UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q


(Mark One)




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





For the quarterly period ended March 31, 2011


OR





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





For the transition period from __________________ to __________________





Commission File Number _000-51129





JAMES RIVER COAL COMPANY


Exact name of registrant as specified in its charter)





Virginia

54-1602012(State or other jurisdiction

(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





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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.








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


YesoNoý









The number of shares of the registrant’s Common Stock, par value $.01 per share, outstanding as of April 19, 2011 was 35,521,434.














FORM 10-Q INDEX





PagePART I
FINANCIAL INFORMATION
3Item 1.
Financial Statements.
3Condensed Consolidated Balance Sheetsas of March 31, 2011 and December 31, 2010
3Condensed Consolidated Statements of Operationsfor the three months ended March 31, 2011 and 2010
4Condensed Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Loss) for the three months ended March 31, 2011 and the year ended December 31, 2010
5Condensed Consolidated Statements of Cash Flowsfor the three months ended March 31, 2011 and 2010
6Notes to Condensed Consolidated Financial Statements
7Item 2.
Management’s Discussion and Analysis ofFinancial Condition and Results ofOperations.
15Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
28Item 4.
Controls and Procedures.
28PART II
OTHER INFORMATION
28Item 1.
Legal Proceedings.
28Item 1A.
Risk Factors.
29Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
42Item 3.
Defaults Upon Senior Securities.
42Item 5.
Other Information.
42Item 6.
Exhibits.
44SIGNATURES
45




2
  PART I                                      FINANCIAL INFORMATION





ITEM 1.  FINANCIAL STATEMENTS


JAMES RIVER COAL COMPANY


AND SUBSIDIARIES





Condensed Consolidated Balance Sheets


(in thousands)




March 31, 2011


December 31, 2010Assets

(unaudited)Current assets:Cash and cash equivalents

$
553,337



180,376Trade receivables


48,442



59,970Inventories:Coal


34,851



23,305Materials and supplies


14,544



13,690Total inventories


49,395



36,995Prepaid royalties


6,549



6,039Other current assets


5,237



5,991Total current assets


662,960



289,371Property, plant, and equipment, net


389,888



385,652Goodwill


26,492



26,492Restricted cash and short term investments (note 1)


302,360



23,500Other assets


42,241



59,554Total assets

$
1,423,941



784,569Liabilities and Shareholders' EquityCurrent liabilities:Accounts payable

$
46,182



57,300Accrued salaries, wages, and employee benefits


7,751



7,744Workers' compensation benefits


9,000



9,000Black lung benefits


2,282



2,282Accrued taxes


5,947



4,924Other current liabilities


20,151



16,496Total current liabilities


91,313



97,746Long-term debt, less current maturities


721,824



284,022Other liabilities:Noncurrent portion of workers' compensation benefits


57,006



55,944Noncurrent portion of black lung benefits


44,344



43,443Pension obligations


11,007



11,968Asset retirement obligations


45,392



43,398Other


646



665Total other liabilities


158,395



155,418Total liabilities


971,532



537,186Commitments and contingencies (note 6)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 outstanding35,426,851 and 27,779,351 shares as of March 31, 2011 and December 31, 2010


354



278Paid-in-capital


537,044



324,705Accumulated deficit


(66,197
)


(58,593
)Accumulated other comprehensive loss


(18,792
)


(19,007
)Total shareholders' equity


452,409



247,383Total liabilities and shareholders' equity

$
1,423,941



784,569See accompanying notes to consolidated financial statements.


3


JAMES RIVER COAL COMPANY


AND SUBSIDIARIES





Condensed Consolidated Statements of Operations


(in thousands, except per share data)


(unaudited)








Three Months


Three MonthsEnded


EndedMarch 31, 2011


March 31, 2010Revenues

$
164,582



184,601Cost of sales:Cost of coal sold


133,546



129,317Depreciation, depletion and amortization


16,035



16,358Total cost of sales


149,581



145,675Gross profit


15,001



38,926Selling, general and administrative expenses


9,370



9,319Acquisition costs (note 2)


4,645



-Total operating income


986



29,607Interest expense (note 4)


7,851



7,381Interest income


(55
)


(4
)Miscellaneous income, net


(121
)


(42
)Total other expense, net


7,675



7,335Income (loss) before income taxes


(6,689
)


22,272Income tax expense (benefit)


915



(973
)Net income (loss)

$
(7,604
)


23,245Earnings (loss) per common share (note 7)Basic earnings (loss) per common share

$
(0.28
)


0.84Diluted earnings (loss) per common share

$
(0.28
)


0.84See accompanying notes to condensed consolidated financial statements.








4





JAMES RIVER COAL COMPANY


AND SUBSIDIARIES


Condensed Consolidated Statements of Changes in Shareholders’


Equity and Comprehensive Income (Loss)


(in thousands)


(unaudited)





Common

stock

shares


Common

stock par

value


Paid-in-

capital


Retained earnings (accumulated deficit)


Accumulated other comprehensive income (loss)


TotalBalances, December 31, 2009


27,545


$
275



320,079



(136,758
)


(13,254
)


170,342Net income


-



-



-



78,165



-



78,165Amortization of pension actuarial amount


-



-



-



-



783



783Amortization of black lung actuarial amount


-



-



-



-



412



412Black lung obligation adjustment


-



-



-



-



(10,320
)


(10,320
)Pension liability adjustment


-



-



-



-



(168
)


(168
)Tax impact of adjustments to accumulated other comprehensive loss


-



-



-



-



3,540



3,540Comprehensive income






















72,412Issuance of restricted stock awards, net of forfeitures


284



3



(3
)


-



-



-Repurchase of shares for tax withholding


(55
)


-



(844
)


-



-



(844
)Exercise of stock options


5



-



73



-



-



73Stock based compensation


-



-



5,400



-



-



5,400Balances, December 31, 2010


27,779



278



324,705



(58,593
)


(19,007
)


247,383Net loss


-



-



-



(7,604
)


-



(7,604
)Amortization of pension actuarial amount


-



-



-



-



197



197Amortization of black lung actuarial amount


-



-



-



-



142



142Tax impact of adjustments to accumulated other comprehensive loss


-



-



-



-



(124
)


(124
)Comprehensive loss






















(7,389
)Issuance of common stock, net of offering costs of $9,106


7,648



76



170,534



-



-



170,610Equity component of convertible debt offering, net of offering costsof $2,117 and deferred taxes of $25,974


-



-



40,627



-



-



40,627Stock based compensation


-



-



1,178



-



-



1,178Balances, March 31, 2011


35,427


$
354



537,044



(66,197
)


(18,792
)


452,409See accompanying notes to consolidated financial statements.





5




JAMES RIVER COAL COMPANY


AND SUBSIDIARIES





Condensed Consolidated Statements of Cash Flows


(in thousands)


(unaudited)





Three Months


Three MonthsEnded


EndedMarch 31,


March 31,2011


2010Cash flows from operating activities:Net income  (loss)

$
(7,604
)


23,245Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation, depletion, and amortization


16,035



16,358Accretion of asset retirement obligations


801



821Amortization of debt discount and issue costs


2,119



1,882Stock-based compensation


1,178



1,420Deferred income tax benefit


944



-Changes in operating assets and liabilities:Receivables


11,528



(23,857
)Inventories


(11,077
)


5,406Prepaid royalties and other current assets


244



547Restricted cash


-



29,907Other assets


1,323



549Accounts payable


(11,118
)


(8,077
)Accrued salaries, wages, and employee benefits


7



3,675Accrued taxes


1,023



2,938Other current liabilities


3,808



4,671Workers' compensation benefits


1,062



668Black lung benefits


1,043



707Pension obligations


(764
)


(508
)Asset retirement obligations


(460
)


(17
)Other liabilities


(19
)


-Net cash provided by operating activities


10,073



60,335Cash flows from investing activities:Additions to property, plant, and equipment


(20,094
)


(13,972
)Net cash used in investing activities


(20,094
)


(13,972
)Cash flows from financing activities:Proceeds from issuance of long-term debt


505,000



-Proceeds of Senior Notes held in escrow (note 1)


(278,860
)


-Net proceeds from issuance of common stock


170,610



-Debt issuance costs


(13,768
)


(1,165
)Net cash provided by (used in) financing activities


382,982



(1,165
)Increase in cash


372,961



45,198Cash and cash equivalents at beginning of period


180,376



107,931Cash and cash equivalents at end of period

$
553,337



153,129





See accompanying notes to condensed consolidated financial statements.





