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, 2009
 OR
 
 [_]
              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.
 
 Large
      accelerated filer ý
              Accelerated
      filer  oNon-accelerated
      filer o (Do
      not check if a smaller reporting company)
              Smaller
      reporting company  o
 
 Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
 YesoNoý
 
 Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
 Yes    ý             No    o
 
 The number of shares of the
registrant’s Common Stock, par value $.01 per share, outstanding as of April 15,
2009 was 27,620,304.
 
 
  
  
 FORM
10-Q INDEX
 PagePART
      IFINANCIAL
      INFORMATIONItem
      1.
                      Financial
      Statements.
                      3Condensed
      Consolidated Balance Sheets as of March 31, 2009 and December 31,
      2008
                      3Condensed
      Consolidated Statements of Operations for the three months
      ended
                      4March
      31, 2009 and 2008Condensed
      Consolidated Statements of Changes in Shareholders’ Equity
    and
                      6Comprehensive
      Income (Loss) for the three months ended March 31, 2009 and the
      yearended
      December 31, 2008Condensed
      Consolidated Statements of Cash Flows for the three months
      ended
                      7March
      31, 2009 and 2008Notes
      to Condensed Consolidated Financial Statements
                      8Item
      2.
                      Management’s
      Discussion and Analysis of Financial Condition and Results of Operations.
                      16Item
      3.
                      Quantitative
      and Qualitative Disclosures about Market Risk.
                      28Item
      4.
                      Controls
      and Procedures.
                      28PART
      IIOTHER
      INFORMATION
                      29Item
      1.
                      Legal
      Proceedings.Item
      1A.
                      Risk
      Factors.Item 2.
                      Unregistered
      Sales of Equity Securities and Use of Proceeds.
                      40Item
      3.
                      Defaults
      Upon Senior Securities.
                      40Item 4.
                      Submission
      of Matters to a Vote of Security Holders.
                      40Item
      5.
                      Other
      Information.
                      40Item
      6.
                      Exhibits.
                      41SIGNATURES
                      42
 
   -2-
  
 PART
I                               FINANCIAL
INFORMATION
 
 ITEM 1.  FINANCIAL
STATEMENTS
 
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 
 Condensed
Consolidated Balance Sheets
 (in
thousands)
 
 March
      31, 2009
                                    
                                    
                                    December
      31, 2008Assets
                                    
                                    (unaudited)Current
      assets:Cash
      and cash equivalents
                                    
                                    $
                                    9,769
                                    
                                    
                                    
                                    3,324Receivables:Trade
                                    
                                    
                                    51,368
                                    
                                    
                                    
                                    33,086Other
                                    
                                    
                                    207
                                    
                                    
                                    
                                    475Total
      receivables
                                    
                                    
                                    51,575
                                    
                                    
                                    
                                    33,561Inventories:Coal
                                    
                                    
                                    22,607
                                    
                                    
                                    
                                    6,847Materials
      and supplies
                                    
                                    
                                    10,392
                                    
                                    
                                    
                                    9,581Total
      inventories
                                    
                                    
                                    32,999
                                    
                                    
                                    
                                    16,428Prepaid
      royalties
                                    
                                    
                                    4,318
                                    
                                    
                                    
                                    2,803Other
      current assets
                                    
                                    
                                    2,646
                                    
                                    
                                    
                                    5,094Total
      current assets
                                    
                                    
                                    101,307
                                    
                                    
                                    
                                    61,210Property,
      plant, and equipment, at cost:Land
                                    
                                    
                                    7,114
                                    
                                    
                                    
                                    6,693Mineral
      rights
                                    
                                    
                                    230,686
                                    
                                    
                                    
                                    229,841Buildings,
      machinery and equipment
                                    
                                    
                                    330,278
                                    
                                    
                                    
                                    320,982Mine
      development costs
                                    
                                    
                                    41,579
                                    
                                    
                                    
                                    39,596Total
      property, plant, and equipment
                                    
                                    
                                    609,657
                                    
                                    
                                    
                                    597,112Less
      accumulated depreciation, depletion, and amortization
                                    
                                    
                                    268,516
                                    
                                    
                                    
                                    252,264Property,
      plant and equipment, net
                                    
                                    
                                    341,141
                                    
                                    
                                    
                                    344,848Goodwill
                                    
                                    
                                    26,492
                                    
                                    
                                    
                                    26,492Other
      assets
                                    
                                    
                                    27,832
                                    
                                    
                                    
                                    30,996Total
      assets
                                    
                                    $
                                    496,772
                                    
                                    
                                    
                                    463,546See
      accompanying notes to condensed consolidated financial
      statements.
 
