33,587
                    )Loss
      per share (Basic and Diluted):
                    
                    $
                    (0.78
                    )
                    
                    
                    (0.97
                    )
                    
                    
                    (0.86
                    )
                    
                    
                    (1.26
                    )








F-29





SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) 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, on the 26th day of February,
2010.




JAMES
      RIVER COAL COMPANYBy:/s/  Peter
      T.
      SochaPeter T. SochaChairman of the Board,President and Chief Executive
      Officer(principal executive
    officer)







Know all men by these presents, that
each person whose signature appears below constitutes and appoints Peter T.
Socha and Samuel M. Hopkins, II, or either of them, as attorneys-in-fact, with
power of substitution, for him in any and all capacities, to sign any amendments
to this annual report on Form 10-K, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorneys-in-fact may do or cause to be done by virtue hereof.




Pursuant to the requirements of the
Securities Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the Registrant in the capacities indicated on the
26th day of February, 2010.




Signature
            Title/s/  Peter
      T.
      Socha
              Peter T. Socha
            Chairman of the Board, President and Chief
      Executive Officer (principal executive officer)/s/  Samuel
      M. Hopkins,
      II
              Samuel M. Hopkins, II
            Vice President and Chief Accounting Officer
      (principal financial officer and principal accounting
      officer)/s/  Alan F.
      Crown
              Alan F. Crown
            Director/s/  Ronald
      J.
      FlorJancic
              Ronald
      J. FlorJancic
            Director/s/  Leonard
      J.
      Kujawa
              Leonard J. Kujawa
            Director/s/  Joseph
      H.
      Vipperman
              Joseph H. Vipperman
            Director























































62