6





JAMES RIVER COAL COMPANY


AND SUBSIDIARIES





Notes to Condensed Consolidated Financial Statements





(Unaudited)







(1)
Summary of Significant Accounting Policies and Other Information




Description of Business and Principles of Consolidation




James River Coal Company and its wholly owned subsidiaries (collectively the Company) mine, process and sell 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 interim condensed consolidated financial statements of the Company presented in this report are unaudited. All significant intercompany balances and transactions have been eliminated in consolidation. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2010. The balances presented as of or for the year ended December 31, 2010 are derived from the Company’s audited consolidated financial statements.





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





Cash and Cash Equivalents and Restricted Cash and Short Term Investments





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





Restricted cash is stated at cost.  Restricted cash and short term investments consists of cash, cash equivalents and investments in bonds and certificate of deposits.  The Company intends to hold all investments held as restricted cash until maturity.





As of March 31, 2011, the Company had restricted cash and short term investments of $302.4 million that it maintained in collateral accounts.  The restricted cash and short term investments consisted of $278.9 million of cash held in escrow from the proceeds and interest due through June 1, 2011 on the 2019 Senior Notes issued in March 2011 (note 4), $15.0 million of cash to ensure that the Company has adequate capacity under the Revolver to support its outstanding letters of credit (note 4) and $8.5 million of cash equivalents and short term investments to support the issuance of surety bonds.  The $278.9 million of cash held in escrow related to the Senior Notes became unrestricted when it was released from escrow upon completion of the acquisition of International Resource Partners LP (note 2) in April 2011.





As of December 31, 2010, the Company had restricted cash and short term investments of $23.5 million that it maintained in collateral accounts.  The restricted cash and short term investments consisted of $15.0 million of cash to ensure that the Company has adequate capacity under the Revolver to support its outstanding letters of credit (note 4) and $8.5 million of cash equivalents and short term investments to support the issuance of surety bonds.








(2)
International Resource Partners Acquisition





On April 18, 2011, the Company completed the acquisition of International Resource Partners LP and its subsidiary companies (collectively IRP) for $475.0 million in an all-cash transaction (the IRP Acquisition), subject to certain adjustments as set forth in the purchase agreement (the Purchase Agreement Adjustments).  Included in the Purchase Agreement Adjustments is an amount due to the sellers of IRP for any working capital (as defined in the purchase agreement) that exceeds $18.5 million.  The Company’s preliminary estimate of the working capital adjustment is that it will increase the purchase price paid in the IRP Acquisition by approximately $31.5 million.   IRP did not have any debt at the time of the closing of the IRP Acquisition.   The IRP Acquisition will be treated as a purchase of assets for tax purposes.


7





IRP is a fully integrated coal company focused on producing and marketing high quality metallurgical and steam coal in Central Appalachia. IRP produces and sells various grades of metallurgical and steam coal from underground and surface mining operations in southern West Virginia and eastern Kentucky. IRP’s customer base consists of domestic steel and coke producers, international steel producers and domestic electric utilities. IRP currently operates nine mines, including five underground mines and four surface mines.





For the year ended December 31, 2010, IRP had revenues of $490.3 million and income before taxes at the partnership level of $51.3 million.IRP’s coal reserves and resources are located in West Virginia and Kentucky. As of December 31, 2010, IRP controlled approximately 136 million tons of coal reserves and resources, consisting of approximately 61 million tons of metallurgical coal and an estimated 75 million tons of steam coal. IRP leases a substantial portion of its coal reserves and resources from various third-party landowners.





The Company is not able to provide pro forma financial statements for the quarter ended March 31, 2011, as IRP has not completed its March 31, 2011 financial statements.   The Company is not able to provide an allocation of the purchase price as the allocation has not been completed due to the timing of the closing of the IRP Acquisition.





For the three months ended March 31, 2011, costs of $4.6 million were incurred related to the IRP Acquisition.  The acquisition costs include $3.8 million of commitment fees associated with the $375.0 million of committed bridge financing (Bridge Commitment) that the Company secured to provide adequate liquidity to complete the IRP Acquisition in the event alternative financing could not be raised.  The Bridge Commitment expired, without any amounts being drawn, upon closing of the 2019 Senior Notes, the 2018 Convertible Senior Notes and the equity offerings (notes 4 and 5).





At the closing date of the IRP Acquisition, the Company incurred an additional $3.5 million of acquisition related costs for transaction advisory services.  These fees will be reflected in the Company’s financial statements in the second quarter of 2011.








(3)
Property, Plant and Equipment





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





March 31, 2011


December 31, 2010Property, plant, and equipment, at cost:Land

$
7,901



7,751Mineral rights


231,681



231,681Buildings, machinery and equipment


443,705



423,617Mine development costs


49,535



48,301Total property, plant, and equipment


732,822



711,350Less accumulated depreciation, depletion, and amortization


342,934



325,698Property, plant and equipment, net

$
389,888



385,652


8





(4)
Long Term Debt and Interest Expense




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




March 31,

2011


December 31,

20102012 Senior Notes

$
150,000


$
150,0002019 Senior Notes


275,000



-2015 Convertible Senior Notes, net of discount


135,542



134,0222018 Convertible Senior Notes, net of discount


161,282



-Revolver


-



-Total long-term debt

$
721,824


$
284,022




2012 Senior Notes and Redemption of 2012 Senior Notes




The Company has $150.0 million of senior notes due on June 1, 2012 (the 2012 Senior Notes).  The 2012 Senior Notes are unsecured and accrue interest at 9.375% per annum.  Interest payments on the 2012 Senior Notes are required semi-annually.  In the second quarter of 2011, the Company notified the trustee that on June 1, 2011, it will redeem all of its outstanding 2012 Senior Notes at a redemption price of 100% of their face value.





2019 Senior Notes





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





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





The gross proceeds from the 2019 Senior Notes offering, along with interest due on the 2019 Senior Notes through June 1, 2011, were held in escrow until the completion of the IRP Acquisition in April 2011.  As a result the Company has included $278.9 million in restricted cash and short term investments on the accompanying balance sheet as of March 31, 2011.





The proceeds from the equity offering, the issuance of the 2019 Senior Notes and the issuance of the 2018 Convertible Senior Notes were used to fund the IRP Acquisition (note 2), will be used to repay the outstanding 2012 Senior Notes, and the remainder will be available for general working capital purposes.   The Company incurred approximately $6.7 million of costs in connection with the issuance of the 2019 Senior Notes.





2015 Convertible Senior Notes





In 2009, the Company issued $172.5 million of 4.5% convertible senior notes due on December 1, 2015 (the 2015 Convertible Senior Notes).   The 2015 Convertible Senior Notes are shown net of a $37.0 million and a $38.5 million discount as of March 31, 2011 and December 31, 2010, respectively.  The discount on the 2015 Convertible Senior Notes relates to the $44.8 million of the proceeds that were allocated to the equity component of the 2015 Convertible Senior Notes at issuance, resulting in an effective interest rate of 10.2%.  The 2015 Convertible Senior Notes are unsecured and are convertible under certain circumstances and during certain periods at an initial conversion rate of 38.7913 shares of the Company’s common stock per $1,000 principal amount of the 2015 Convertible Senior Notes, representing an initial conversion price of approximately $25.78 per share of the Company’s stock.  Interest on the 2015 Convertible Senior Notes is paid semi-annually.





9





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





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


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


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


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





2018 Convertible Senior Notes





In the first quarter of 2011, the Company issued $230.0 million of 3.125% convertible senior notes due on March 15, 2018 (the 2018 Convertible Senior Notes).   The 2018 Convertible Senior Notes are shown net of a $68.7 million discount as of March 31, 2011.  The discount on the 2018 Convertible Senior Notes relates to the $68.7 million of the proceeds that were allocated to the equity component of the 2018 Convertible Senior Notes at issuance, resulting in an effective interest rate of 8.9%.  The equity component was recorded as an increase to shareholders’ equity, net of allocated issuance costs and deferred income taxes of $2.1 million and $26.0 million, respectively.  The 2018 Convertible Senior Notes are unsecured and are convertible under certain circumstances and during certain periods at an initial conversion rate of 32.7332 shares of the Company’s common stock per $1,000 principal amount of 2018 Convertible Senior Notes, representing an initial conversion price of approximately $30.55 per share of the Company’s stock.  Interest payments on the 2018 Convertible Senior Notes are required semi-annually.





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





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


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


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


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





The proceeds from the equity offering, the issuance of the 2019 Senior Notes and the issuance of the 2018 Convertible Senior Notes were used to fund the IRP Acquisition (note 2), will be used to repay the outstanding 2012 Senior Notes, and the remainder will be available for general working capital purposes.  The Company incurred approximately $7.1 million of costs in connection with the issuance of the 2018 Convertible Senior Notes issuance, including $2.1 million which was allocated to the equity portion of the transaction.