  -3-
  JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 
 Condensed
Consolidated Balance Sheets
 (in
thousands, except share amounts)
 
  March
      31, 2009
                                
                                
                                December
      31, 2008Liabilities
      and Shareholders' Equity
                                
                                (unaudited)Current
      liabilities:Current
      maturities of long-term debt (note 2)
                                
                                $
                                9,000
                                
                                
                                
                                18,000Accounts
      payable
                                
                                
                                58,989
                                
                                
                                
                                57,068Accrued
      salaries, wages, and employee benefits
                                
                                
                                9,132
                                
                                
                                
                                6,642Workers'
      compensation benefits
                                
                                
                                9,300
                                
                                
                                
                                9,300Black
      lung benefits
                                
                                
                                1,539
                                
                                
                                
                                1,539Accrued
      taxes
                                
                                
                                9,536
                                
                                
                                
                                4,457Other
      current liabilities
                                
                                
                                19,511
                                
                                
                                
                                19,165Total
      current liabilities
                                
                                
                                117,007
                                
                                
                                
                                116,171Long-term
      debt, less current maturities
                                
                                
                                150,000
                                
                                
                                
                                150,000Other
      liabilities:Noncurrent
      portion of workers' compensation benefits
                                
                                
                                47,504
                                
                                
                                
                                46,477Noncurrent
      portion of black lung benefits
                                
                                
                                29,621
                                
                                
                                
                                29,029Pension
      obligations
                                
                                
                                19,827
                                
                                
                                
                                19,693Asset
      retirement obligations
                                
                                
                                36,916
                                
                                
                                
                                36,409Other
                                
                                
                                572
                                
                                
                                
                                529Total
      other liabilities
                                
                                
                                134,440
                                
                                
                                
                                132,137Total
      liabilities
                                
                                
                                401,447
                                
                                
                                
                                398,308Commitments
      and contingencies (note 4)Shareholders'
      equity:Preferred
      stock, $1.00 par value.  Authorized 10,000,000
      shares
                                
                                
                                -
                                
                                
                                
                                -Common
      stock, $.01 par value.  Authorized 100,000,000
      shares;issued
      and outstanding 27,393,493 and 27,393,493 sharesas
      of March 31, 2009 and December 31, 2008, respectively
                                
                                
                                274
                                
                                
                                
                                274Paid-in-capital
                                
                                
                                273,880
                                
                                
                                
                                272,366Accumulated
      deficit
                                
                                
                                (159,541
                                )
                                
                                
                                (187,712
                                )Accumulated
      other comprehensive loss
                                
                                
                                (19,288
                                )
                                
                                
                                (19,690
                                )Total
      shareholders' equity
                                
                                
                                95,325
                                
                                
                                
                                65,238Total
      liabilities and shareholders' equity
                                
                                $
                                496,772
                                
                                
                                
                                463,546See
      accompanying notes to condensed consolidated financial
      statements.
  4
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 
 Condensed
Consolidated Statements of Operations
 (in
thousands, except per share data)
 (unaudited)
 
 
 Three
      Months
                                        
                                        
                                        Three
      MonthsEnded
                                        
                                        
                                        EndedMarch
      31,
                                          2009
                                        
                                        
                                        March
      31,
                                          2008Revenues
                                        
                                        $
                                        192,121
                                        
                                        
                                        
                                        138,188Cost
      of sales:Cost
      of coal sold
                                        
                                        
                                        132,707
                                        
                                        
                                        
                                        125,730Depreciation,
      depletion and amortization
                                        
                                        
                                        14,473
                                        
                                        
                                        
                                        17,290Total
      cost of sales
                                        
                                        
                                        147,180
                                        
                                        
                                        