Revolving Credit Agreement





In April 2011, the Company amended and restated its existing Revolving Credit Agreement (as amended and restated the Revolving Credit Agreement is referred to as the Revolver) to increase the maximum availability under the Revolver from $65.0 million to $75.0 million in order to support the additional outstanding letters of credit outstanding as a result of the IRP Acquisition.  The following is a summary of the significant terms of the Revolver.





10





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 $75.0 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 of 85% of the Company’s eligible accounts receivable plus 65% of the eligible inventory minus reserves from time to time set by the administrative agent.  The eligible accounts receivable and inventories are further adjusted as specified in the Revolver.  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 Adjusted EBITDA and maximum Leverage Ratio covenants are only applicable if the Company’s unrestricted cash balance falls below $75.0 million and would remain in effect until the Company’s unrestricted cash exceeds $75.0 million for 90 consecutive days.





As of March 31, 2011, the Company had used $58.8 million of the $65.0 million then available under the Revolver to secure outstanding letters of credits.   As of March 31, 2011, the Company had $15.0 million of cash in a restricted cash collateral account to ensure that the Company has adequate capacity under the Revolver to support its outstanding letters of credit.





Interest Expense and Other





During the three months ended March 31, 2011 and 2010, the Company had no cash payments for interest.





The Company was in compliance with all of the financial covenants under its outstanding debt instruments as of March 31, 2011.





(5)
Equity




Equity Issuance




In the first quarter of 2011, the Company received proceeds of approximately $170.6 million, net of offering costs, through the issuance of approximately 7.6 million shares of common stock.  The proceeds from the equity offering, the issuance of the Senior Notes and the issuance of the 2018 Convertible Senior Notes were used to fund the IRP Acquisition (note 2), will be used to the repay the outstanding 2012 Senior Notes, and the remainder will be available for general working capital purposes.




Equity Based Compensation




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




Three months endedMarch 31,2011


2010Restricted stock

$
1,098


$
1,348Stock options


80



72Stock based compensation

$
1,178


$
1,420




The following is a summary of activity related to restricted stock and stock option awards for the three months ended March 31, 2011:




Restricted Stock


Stock OptionsWeighted




WeightedAverage





AverageNumber of

Fair Value

Number of

ExerciseShares


at Issue


Shares


PriceDecember 31, 2010


842,886


$
19.30



291,000


$
16.42Granted


-



-



-



-Exercised/Vested


-



-



-



-Canceled


-



-



-



-March 31, 2011


842,886



19.30



291,000



16.42




11




(6)
Commitments and Contingencies




The Company has established irrevocable letters of credit totaling $58.8 million as of March 31, 2011 to guarantee performance under certain contractual arrangements.  The letters of credit have been issued under the Revolver (note 4).





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.





(7)
Earnings (Loss) per Share




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





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




Three Months EndedMarch 31,2011


2010Basic earnings (loss) per common share:Net income  (loss)

$
(7,604
)

$
23,245Income allocated to participating securities


-



(605
)Net income (loss) available to common shareholders

$
(7,604
)

$
22,640Weighted average number of common andcommon equivalent shares outstanding:Basic number of common shares outstanding


27,191



26,827Dilutive effect of unvested restricted stock(participating securities)


-



717Dilutive effect of stock options


-



51Diluted number of common shares andcommon equivalent shares outstanding


27,191



27,595Basic earnings (loss) per common share

$
(0.28
)

$
0.84Diluted net income (loss) per common share:Net income (loss)

$
(7,604
)

$
23,245Income (loss) allocated to participating securities


-



-Net income (loss) available to potential commonshareholders

$
(7,604
)

$
23,245Diluted earnings (loss) per common share

$
(0.28
)

$
0.84




For periods in which there was a loss, the Company excludes from its diluted loss per common share calculation options to purchase shares and the unvested portion of time vested restricted shares, as inclusion of these securities would have reduced the net loss per common share.  The excluded instruments would have increased the diluted weighted average number of common and common equivalent shares outstanding by approximately 0.9 million for the three months ended March 31, 2011.  In addition, in periods of net losses, the Company has not allocated any portion of such losses to participating securities holders for its basic loss per common share calculation as such participating securities holders are not contractually obligated to fund such losses.





The Company’s 2015 Convertible Senior Notes and 2018 Convertible Senior Notes are convertible at the option of the holders upon the occurrence of certain events (note 4).  As of March 31, 2011, none of the convertible senior notes had reached the specified threshold for conversion.





12





(8)
Pension Expense




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





Three Months EndedMarch 31,2011


2010Interest cost

$
911



940Expected return on plan assets


(1,070
)


(922
)Recognized net actuarial loss


197



196Net periodic cost

$
38



214




(9)
Pneumoconiosis (Black Lung) Benefits




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





Three Months EndedMarch 31,2011


2010Service Cost

$
456



342Interest cost


597



459Amortization of actuarial losses


142



—Net periodic benefit cost

$
1,195



801





(10)
Financial Instruments





The estimated fair value of financial instruments has been determined by the Company using available market information. As of March 31, 2011 and December 31, 2010, except for long-term debt obligations, the carrying amounts of all financial instruments approximate their fair values due to their short maturities.





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





March 31, 2011

December 31, 2010Carrying Value
Fair Value

Carrying Value
Fair Value2012 Senior Notes
$150,000
$151,500

$150,000
$153,0002019 Senior Notes
275,000
283,938

N/A
N/A2015 Convertible Senior Notes, (excludes discount )
172,500
214,469

172,500
210,8802018 Convertible Senior Notes, (excludes discount)
230,000
241,569

N/A
N/A




The fair value of our senior notes and convertible senior notes are based on available market data at the date presented.  The carrying value of the convertible senior notes reflected in long-term debt in the table above reflects the full face amount and have been adjusted in the Consolidated Balance Sheets for a discount related to the convertible feature (note 4).




(11)
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).


13





Three Months EndedMarch 31,2011


2010RevenuesCAPP

$
137,585


$
155,564Midwest


26,997



29,037Corporate


-



-Total

$
164,582


$
184,601Depreciation, depletion and amortizationCAPP

$
13,052


$
13,488Midwest


2,969



2,855Corporate


14



15Total

$
16,035


$
16,358Total operating income (loss)CAPP

$
11,643


$
31,642Midwest


(1,365
)


3,037Corporate


(9,292
)


(5,072
)Total

$
986


$
29,607Net earnings (loss) (1)CAPP

$
11,643


$
31,642Midwest


(1,365
)


3,037Corporate


(17,882
)


(11,434
)Total

$
(7,604
)

$
23,245




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





March 31,


December 31,2011


2010Total AssetsCAPP

$
565,485


$
551,762Midwest


109,473



114,939Corporate


748,983



117,868Total

$
1,423,941


$
784,569GoodwillCAPP

$
-



-Midwest


26,492



26,492Corporate


-



-Total

$
26,492



26,492








14


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, the Condensed Consolidated Financial Statements and accompanying notes contained herein and the Company’s annual report on Form 10-K for the year ended December 31, 2010.





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)). We derived 84% of our total revenues (contract and spot) for the three months ended March 31, 2011 from coal sales to electric utility customers and the remaining 16% from coal sales to industrial and other customers. For the three months ended March 31, 2011, our mines produced 2.1 million tons of coal (including 0.1 million tons of contract coal) and we purchased another 0.1 million tons for resale. Of the 2.1 million tons produced from Company mines, approximately 62% came from underground mines, while the remaining 38% came from surface mines. For the three months ended March 31, 2011, we generated revenues of $164.6 million and net loss of $7.6 million.





On April 18, 2011, we completed the acquisition of International Resource Partners LP and its subsidiary companies (collectively IRP) for $475.0 million in an all-cash transaction (the IRP Acquisition), subject to certain adjustments as set forth in the purchase agreement (the Purchase Agreement Adjustments).  Included in the Purchase Agreement Adjustment is an amount due to the sellers of IRP for any working capital (as defined in the purchase agreement) that exceeds $18.5 million.  Our preliminary estimate of the working capital adjustment is that it will increase the purchase price paid in the IRP Acquisition by approximately $31.5 million.   IRP did not have any debt at the time of the closing of the IRP Acquisition.   The IRP Acquisition will increase our offerings of metallurgical coal, provide us with greater access to the international seaborne coal market and provide us with a brokering and trading operation.  IRP is a fully integrated coal company focused on producing and marketing high quality metallurgical and steam coal in Central Appalachia. IRP produces and sells various grades of metallurgical and steam coal from underground and surface mining operations in southern West Virginia and eastern Kentucky. IRP’s customer base consists of domestic steel and coke producers, international steel producers and domestic electric utilities. IRP currently operates nine mines, including five underground mines and four surface mines.





For the year ended December 31, 2010, IRP produced approximately 1.9 million tons of coal, including 1.2 million tons of metallurgical coal and 0.7 million tons of steam coal. Total 2010 shipments, including coal purchased for blending purposes, were 3.7 million tons. These tons included 2.6 million tons of metallurgical coal and 1.1 million tons of steam coal. IRP generated revenues of $490.3 million, income before taxes at the partnership level of $51.3 million and Adjusted EBITDA of $84.9 million in 2010.  IRP’s coal reserves and resources are located in West Virginia and Kentucky. As of December 31, 2010, IRP controlled approximately 136 million tons of coal reserves and resources, consisting of approximately 61 million tons of metallurgical coal and an estimated 75 million tons of steam coal. IRP leases a substantial portion of its coal reserves and resources from various third-party landowners.





CAPP Segment





In Central Appalachia, 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.  We have been providing coal to customers in the South Atlantic region since our formation in 1988.  For the three months ended March 31, 2011, our CAPP segment produced 1.5 million tons of coal (including contract coal and purchased coal). Of the CAPP tons produced, 78% came from Company operated underground mines. For the three months ended March 31, 2011, we shipped 1.4 million tons of coal and generated coal sale revenues of $137.6 million from our CAPP segment. For the three months ended March 31, 2011, South Carolina Public Service Authority and Georgia Power Company were our largest customers, representing approximately 36% and 22% of our total revenues, respectively.  No other CAPP customer accounted for more than 10% of our total revenues.





Midwest Segment





In the Midwest, the majority of our coal is sold in the East North Central Region, which includes the states of Illinois, Indiana, Ohio, Michigan and Wisconsin. For the three months ended March 31, 2011, our Midwest mines produced approximately 0.7 million tons of coal. Of the Midwest tons produced, 82% came from Company operated surface mines. For the three months ended March 31, 2011, we shipped 0.7 million tons of coal and generated coal sale revenues of $27.0 million from our Midwest segment. For the three months ended March 31, 2011, our Midwest segment’s largest customer, Indianapolis Power and Light, represented approximately 12% of our total revenues. No other Midwest customer accounted for more than 10% of our total revenues.


15





Results of Operations





Three Months Ended March 31, 2011 Compared with the Three Months Ended March 31, 2010





The following tables show selected operating results for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 (in thousands except per ton amounts).





Three Months Ended March 31,2011


2010Total


Per Ton


Total


Per TonVolume shipped (tons)


2,073






2,400Revenues

$
164,582



79.39


$
184,601



76.92Cost of coal sold


133,546



64.42



129,317



53.88Depreciation, depletion and amortization


16,035



7.74



16,358



6.82Gross profit


15,001



7.24



38,926



16.22Selling, general and administrative


9,370



4.52



9,319



3.88Acquisition costs


4,645



2.24



-



-Operating income


986



0.48



29,607



12.34





Volume and Revenues by Segment





Three Months Ended March 31,2011


2010CAPP


Midwest


CAPP


MidwestVolume shipped (tons)


1,415



658



1,662



738Coal sales revenue

$
137,586



26,997



155,564



29,037Average sales price per ton

$
97.23



41.03



93.60



39.35





Coal sales revenue for the three months ended March 31, decreased from $184.6 million in 2010 to $164.6 million in 2011. This decrease was due to a decrease in tons shipped in the CAPP and Midwest regions, which was partially offset by an increase in the average sales price per ton in the CAPP and Midwest regions.





For the three months ended March 31, 2011, the CAPP region sold approximately 0.9 million tons of coal under long-term contracts (63% of total CAPP sales volume) at an average selling price of $107.83 per ton. For the three months ended March 31, 2010, the CAPP region sold approximately 1.3 million tons of coal under long-term contracts (79% of total CAPP sales volume) at an average selling price of $101.27 per ton.  For the three months ended March 31, 2011, the CAPP region sold 0.5 million tons of coal (37% of total CAPP sales volume) under short term contracts (includes spot sales) at an average selling price of $79.43 per ton. For the three months ended March 31, 2010, the CAPP region sold 0.4 million tons of coal (21% of total CAPP sales volume) under short term contracts (includes spot sales) at an average selling price of $64.85 per ton.





The Midwest’s region sales of coal were under long term contracts for the three months ended March 31, 2011 and 2010.  For the three months ended March 31, 2011, the Midwest region sold 0.7 million tons at an average sales price of $41.03 per ton.  For the three months ended March 31, 2010, the Midwest region sold 0.7 million tons at an average sales price of $39.35 per ton.





16


Operating Costs by Segment




Three Months Ended March 31,2011


2010CAPP


Midwest


Corporate


CAPP


Midwest


CorporateCost of coal sold

$
108,699



24,847



-



106,740



22,577



-Per ton


76.82



37.76



-



64.22



30.59



-Depreciation, depletion and amortization


13,052



2,969



14



13,488



2,855



15Per ton


9.22



4.51



-



8.12



3.87



-




Cost of Coal Sold




For the three months ended March 31, the cost of coal sold, excluding depreciation, depletion and amortization, increased from $106.7 million in 2010 to $108.7 million in 2011.  Our cost per ton of coal sold in the CAPP region increased from $64.22 per ton in 2010 to $76.82 per ton in the 2011.  Our costs continue to be impacted by lower productivity due to increased federal and state regulatory scrutiny, a decrease in tons produced in response to market conditions and an increase in commodity prices.  The major components of the $12.60 per ton increase in the cost per ton of coal sold from 2010 to 2011 include an increase in our labor and benefit costs of $5.64 per ton and variable costs of $6.50 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 increased $7.17 per ton from $30.59 in the 2010 period to $37.76 per ton in the 2011 period.  The major components of this increase include an increase in the variable costs of $3.35 per ton, labor and benefit costs of $1.10 per ton, trucking costs of $1.21 per ton, and sales related costs of $0.80 per ton.  The increase in the variable costs was primarily due to an increase in diesel and explosives costs.





Depreciation, depletion and amortization




For the three months ended March 31, depreciation, depletion and amortization decreased from $16.4 million in the 2010 period to $16.0 million in the 2011 period.  In the CAPP region, depreciation, depletion and amortization decreased $0.4 million to $13.1 million or $9.22 per ton.  In the Midwest, depreciation, depletion and amortization increased $0.1 million to $3.0 million or $4.51 per ton.




Selling, general and administrative




For the three months ended March 31, selling, general and administrative expenses increased from $9.3 million in the 2010 period to $9.4 million in the 2011 period.




Acquisition costs




For the three months ended March 31, 2011, costs of $4.6 million were incurred related to the IRP Acquisition.




Interest Expense




Interest expense for the three months ended March 31, increased from $7.4 million in 2010 to $7.9 million in 2011.





Income Taxes





Our effective tax rate for the three months ended March 31, 2011 was (13.7)% and our effective tax rate for the three months ended March 30, 2010 was 4.4%.  For the three months ended March 31, 2011, our effective income tax rate was impacted primarily by a change in estimated book to tax differences and the effects of percentage depletion. Our effective tax rate for the three months ended March 31, 2010, was primarily impacted by the amount of the valuation allowance recorded and the effects of percentage depletion.  Our effective tax rate for the three months ended March 31, 2010 reflects a benefit for a tax election that allowed us to utilize additional alternative minimum tax net operating losses. The criteria for recording a valuation allowance are described in “Critical Accounting Estimates – Income Taxes.”  As of March 31, 2011, we did not have a valuation allowance against gross deferred tax assets.    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.





17


Liquidity and Capital Resources





During the first quarter of 2011, we issued $275 million of senior notes due in 2019 (the 2019 Senior Notes), issued $230 million of convertible senior notes due in 2018 (the 2018 Convertible Senior Notes) and received net proceeds of $170.6 million through the issuance of approximately 7.6 million shares of common stock.  The proceeds from these offerings were used to fund the IRP Acquisition, will be used to the repay the $150.0 million outstanding senior notes in the second quarter of 2011 (the 2012 Senior Notes), and the remainder will be available for general working capital purposes.   Only $143.8 million of the net proceeds from the 2018 Convertible Senior Notes issuance were used to fund the IRP Acquisition.





The following chart reflects the components of our debt as of March 31, 2011 and December 31, 2010:





March 31,

2011


December 31,

20102012 Senior Notes

$
150,000


$
150,0002019 Senior Notes


275,000



-2015 Convertible Senior Notes, net of discount


135,542



134,0222018 Convertible Senior Notes, net of discount


161,282



-Revolver


-



-Total long-term debt

$
721,824


$
284,022







2012 Senior Notes and Redemption of 2012 Senior Notes




The 2012 Senior Notes are due on June 1, 2012.  The 2012 Senior Notes are unsecured and accrue interest at 9.375% per annum. Interest payments on the 2012 Senior Notes are required semi-annually.   In the second quarter of 2011, we notified the trustee that on June 1, 2011 we will redeem all of our outstanding 2012 Senior Notes at a redemption price of 100% of their face value.