                                        143,020Gross
      profit (loss)
                                        
                                        
                                        44,941
                                        
                                        
                                        
                                        (4,832
                                        )Selling,
      general and administrative expenses
                                        
                                        
                                        9,287
                                        
                                        
                                        
                                        7,334Total
      operating income (loss)
                                        
                                        
                                        35,654
                                        
                                        
                                        
                                        (12,166
                                        )Interest
      expense (note 2)
                                        
                                        
                                        4,053
                                        
                                        
                                        
                                        4,889Interest
      income
                                        
                                        
                                        (25
                                        )
                                        
                                        
                                        (88
                                        )Miscellaneous
      income, net
                                        
                                        
                                        (54
                                        )
                                        
                                        
                                        (279
                                        )Total
      other expense, net
                                        
                                        
                                        3,974
                                        
                                        
                                        
                                        4,522Income
      (loss) before income taxes
                                        
                                        
                                        31,680
                                        
                                        
                                        
                                        (16,688
                                        )Income
      tax expense
                                        
                                        
                                        3,509
                                        
                                        
                                        
                                        -Net
      income (loss)
                                        
                                        $
                                        28,171
                                        
                                        
                                        
                                        (16,688
                                        )Earnings
      (loss) per common share (note 5)Basic
      earnings (loss) per common share
                                        
                                        $
                                        1.03
                                        
                                        
                                        
                                        (0.78
                                        )Diluted
      earnings (loss) per common share
                                        
                                        $
                                        1.03
                                        
                                        
                                        
                                        (0.78
                                        )See
      accompanying notes to condensed consolidated financial
      statements.
 
 
  5
  
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Condensed
Consolidated Statements of Changes in Shareholders’
 Equity
and Comprehensive Income (Loss)
 (in
thousands)
 (unaudited)
  
 Predecessor
      Company
                                
                                Common
                                  stock
                                  shares
                                
                                
                                Common
                                  stock
      par
                                  value
                                
                                
                                Paid-in-
                                  capital
                                
                                
                                Retained
                                  earnings
      (accumulated
                                  deficit)
                                
                                
                                Accumulated
      other comprehensive income (loss)
                                
                                
                                TotalBalances,
      January 1, 2008
                                
                                
                                21,906
                                
                                
                                $
                                219
                                
                                
                                
                                159,403
                                
                                
                                
                                (91,719
                                )
                                
                                
                                1,871
                                
                                
                                
                                69,774Net
      loss
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (95,993
                                )
                                
                                
                                -
                                
                                
                                
                                (95,993
                                )Amortization
      of black lung liability
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (562
                                )
                                
                                
                                (562
                                )Black
      lung obligation adjustment
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (5,334
                                )
                                
                                
                                (5,334
                                )Pension
      liability adjustment
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (15,665
                                )
                                
                                
                                (15,665
                                )Comprehensive
      loss
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (117,554
                                )Issuance
      on common stock, net of offeringcosts
      of $421
                                
                                
                                4,913
                                
                                
                                
                                49
                                
                                
                                
                                93,771
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                93,820Common
      stock issued for acquisition of mineral rights (note 2)
                                
                                
                                388
                                
                                
                                
                                4
                                
                                
                                
                                15,996
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                16,000Issuance
      of restricted stock awards, net of forfeitures
                                
                                
                                238
                                
                                
                                
                                2
                                
                                
                                
                                (2
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Repurchase
      of shares for tax withholding
                                
                                
                                (72
                                )
                                
                                
                                -
                                
                                
                                
                                (2,474
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (2,474
                                )Exercise
      of Stock Options
                                
                                
                                20
                                
                                
                                
                                -
                                
                                
                                
                                542
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                542Stock
      based compensation
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                5,130
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                5,130Balances,
      December 31, 2008
                                
                                
                                27,393
                                
                                
                                
                                274
                                
                                
                                
                                272,366
                                
                                
                                
                                (187,712
                                )
                                
                                
                                (19,690
                                )
                                
                                
                                65,238Net
      Income
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                28,171
                                
                                
                                
                                -
                                
                                
                                
                                28,171Amortization
      of pension liability
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                402
                                
                                
                                
                                402Comprehensive
      income
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                28,573Stock
      based compensation
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,514
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,514Balances,
      March 31, 2009
                                
                                
                                27,393
                                
                                
                                $
                                274
                                
                                
                                
                                273,880
                                
                                
                                
                                (159,541
                                )
                                
                                
                                (19,288
                                )
                                
                                
                                95,325See
      accompanying notes to condensed consolidated financial
      statements.
 