2019 Senior Notes





In the first quarter of 2011, we issued $275 million of 2019 Senior Notes due on April 1, 2019.  The 2019 Senior Notes are unsecured and accrue interest at 7.875% per annum.  Interest payments on the 2019 Senior Notes are required semi-annually.   We may redeem the 2019 Senior Notes, in whole or in part, at any time on or after April 1, 2015 at redemption prices ranging from 103.938% beginning April 1, 2015 to 100% beginning on April 1, 2017.  In addition, at any time prior to April 1, 2014, we may redeem up to 35% of the principal amount of the 2019 Senior Notes with the net cash proceeds of a public equity offering at a redemption price of 107.875%, plus accrued and unpaid interest to the redemption date.





The 2019 Senior Notes limit 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 2019 Senior Notes will have the right to require us to repurchase all or a part of the 2019 Senior Notes at a price equal to 101% of their principal amount, plus any accrued interest to the date of repurchase.





The gross proceeds from the 2019 Senior Notes offering, along with interest due on the 2019 Senior Notes through June 1, 2011, were held in escrow until the completion of the IRP Acquisition in April 2011.  As a result we have included this amount, $278.9 million, in restricted cash and short term investments on the accompanying balance sheet as of March 31, 2011.





We incurred approximately $6.7 million of costs in connection with the issuance of the 2019 Senior Notes.





2015 Convertible Senior Notes





There have been no changes to the terms of our outstanding 4.5% convertible senior notes due on December 1, 2015 (the 2015 Convertible Senior Notes) during 2011.  See Item 1 of Part I, “Financial Statements — Note 4 — Long Term Debt and Interest Expense” for a description of our 2015 Convertible Senior Notes.





2018 Convertible Senior Notes





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





18


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





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


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


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


·
If we elect to make certain distributions to the holders of our common stock or engage in certain corporate transactions.





We incurred approximately $7.1 million of costs in connection with the issuance of the 2018 Convertible Senior Notes issuance, including $2.1 million which was allocated to the equity portion of the transaction.





Revolving Credit Agreement





In April 2011, we amended and restated our existing Revolving Credit Agreement (as amended and restated the Revolving Credit Agreement is referred to as the Revolver) to increase the maximum availability under the Revolver from $65.0 million to $75.0 million in order to support the additional outstanding letters of credit outstanding as a result of the IRP Acquisition. There have been no other changes to the terms of our Revolver during 2011.  See Item 1 of Part I, “Financial Statements — Note 4 — Long Term Debt and Interest Expense” for a description of our Revolver.





As of March 31, 2011, the Company had used $58.8 million of the $65.0 million then available under the Revolver to secure outstanding letters of credits.





We were in compliance with all of the financial covenants under our outstanding debt instruments as of March 31, 2011.  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 March 31, 2011, we had total liquidity of approximately $559.5 million, consisting of $6.2 million of unused borrowing capacity under the Revolver and $553.3 million of cash and cash equivalents (excluding restricted cash and short term investments).  As of March 31, 2011, we had used $58.8 million of the existing revolving credit facility’s availability to secure outstanding letters of credits.





As discussed above, on April 18, 2011, we completed the IRP Acquisition for $475.0 million in an all-cash transaction, subject to the Purchase Agreement Adjustments.  Included in the Purchase Agreement Adjustments is an amount due to the sellers of IRP for any working capital (as defined in the purchase agreement) that exceeds $18.5 million.  Our preliminary estimate of the working capital adjustment is that it will increase the purchase price paid in the IRP Acquisition by approximately $31.5 million.  Additionally as a result of the closing of the IRP Acquisition, $278.9 million, consisting of the gross proceeds from the issuance of the 2019 Senior Notes and interest due on the 2019 Senior Notes through June 1, 2011 that was held in escrow at March 31, 2011 became unrestricted and was available to us to fund the purchase price of the IRP Acquisition. Finally, we notified the trustee that on June 1, 2011 we will redeem $150.0 million of our outstanding 2012 Senior Notes at a redemption price of 100% of their face value.  As of March 31, 2011, we would have had pro forma cash and cash equivalents of $172.2 million as adjusted for the cash paid to complete the IRP Acquisition (including the estimated working capital adjustment and a $3.5 million transaction advisory fee), the release from escrow of the $278.9 million related to the 2019 Senior Notes and the repayment of our 2012 Senior Notes.





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.


19





We believe that cash generated from operations, borrowings under our Revolver and future debt and equity offerings, if any, will be sufficient to meet working capital requirements, anticipated capital expenditures, and scheduled debt payments throughout 2011 and for the next several years. Nevertheless, our ability to satisfy our working capital requirements and debt service obligations, or fund planned capital expenditures, will substantially depend upon our future operating performance (which will be affected by prevailing economic conditions in the coal industry), debt covenants, and financial, business and other factors, some of which are beyond our control.





In the event that the sources of cash described above are not sufficient to meet our future cash requirements, we will need to reduce certain planned expenditures, seek additional financing, or both. We may seek to raise funds through additional debt financing or the issuance of additional equity securities. If such actions are not sufficient, we may need to limit our growth, sell assets or reduce or curtail some of our operations to levels consistent with the constraints imposed by our available cash flow, or any combination of these options. Our ability to seek additional debt or equity financing may be limited by our existing and any future financing arrangements, economic and financial conditions, or all three. In particular, our existing 2012 Senior Notes, 2019 Senior Notes, 2015 Convertible Senior Notes, 2018 Convertible Senior Notes and our Revolver restrict our ability to incur additional indebtedness. We cannot provide assurance that any reductions in our planned expenditures or in our expansion would be sufficient to cover shortfalls in available cash or that additional debt or equity financing would be available on terms acceptable to us, if at all.





In addition to the cash used to complete the IRP Acquisition and to repay the 2012 Senior Notes in the second quarter of 2011, 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 2011 will be approximately $115 million (excluding capital expenditures related to IRP). These projected capital expenditures primarily consist of capital expenditures for normal mining activities including new and replacement mine equipment. Our projected capital expenditures for 2011 also include approximately $30 million for safety mandates and new mine and infrastructure development. We expect that such expenditures will be funded through cash on hand and cash generated by operations.





Net cash from operating activities reflects net income (loss) adjusted for non-cash charges and changes in net working capital (including non-current operating assets and liabilities). Net cash provided by operating activities was $10.1 million and $60.3 million for the three months ended March 31, 2011 and 2010, respectively.  We had a net loss of $7.6 million in the three months ended March 31, 2011 as compared to net income of $23.2 million in the three months ended March 31, 2010.  In reconciling our net loss to cash provided by operating activities, $21.1 million was added for non cash charges during 2011, as compared to $20.5 million added during 2010.  During 2011, our net loss, as adjusted for non cash charges, was decreased by $3.4 million as a result of changes in cash from our operating assets and liabilities.  The change in our operating assets and liabilities for 2011 included an $11.5 million decrease in receivables and an $11.1 million increase in inventories. During 2010, our net income, as adjusted for non cash charges, was increased by $16.6 million as a result of changes in cash from our operating assets and liabilities.  The change in our operating assets and liabilities for 2010 included a $29.9 million decrease in restricted cash, a $5.4 million decrease in inventories and a $23.9 increase in accounts receivable.  The change in our restricted cash is the result of replacing letters of credit that were secured by cash with letters of credit issued against our Revolver.





Net cash used in investing activities increased by $6.1 million to $20.0 million for the three months ended March 31, 2011 as compared to the same period in 2010 and consisted of capital expenditures.  Capital expenditures primarily consisted of new and replacement mine equipment and various projects to improve the production and efficiency of our mining operations.  Additionally, during 2011 our capital expenditures also included approximately $5.7 million for safety mandates and new mine and infrastructure development.





Net cash provided by financing activities was $383.0 million for the three months ended March 31, 2011 and consists of $491.2 million of net proceeds from the issuance of the 2019 Senior Notes and the 2018 Convertible Senior Notes and debt issuance costs, and $170.6 million of net proceeds from the issuance of common stock which were offset by $278.9 million related to the 2019 Senior Notes issuance that were held in escrow until the completion of the IRP Acquisition.  Net cash used by financing activities was $1.2 million for the three months ended March 31, 2010 and consisted of debt issuance costs on the amendment to the Revolver.




Reserves




Marshall Miller & Associates, Inc. (MM&A) prepared a detailed study of our CAPP reserves as of March 31, 2004 based on all of our geologic information, including our updated drilling and mining data. MM&A completed their report on our CAPP reserves in June 2004.  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.





20





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 March 31, 2011, we estimate that, as of March 31, 2011, we controlled approximately 230.2 million tons of proven and probable coal reserves in the CAPP region and 40.3 million tons in the Midwest region.  The following table provides additional information regarding changes to our reserves for the quarter ended March 31, 2011 (in millions of tons):





CAPP


Midwest


TotalProven and Probable Reserves, as of December 31, 2010 (1)


230.4



40.9



271.3Coal Extracted


(1.4
)


(0.7
)


(2.1
)Acquisitions (2)


0.9



-



0.9Adjustments (3)


0.3



0.1



0.4Divesture (4)


-



-



-Proven and Probable Reserves, as of March 31, 2011 (1)


230.2



40.3



270.5





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.





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 or transferred leases.








21


Key Performance Indicators





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





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





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





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





Trends In Our Business





Near-term, the slow global economic recovery has lowered demand for coal which has resulted in a decline in spot steam coal prices.  The price of spot steam 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 steam 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.





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.





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.


22





We use surety bonds to secure reclamation, workers’ compensation and other miscellaneous obligations. At March 31, 2011, we had $104.1 million of outstanding surety bonds with third parties. These bonds were in place to secure obligations as follows: post-mining reclamation bonds of $59.2 million, workers’ compensation bonds of $40.3 million, wage payment, collection bonds, and other miscellaneous obligation bonds of $4.6 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 post-mining reclamation, workers’ compensation programs, various insurance contracts and other obligations. As of March 31, 2011, we had $58.8 million of letters of credit outstanding.  The letters of credit are issued under our Revolver.





Critical Accounting Estimates





Overview





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





Workers' Compensation





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





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 4.5% at December 31, 2010.  Significant changes to interest rates result in substantial volatility to our consolidated financial statements. If we were to decrease our estimate of the discount rate from 4.5% to 4.0%, all other things being equal, the present value of our workers’ compensation 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 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 March 31, 2011 was $66.0 million.





Coal Miners' Pneumoconiosis





We are required under the Federal Mine Safety and Health Act of 1977, as amended, as well as various state statutes, to provide pneumoconiosis (black lung) benefits to eligible current and former employees and their dependents. We provide for federal and state black lung claims through a self-insurance program for our 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 5.4% at December 31, 2010. 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 4.9%, all other things being equal, the present value of our black lung obligation would increase by approximately $3.3 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 March 31, 2011 was $46.6 million.


23





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, 2010, the discount rate used to determine the obligation was 5.4%. 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 5.4% to 4.9%, all other things being equal, the present value of our projected benefit obligation would increase by approximately $4.8 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, 2010. Significant changes to these rates would introduce volatility to our pension expense.  Our accrued pension obligation as of March 31, 2011 was $11.0 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 March 31, 2011 was $50.2 million.





Contingencies





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





Income Taxes





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





We have no valuation allowance against our gross deferred tax assets as of March 31, 2011.





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:


24





·
all currently available data;





·
our own operational experience and that of our consultants;





·
historical production from similar areas with similar conditions;





·
previously completed geological and reserve studies;





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





·
assumptions governing future prices and future operating costs.





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





·      mining activities;





·      new engineering and geological data;





·      acquisition or divestiture of reserve holdings; and





·      modification of mining plans or mining methods.





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





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;


25





·
Economic Projections –  Assumptions regarding general economic conditions are included in and affect the assumptions used in our impairment tests.  These assumptions include, but are not limited to, supply and demand for coal, inflation, interest rates, and prices of raw materials (commodities); and·
Discount Rates – When measuring a possible impairment, future cash flows are discounted at a rate that we believe represents our cost of capital.





Recent Accounting Pronouncements







In the three months ended March 31, 2011, there were no accounting pronouncements that became effective that impacted our financial statements.





Other Supplemental Information





Reconciliation of Non-US 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.  The leverage ratio is calculated as our Senior Funded Indebtedness divided by annualized Adjusted EBITDA.  Adjusted EBITDA is 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 March 31, 2011, we had $58.8 million of Senior Funded Indebtedness outstanding.  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.




Three months endedMarch 312011


2010Net income (loss)

$
(7,604
)


23,245Income tax expense (benefit)


915



(973
)Interest expense


7,851



7,381Interest income


(55
)


(4
)Depreciation, depletion, and amortization


16,035



16,358EBITDA (before adjustments)

$
17,142



46,007Other adjustments specified in our current debt agreement:


1,915



2,117Adjusted EBITDA

$
19,057



48,124




26


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. 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 acquisitions, dispositions 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;





·
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 inadequate; 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 cost 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 the business; 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; employee workforce factors; our assumptions concerning economically recoverable coal reserve estimates; future economic or capital market conditions; our plans and objectives for future operations and expansion or consolidation; our ability to integrate successfully operations that we may acquire or develop in the future, including those of IRP, or the risk that any such integration could be more difficult, time-consuming or costly than expected; the consummation of financing transactions, acquisitions or dispositions and the related effects on our business; uncertainty of our expected financial performance following completion of the IRP Acquisition; disruption from the IRP Acquisition making it more difficult to maintain relationships with customers, employees or suppliers; and the risk factors set forth in this Form 10-Q under Part II - 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.


27





ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





At March 31, 2011, all $721.8 million of our outstanding debt has a fixed interest rate and is not sensitive to changes in the general level of interest rates.  Our Revolver has floating interest rates based on our option of either the base rate or LIBOR rate.  As of March 31, 2011, 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 75% for the three months ended March 31, 2011.





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





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





ITEM 4.  CONTROLS AND PROCEDURES




Evaluation of Disclosure Controls and Procedures





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





There were no changes in our internal control over financial reporting during the three months ended March 31, 2011 that materially affected, or are reasonably likely to materially affect, our 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.








PART II


OTHER INFORMATION








ITEM 1.  LEGAL PROCEEDINGS





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


28





ITEM 1A. RISK FACTORS





Certain Risks





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





Risks Related to the Coal Industry





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





We derived 84% of our total revenues (contract and spot) for the three months ended March 31, 2011 and 88% of our total revenues in 2010, 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.





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.





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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 2010, we shipped in excess of 90% of our coal from our Central Appalachia mines via CSX.  In the Midwest, we shipped in excess of 65% of our produced coal by truck and the remainder via the rail system or by barge.  We believe that our 2011 transportation modes will continue to be comparable to those used in 2010, except that the shipments from the newly acquired IRP mines will also use ocean vessels and barges.  Our dependence upon railroads, third party trucking companies, ocean vessels and barges impacts our ability to deliver coal to our customers.  Disruption of service due to weather-related problems, mechanical difficulties, strikes, lockouts, bottlenecks and other events could temporarily impair our ability to supply coal to our customers, resulting in decreased shipments.  Decreased performance levels over longer periods of time could cause our customers to look elsewhere for their fuel needs, negatively affecting our revenues and profitability.





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





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





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





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





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.


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





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





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





The United States and more than 160 other nations are signatories to the 1992 Framework Convention on Global Climate Change, commonly known as the Kyoto Protocol, which is intended to limit or capture emissions of greenhouse gases, such as carbon dioxide.  In December 1997, the signatories to the convention established a potentially binding set of emissions targets for developed nations.  Although the specific emissions targets vary from country to country, the United States would be required to reduce emissions to 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 inside and 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 (such as the proposal discussed below in the risk factor “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”)and corresponding state laws could cause us to incur significant additional costs that adversely affect our operating results.





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





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





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





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





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





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


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





The U.S. Department of Justice, on behalf of the EPA, has 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 December 2009, the EPA published its finding that current and projected concentrations of carbon dioxide and five other greenhouse gases in the atmosphere threaten the public’s health and welfare. This finding enables the EPA to proceed with a broad regulatory program for the control of greenhouse gas emissions, including carbon dioxide emissions. The EPA has recently completed several rulemaking actions indicating its intent to do so, including, among others, a final greenhouse gas reporting rule for certain major stationary source permitting programs, final regulations to control greenhouse gas emissions from light duty vehicles, and a final “tailoring” rule explaining how it would implement the Clean Air Act’s Title V and prevention of significant deterioration permitting programs with respect to greenhouse gas emissions from major stationary sources In recent legislative sessions, both houses of Congress have considered, but failed to enact, new legislation that could establish a national cap on, or other regulation of, carbon emissions and other greenhouse gases. Recent proposals include a cap and trade system that would require the purchase of emission permits, which could be traded on the open market. These and other proposals would make it more costly to operate coal-fired plants and could make coal a less attractive fuel for future power plants. Any new or proposed requirements adversely affecting the use of coal could adversely affect our operations and results.