  6
 
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 
 Condensed
Consolidated Statements of Cash Flows
 (in
thousands)
 (unaudited)
 
 Three
      Months
                                
                                
                                Three
      MonthsEnded
                                
                                
                                EndedMarch
      31,
                                  2009
                                
                                
                                March
      31,
                                  2008Cash
      flows from operating activities:Net
      income (loss)
                                
                                $
                                28,171
                                
                                
                                
                                (16,688
                                )Adjustments
      to reconcile net income (loss) to net cash (used in) providedby
      operating activitiesDepreciation,
      depletion, and amortization
                                
                                
                                14,473
                                
                                
                                
                                17,290Accretion
      of asset retirement obligations
                                
                                
                                793
                                
                                
                                
                                664Amortization
      of deferred financing costs
                                
                                
                                293
                                
                                
                                
                                396Stock-based
      compensation
                                
                                
                                1,514
                                
                                
                                
                                984Gain
      on sale or disposal of property, plant, and equipment
                                
                                
                                -
                                
                                
                                
                                (174
                                )Changes
      in operating assets and liabilities:Receivables
                                
                                
                                (18,014
                                )
                                
                                
                                (2,358
                                )Inventories
                                
                                
                                (14,883
                                )
                                
                                
                                (1,807
                                )Prepaid
      royalties and other current assets
                                
                                
                                933
                                
                                
                                
                                845Other
      assets
                                
                                
                                2,871
                                
                                
                                
                                263Accounts
      payable
                                
                                
                                1,921
                                
                                
                                
                                (8,152
                                )Accrued
      salaries, wages, and employee benefits
                                
                                
                                2,490
                                
                                
                                
                                1,526Accrued
      taxes
                                
                                
                                5,079
                                
                                
                                
                                1,192Other
      current liabilities
                                
                                
                                229
                                
                                
                                
                                4,699Workers'
      compensation benefits
                                
                                
                                1,027
                                
                                
                                
                                134Black
      lung benefits
                                
                                
                                592
                                
                                
                                
                                353Pension
      obligations
                                
                                
                                536
                                
                                
                                
                                (178
                                )Asset
      retirement obligation
                                
                                
                                (210
                                )
                                
                                
                                (62
                                )Other
      liabilities
                                
                                
                                43
                                
                                
                                
                                45Net
      cash provided by (used in) operating activities
                                
                                
                                27,858
                                
                                
                                
                                (1,028
                                )Cash
      flows from investing activities:Additions
      to property, plant, and equipment
                                
                                
                                (12,413
                                )
                                
                                
                                (9,310
                                )Proceeds
      from sale of property, plant, and equipment
                                
                                
                                -
                                
                                
                                
                                1,014Net
      cash used in investing activities
                                
                                
                                (12,413
                                )
                                
                                
                                (8,296
                                )Cash
      flows from financing activities:Borrowings
      under Revolver
                                
                                
                                5,000
                                
                                
                                
                                4,000Repayments
      under Revolver
                                
                                
                                (14,000
                                )
                                
                                
                                (4,000
                                )Repayment
      of long-term debt
                                
                                
                                -
                                
                                
                                
                                (400
                                )Net
      proceeds from issuance of common stock
                                
                                
                                -
                                
                                
                                
                                50,083Net
      cash provided by (used in) financing activities
                                
                                
                                (9,000
                                )
                                
                                
                                49,683Increase
      in cash
                                
                                
                                6,445
                                
                                
                                
                                40,359Cash
      at beginning of period
                                
                                
                                3,324
                                
                                
                                
                                5,413Cash
      at end of period
                                
                                $
                                9,769
                                
                                
                                
                                45,772
 
 See
accompanying notes to condensed consolidated financial statements.
 
  7
  
 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
  The
Company mines, processes and sells 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 James River Coal Company
and subsidiaries 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, 2008.
The balances presented as of or for the year ended December 31, 2008 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 condensed
consolidated financial statements in conformity with U.S. generally accepted
accounting principles. 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.
  Recent
Accounting Pronouncements
 In June
2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
Emerging Issues Task Force No. 03-6-1,Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
(FSP EITF 03-6-1). FSP EITF 03-6-1 addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting,
and therefore need to be included in the earnings allocation in computing
earnings per share under the two-class method as described in SFAS No. 128,
“Earnings per Share.” Under the guidance of FSP EITF 03-6-1, unvested
share-based payment awards that contain non-forfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earnings per share pursuant to the
two-class method. The Company’s unvested restricted stock awards are considered
“participating securities” because they contain non-forfeitable rights to
dividends. FSP EITF 03-6-1 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and all prior-period
earnings per share data presented has been adjusted retrospectively (note
5).
 
 (2)
              Long
      Term Debt and Interest Expense
 
 Long-term
debt is as follows (amounts in thousands):
  8
  
 
 March
      31,
                          2009
                        
                        
                        December
      31,
                          2008Senior
      Notes
                        
                        $
                        150,000
                        
                        
                        $
                        150,000Revolver
                        
                        
                        9,000
                        
                        
                        
                        18,000Total
      long-term debt
                        
                        
                        159,000
                        
                        
                        
                        168,000Less
      amounts classified as current
                        
                        
                        9,000
                        
                        
                        
                        18,000Total
      long-term debt, less current maturities
                        
                        $
                        150,000
                        
                        
                        $
                        150,000
  Senior
Notes
  The
$150.0 million of Senior Notes are due on June 1, 2012 (the Senior Notes). 
The Senior Notes are unsecured and accrue interest at 9.375% per annum. 
Interest payments on the Senior Notes are required semi-annually.  The
Company may redeem the Senior Notes, in whole or in part, at any time on or
after June 1, 2009 at redemption prices ranging from 104.86% in 2009 to 100% in
2011.
 
 The
Senior Notes limit the Company’s ability, among other things, to pay cash
dividends.  In addition, if a change of control occurs (as defined in the
Indenture), each holder of the Senior Notes will have the right to require the
Company to repurchase all or a part of the Senior Notes at a price equal to 101%
of their principal amount, plus any accrued interest to the date of
repurchase.
 
 Senior
Secured Credit Facilities
  In 2007,
the Company entered into a $35.0 million Revolving Credit Agreement (the
Revolver) and a Term Credit Agreement (collectively the Facilities). The Term
Credit Agreement consists of a term facility (the Term Facility) and a $60.0
million letter of credit facility (the Letter of Credit
Facility).  The Company repaid the outstanding balance of the Term
Facility in October 2008 and used $5.2 million of the Company’s cash to secure
letters of credit under the Letter of Credit Facility.  The $5.2
million of cash used to secure the letters of credit under the Letter of Credit
Facility is included in other assets the Company’s consolidated balance sheets
as of March 31, 2009 and December 31, 2008.  The Letter of Credit
Facility does not constitute a loan to the Company and accordingly is not
available for borrowing by the Company.  The Letter of Credit Facility
supports the issuance of up to $60.0 million of letters of credit by the
Company.
  The
following is a summary of significant terms of the Facilities, as amended, as
of March 31, 2009.
 
  Revolver
                      Letter
      of Credit FacilityMaturity
                      February
      2012(c)
                      February
      2013Interest/Usage
      Rate
                      Company’s
      option of Base Rate(a)
      plus 1.75% or LIBOR plus 2.75% per annum
                      10.0%
      effective January 1, 2009; and 12.5% effective April 1, 2009 to the Letter
      of Credit Facility’s maturity date.Maximum
      Availability
                      Lesser
      of $35.0 million or the borrowing base (b)
                      $60.0
      millionPeriodic
      Principal Payments
                      None
                      Not
      applicable
 
 (a)
                Base
      rate is the higher of (1) the Federal Fund Rate plus 0.5%, and (2) the
      prime rate.(b)
                The
      Revolver’s borrowing base is the sum of up to 85% of the eligible accounts
      receivable plus the lesser of (1) up to 60% of eligible inventory and (2)
      up to 85% of the net orderly liquidation value of eligible inventory;
      minus reserve from time to time set by administrative
      agent.  Amount available is also subject to a minimum liquidity
      covenant.(c)
                The
      Revolver is classified as current on our consolidated balance sheet based
      on our intent to pay the balance within the next
  year.
 