In December 2009, approximately 190 countries participated in the United Nations Climate Change Conference in Copenhagen. The participants “took note” of a non-binding accord under which participating nations would report, by January 31, 2010, their commitments to reduce greenhouse gas emissions. Under this non-binding framework, the U.S. has committed to cut greenhouse gas emissions by 17% below 2005 levels by 2020, 42% below 2005 levels by 2030, and 83% below 2005 levels by 2050.





The permitting of new coal-fired power plants has also recently been contested by state regulators and environmental organizations based on concerns relating to greenhouse gas emissions. In 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. In December 2010, the U.S. Supreme Court granted certiorari review of this decision by the Second Circuit. The plaintiffs in this case are seeking various remedies, including 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 because the EPA has finalized the adoption of greenhouse gas emission standards. Nevertheless, increased efforts to control greenhouse gas emissions by state, federal, judicial or international authorities could result in reduced demand for coal.





The 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.


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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 2005, the EPA adopted federal rules intended to reduce the interstate transport of fine particulate matter and ozone through reductions in sulfur dioxides and nitrogen oxide emissions from certain sources throughout 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. In July 2010, the EPA issued a proposed Clean Air Transport Rule in response to the Court’s prior remand of the 2005 rule. The recently proposed rule calls for reductions of sulfur dioxides and nitrogen oxides that drift across state lines in phases beginning in 2012. 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. These and other proposals would make it more costly to operate coal-fired plants and could make coal a less attractive fuel for future power plants.





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). Previously, this permit could be either a simplified Nationwide Permit #21 (NWP 21) or a more complicated individual permit. Litigation respecting the validity of the NWP 21 permit program has been ongoing for several years. Recently, the Corps announced its decision to suspend the use of NWP 21 in a six state Appalachian region, including Kentucky, where we operate. Litigation respecting the issuance of certain Section 404 permits has also been ongoing for several years, focusing primarily on whether the Corps’ decision to issue such permits conformed to the requirements of the Clean Water Act and/or the National Environmental Policy Act. The matters at issue in such litigation are such that a ruling for the plaintiffs could have an adverse impact on our planned surface mining operations.





In 2009, the EPA announced publicly that it will exercise its statutory right to more actively review Section 404 permitting actions by the 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. EPA oversight could further delay and/or restrict the issuance of such permits, either of which events could have an adverse impact on our planned mining operations. More recently, the EPA announced acceptable levels for the conductivity of water in streams receiving discharge from permitted coal mining sites in a six-state area of Central Appalachia, including Kentucky and West Virginia. If such levels of conductivity are permanently imposed, they could have a significant impact on our ability to secure Section 404 permits and have a material impact on our operations. The National Mining Association (NMA), on behalf of its member companies including coal producers such as ourselves, has filed suit against the EPA and the Corps contesting the legality of the enhanced review process and the imposition of such conductivity standard. Recently, the U.S. District Court for the District of Columbia, before which this suit was brought, issued its opinion denying the EPA’s motion to dismiss the case on grounds that there was no final agency action, that the case was not ripe for adjudication and that the NMA lacked standing. The court also denied the NMA’s motion for a preliminary injunction of EPA’s exercise of such oversight and the imposition of such standard. The states of West Virginia and Kentucky, and the coal associations in those states, have also filed suits contesting these actions by the EPA.


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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 March 31, 2011, we had accrued $50.2 million, and IRP had accrued $29.3 million at December 31, 2010, 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 each of the years ended December 31, 2008 and 2007. While we were profitable in the years ended December 31, 2010 and 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.





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





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





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





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We will incur significant transaction and acquisition-related integration costs in connection with the IRP Acquisition.





We are currently implementing our plan to integrate the operations of IRP. In connection with that plan, we anticipate that we will incur certain non-recurring charges, such as system conversion costs, in connection with this integration. We cannot identify the timing, nature and amount of all such charges at this time.  The acquisition-related integration costs could materially affect our results of operations in the period in which such charges are recorded. Although we believe that the realization of efficiencies related to the integration of the businesses, will offset acquisition-related costs over time, this net benefit may not be achieved in the near term, or at all.





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





For the three months ended March 31, 2011, we generated approximately 84% of our total revenues from several long term contracts and spot sales with electrical utilities, including 36% from South Carolina Public Service Authority, 22% from Georgia Power Company and 12% from Indianapolis Power and Light. At March 31, 2011, we had coal supply agreements with these customers that expire in 2011 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.





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 expire or 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 or are modified or terminated





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





Our 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.





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





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





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





On April 12, 2011, MSHA notified our subsidiary, Bledsoe Coal Corporation, that a Pattern of Violation (POV) exists at its Abner Branch Rider Mine.  As a result, within 90 days of the POV notice, if MSHA finds any violation of a mandatory health or safety standard that could significantly and substantially contribute to the cause and effect of a coal or other mine safety or health hazard, MSHA shall require all persons in the areas affected by such violation to be withdrawn from, and to be prohibited from entering such area until MSHA determines the violation has been abated.  The POV notice will terminate if, upon inspection of the entire mine, MSHA finds no S&S violations of mandatory safety and health standards. The Abner Branch Rider Mine produced approximately 220,000 tons in 2010.  The POV could have a significant impact on the operations of that mine.





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





The Dodd-Frank Act includes new requirements for reporting certain mine safety information on a Form 8-K, and for including additional mine safety disclosures in our periodic reports filed with the SEC. Under the Dodd-Frank Act, the SEC is authorized to issue rules and regulations regarding mine safety disclosures, and the SEC has issued proposed rules as of the date of this filing. While the new rules are not yet in effect, such rulemaking by the SEC may cause us to incur additional costs in complying with the new reporting and disclosure requirements.





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 mine water discharges or other environmental accidents;·
other accidents or natural disasters; and·
weather conditions.





36





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





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





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





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





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





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 2011, we anticipate less than 10% of our total production from our historical operations will come from mines operated by independent contract mine operators and from third party purchased coal sources. We anticipate that our third purchase coal will increase in connection with the IRP Acquisition. 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.





37


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 March 31, 2011, we had outstanding surety bonds with third parties for post-mining reclamation totaling $59.2 million. Furthermore, we have surety bonds for an additional $44.9 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, cash collateral or other assurances of payment. However, letters of credit can be significantly more costly to us than surety bonds. The issuance of letters of credit under our Revolver also reduces amounts that we can borrow under our Revolver. If we are unable to secure surety bonds for these obligations in the future, and are forced to secure letters of credit indefinitely, our profitability may be negatively affected.





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





Our company owned mines are currently operated by union-free employees. However, our subsidiaries’ employees have the right at any time under the National Labor Relations Act to form or affiliate with a union. Any unionization of our subsidiaries’ employees, or the employees of third-party contractors who mine coal for us, could adversely affect the stability of our production and reduce our profitability.





The current administration has indicated that it will support legislation that may make it easier for employees to unionize. 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 March 31, 2011, the current and non-current portions of these obligations included $46.6 million for coal workers’ black lung benefits and $66.0 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 March 31, 2011, we estimated that our obligation under the pension plan was underfunded by approximately $11.0 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.





38





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 March 31, 2011 was $721.8 million (net of discounts on our convertible notes of $105.7 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. In addition, we may incur additional indebtedness in the future, and, as a result, the related risks that we now face, including those described above, could intensify.





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





Our debt instruments impose a number of restrictions on us. A failure to comply with these restrictions could adversely affect our ability to borrow under our Revolver or result in an event of default under our 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”). As of March 31, 2011, our unrestricted cash was $553.3 million. 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 be $105.0 million during 2011.  In order to meet the twelve month Adjusted EBITDA target at March 31, 2011, we needed Adjusted EBITDA of $(3.5) million in the three months ended March 31, 2011.   Our Adjusted EBITDA in the three months ended March 31, 2011 was $19.1 million.  The most directly comparable US GAAP financial measure is net income.  For the three months ended March 31, 2011, we had a net loss of $7.6 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 0.63X to 0.61X during 2011.  Our Leverage Ratio was 0.46X as of March 31, 2011.·
Our revolving credit facility limits the Capital Expenditures (as 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, 2011, we cannot make Capital Expenditures in excess of $119.6 million.  For the three months ended March 31, 2011, we made Capital Expenditures of $20.1 million.





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





39





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, West Virginia 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, West Virginia and southern Indiana. We may also consider opportunities in other energy-related areas that are not prohibited by our debt instruments. If we undertake these diversification strategies and fail to execute them successfully, our financial condition and results of operations may be adversely affected.