  9
  
 The
Revolver provides that the Company can use up to $10.0 million of the Revolver
availability to issue letters of credit. The Revolver provides for a 2.75% fee
on any outstanding letters of credit issued under the Revolver and a 0.75% fee
on the unused portion of the Revolver. The Facilities require certain mandatory
prepayments from certain asset sales, incurrence of indebtedness and excess cash
flow. The Facilities include financial covenants that require us to maintain a
minimum EBITDA, a minimum liquidity level and a maximum leverage ratio and limit
capital expenditures, each as defined by the agreement. The Facilities are
secured by substantially all of our assets.
 
 As of
March 31, 2009, the Company had $35.0 million of availability under its
Revolver.   We are required to maintain minimum liquidity as defined
under our credit agreements of $10.0 million and as a result had $16.0 million
of borrowing capacity at March 31, 2009.  The Company was in
compliance with all of the financial covenants under the Facilities and Senior
Notes as of March 31, 2009.
 
 Interest
Expense and Other
 
 During
the three months ended March 31, 2009 and 2008, the Company paid $0.5 million
and $1.0 million in interest, respectively.
 
 (3)
              Equity
  Preferred
Stock and Shareholder Rights Agreement
  The
Company has authorized 10,000,000 shares of preferred stock, $1.00 par value per
share, the rights and preferences of which are established by the Board of the
Directors. The Company has reserved 500,000 of these shares as Series A
Participating Cumulative Preferred Stock for issuance under a shareholder rights
agreement (the Rights Agreement).
  On May
25, 2004, the Company’s shareholders approved the Rights Agreement and declared
a dividend of one preferred share purchase right (Right) for each two shares of
common stock outstanding.  Each Right entitles the registered holder to
purchase from the Company one one-hundredth (1/100) of a share of our Series A
Participating Cumulative Preferred Stock, par value $1.00 per share, at a price
of $200 per one one-hundredth of a Series A preferred share.  The Rights
are not exercisable until a person or group of affiliated or associated persons
(an Acquiring Person) has acquired or announced the intention to acquire 20% or
more of the Company’s outstanding common stock.
  In the
event that the Company is acquired in a merger or other business combination
transaction or 50% or more of the Company’s consolidated assets or earning power
is sold after a person or group has become an Acquiring Person, each holder of a
Right, other than the Rights beneficially owned by the Acquiring Person (which
will thereafter be void), will receive, upon the exercise of the Right, that
number of shares of common stock of the acquiring company which at the time of
such transaction will have a market value of two times the exercise price of the
Right.  In the event that any person becomes an Acquiring Person, each
Right holder, other than the Acquiring Person (whose Rights will become void),
will have the right to receive upon exercise that number of shares of common
stock having a market value of two times the exercise price of the
Right.
  The
rights will expire May 25, 2014, unless that expiration date is extended. The
Board of Directors may redeem the Rights at a price of $0.001 per Right at any
time prior to the time that a person or group becomes an Acquiring
Person.
  Equity
Based Compensation
  Under the
2004 Equity Incentive Plan (the Plan), participants may be granted stock options
(qualified and nonqualified), stock appreciation rights (SARs), restricted
stock, restricted stock units, and performance shares. The total number of
shares that may be awarded under the Plan is 1,650,000, and no more than
1,000,000 of the shares reserved under the Plan may be granted in the form of
incentive stock options.  The Company currently has the following
types of equity awards outstanding under the Plan.
 
 Restricted
Stock Awards
  Pursuant
to the Plan certain directors and employees have been awarded restricted common
stock with such shares vesting over two to five years. The related expense is
amortized over the vesting period.
 