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





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





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


40





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





We believe that our cash on hand, the availability under our Revolver and cash generated from our operations will provide us with adequate liquidity through 2011. However, such funds may not provide sufficient cash to fund any future acquisitions. Accordingly, we may need to conduct additional debt or equity financings in order to fund any such additional acquisitions, unless we issue shares of our common stock as consideration for those acquisitions. If we are unable to obtain any such financings, we may be required to forego future acquisition opportunities





Our current reserve base in southern Indiana is limited.





Our southern Indiana mining complex currently has rights to proven and probable reserves that we believe will be exhausted in approximately 14 years at 2010 levels of production, compared to our current Central Appalachia mining complexes, which have reserves that we believe will last an average of approximately 37 years at 2010 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.





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





We are party to a number of legal proceedings incidental to our normal business activities, including a large number of workers’ compensation claims. While we cannot predict the outcome of the proceedings, there is always the potential that the costs of defending litigation in an individual matter or the aggregation of many matters could have an adverse effect on our cash flows, results of operations or financial position.





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





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








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.





41





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





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





We do not anticipate paying cash dividends on our common stock in the foreseeable future. In addition, covenants in our Revolver, 2012 Senior Notes, 2019 Senior Notes, 2015 Convertible Senior Notes and 2018 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.





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








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





None.





ITEM 3. DEFAULTS UNDER SENIOR SECURITIES


None.





ITEM 5. OTHER INFORMATION





On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act) was enacted. Section 1503 of the Act contains new reporting requirements regarding coal or other mine safety.





The operation of our mines is subject to regulation by the federal Mine Safety and Health Administration (MSHA) under the Federal Mine Safety and Health Act of 1977 (the Mine Act). MSHA inspects our mines on a regular basis and issues various citations and orders when it believes a violation has occurred under the Mine Act. The table below presents information regarding certain mining safety and health citations which MSHA has issued with respect to our coal mining operations. In evaluating this information, consideration should be given to factors such as: (i) the number of citations and orders will vary depending on the size of the coal mine, (ii) the number of citations issued will vary from inspector to inspector and mine to mine, and (iii) citations and orders can be contested and appealed, and in that process, may be reduced in severity and amount, and are sometimes dismissed.





The information below includes references to specific sections of the Mine Act.   The information provided is for the three months ended March 31, 2011, except for pending legal actions, which are as of March 31, 2011:





(1)
For each coal or other mine, of which the issuer or a subsidiary of the issuer is an operator (number of occurrences, except for proposed assessment dollar values)


42


Table I - Mine Safety Information (Columns A to G show 3 months ended March 31, 2011 totals)Mine
Section 104A S&S Citations (A)
Section

104(b) Orders

(B)
Section

104(d) Citations

and Orders (C)
Section

110(b)(2) Violations

(D)
Section 107(a) Orders

(E)
Proposed MSHA Assessments

(F)
Fatalities

(G)
Pending

Legal Actions

(H)
Pattern or Potential

Pattern of ViolationBell County Coal CorporationJellico
10
-
-
-
-
$5,541
-
9
NoGarmeada  #2
5
-
-
-
-
1,609
-
5
NoCoal Creek
2
-
-
-
-
8,943
-
3
NoCabin Hollow
-
-
-
-
-
-
-
1
NoMosley Spur
-
-
-
-
-
-
-
1
NoBell Preparation Plant
3
-
-
-
-
3,369
-
-
NoBledsoe Coal CorporationBeechfork Mine
24
-
2
-
-
64,129
-
10
NoOldhouse Branch
13
-
-
-
-
7,236
-
7
NoAbner Branch Rider
18
-
-
-
-
43,647
-
11
YesTantrough
11
-
-
-
-
1,163
-
6
No#4
-
-
-
-
-
-
-
5
NoMarion Branch
-
-
-
-
-
-
-
1
No#61 Plant
1
-
-
-
-
585
-
1
No#1 Plant
1
-
-
-
-
-
-
1
NoClover Loadout
4
-
-
-
-
-
-
-
NoBlue Diamond Coal Company#74
-
-
-
-
-
-
-
1
No#75
19
-
2
-
-
36,065
-
11
No#77
12
-
-
-
-
34,895
-
25
NoCalvary No. 81
15
-
-
-
-
32,820
-
16
No76 Plant
-
-
-
-
-
700
-
-
NoJames River Coal Service CompanyBear Branch Surface
-
-
-
-
-
200
-
-
NoMontgomery Creek
3
-
-
-
-
1,879
-
-
NoLeeco Inc.# 68
36
1
1
-
-
614,982
-
25
No# 64 Plant
-
-
-
-
-
100
-
-
NoJeff Tipple
-
-
-
-
-
-
-
-
NoMccoy Elkhorn Coal Corp.Mine #12
-
-
-
-
-
-
-
1
NoMine # 15
9
-
1
-
-
7,984
-
21
NoMine # 15A
1
-
-
-
-
1,036
-
2
NoMine # 16
11
-
-
-
-
1,694
-
11
NoMine # 23
19
-
-
-
-
15,010
-
11
NoBevins Branch Preparation Plant
1
-
-
-
-
-
-
2
NoBurke Preparation Plant
8
-
-
-
-
-
-
-
NoShamrock Coal CompanyBeech Fork Coal Prep Facility
6
-
-
-
-
-
-
3
NoShamrock
-
-
-
-
-
-
-
8
NoTriad Underground Mining LLCFreelandville Underground
-
-
-
-
-
-
-
5
NoTriad Mining Inc.Log Creek Surface
2
-
-
-
-
1,094
-
1
NoFreelandville Mine
-
-
-
-
-
-
-
1
No


43





(A)
The total number of violations of mandatory health or safety standards that could significantly and substantially contribute to the cause and effect of a coal or other mine safety or health hazard under section 104 of the Mine Act for which the operator received a citation from the Mine Safety and Health Administration.


(B)
The total number of orders issued under section 104(b) of the Mine Act.


(C)
The total number of citations and orders for unwarrantable failure of the mine operator to comply with mandatory health or safety standards under section 104(d) of the Mine Act.


(D)
The total number of flagrant violations under section 110(b)(2) of the Mine Act.


(E)
The total number of imminent danger orders issued under section 107(a) of the Mine Act.


(F)
The total dollar value of proposed assessments from the MSHA under the Mine Act.


(G)
The total number of mining-related fatalities.


(H)
The Pending Legal Actions include matters which were initiated by us and do not necessarily relate to the citations, orders or proposed assessments issued by MSHA during the current reporting period. All of the Legal Actions were initiated by us to contest citations, orders or proposed assessments issued by MSHA, and if we are successful, may result in reduction or dismissal of those citations, orders or assessments.  Each legal action is assigned a docket number and may have as its subject matter one or more citations, orders, penalties or complaints.





(2)
A list of such coal or other mine, of whichthe issuer or a subsidiary of the issuer is an operator, that received written notice from the MSHA of — (A) a pattern of violations of mandatory health or safety standards that are of such nature as could have significantly and substantially contributed to the cause and effect of coal or other mine health and safety hazards under section 104(e) of such Act (30 U.S.C. 814 (e)); or (B) the potential to have such a pattern.





On November 18, 2010, Bledsoe Coal Corporation, a subsidiary of James River Coal Company, received written notification that a potential pattern of violation exists at its Abner Branch Rider Mine.  On April 12, 2011, MSHA notified Bledsoe Coal Corporation that a Pattern of Violation (POV) exists at its Abner Branch Rider Mine.  As a result, within 90 days of the POV notice, if MSHA finds any violation of a mandatory health or safety standard that could significantly and substantially contribute to the cause and effect of a coal or other mine safety or health hazard, MSHA shall require all persons in the areas affected by such violation, except those persons referred to in Section 104(c) of the Mine Act, to be withdrawn from, and to be prohibited from entering such area until MSHA determines the violation has been abated.  The POV notice will terminate if, upon inspection of the entire mine, MSHA finds no S&S violations of mandatory safety and health standards. The Abner Branch Rider Mine produced approximately 220,000 tons in 2010.  The POV could have a significant impact on the operations of that mine.





(3)
Any pending legal action before the Federal Mine Safety and Health Review Commission involving such coal or other mine.





See footnote (H) in the table above.








ITEM 6. EXHIBITS





The following exhibits are filed herewith:
ExhibitCertification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.1Certification of Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.1Certification of Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2








44


SIGNATURES





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








James River Coal Company





By: /s/  Peter T. Socha

Peter T. Socha

Chairman, President and

Chief Executive Officer







By: /s/ Samuel M. Hopkins II

Samuel M. Hopkins, II

Vice President and

Chief Accounting Officer





May 10, 2011