 Stock
Option Awards
  Pursuant
to the Plan certain directors and employees have been awarded options to
purchase common stock with such shares vesting ratably over three to five years.
The Company’s stock options have been issued at exercise prices equal to or
greater than the fair value of the Company’s stock at the date of
grant.
  10
  
 Shares
awarded or subject to purchase under the Plan that are not delivered or
purchased, or revert to the Company as a result of forfeiture or termination,
expiration or cancellation of an award or that are used to exercise an award or
for tax withholding, will be again available for issuance under the Plan. At
March 31, 2009, there were 260,201 shares available under the Plan for future
awards.
 
 The
following table highlights the expense related to share-based payment for the
periods ended March 31 (in thousands):
  Three
      months endedMarch
      31,2009
                          
                          
                          2008Restricted
      stock
                          
                          $
                          1,435
                          
                          
                          $
                          905Stock
      options
                          
                          
                          79
                          
                          
                          
                          79Stock
      based compensation
                          
                          $
                          1,514
                          
                          
                          $
                          984
  The fair
value of the restricted stock outstanding and issued is equal to the value of
shares at the grant date.  At this time, the Company does not expect
any of its restricted shares or options to be forfeited before vesting. The fair
value of stock options was estimated using the Black-Scholes option pricing
model.
 
 The
following is a summary of restricted stock and stock option awards for the three
months ended March 31, 2009:
  Restricted
      Stock
                          
                          
                          Stock
      OptionsWeighted
                          
                          
                          
                          
                          WeightedAverage
                          
                          
                          
                          
                          AverageNumber
      of
                          
                          Fair
      Value
                          
                          Number
      of
                          
                          ExerciseShares
                          
                          
                          at
      Issue
                          
                          
                          Shares
                          
                          
                          PriceDecember
      31, 2008
                          
                          
                          702,049
                          
                          
                          $
                          22.78
                          
                          
                          
                          261,000
                          
                          
                          $
                          16.51Granted
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Exercised/Vested
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Canceled
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -March
      31, 2009
                          
                          
                          702,049
                          
                          
                          
                          22.78
                          
                          
                          
                          261,000
                          
                          
                          
                          16.51
   The
following table summarizes additional information about the stock options
outstanding at March 31, 2009.
   Range
      of
                                            Exercise
      Price
                                          
                                          Shares
                                          
                                          Weighted
      Average Exercise Price
                                          
                                          Weighted
                                            Average
                                            Remaining
                                            Contractual
      Life
                                            (Years)
                                          
                                          Aggregate
                                            Intrinsic
                                            Value
      (1)
                                            (in
      000's)Outstanding
      at March 31, 2009
                                          
                                          $10.80-$36.30
                                          261,000
                                          
                                          $16.51
                                          
                                          5.9
                                          
                                          $         231Exercisable
      at March 31, 2009
                                          
                                          $10.80-$33.57
                                          189,337
                                          
                                          $15.08
                                          
                                          5.5
                                          
                                          $         185Vested
      and expected to vest at March 31, 2009
                                          
                                          
                                          
                                          261,000
                                          
                                          $16.51
                                          
                                          5.9
                                          
                                          $         231(1)
      The difference between a stock award's exercise price and the underlying
      stock's market price at March 31, 2009.No
      value is assigned to stock awards whose option price exceeds
      the stock's market price at March 31,
2009.
  The
following table summarizes the Company’s total unrecognized compensation cost
related to stock based compensation as of March 31, 2009.
   11
  Weighted
      AverageRemaining PeriodUnearned
                              
                              
                              Of
      ExpenseCompensation
                              
                              
                              Recognition(in
      000's)
                              
                              
                              (in
      years)Stock
      Options
                              
                              $
                              426
                              
                              
                              1.5Restricted
      Stock
                              
                              
                              10,818
                              
                              
                              2.2Total
                              
                              $
                              11,244
   (4)
              Commitments
      and Contingencies
  The
Company has established irrevocable letters of credit totaling $60.0 million as
of March 31, 2009 to guarantee performance under certain contractual
arrangements.  The letters of credit were issued under the Company’s
Letter of Credit Facility (see note 2).
  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.
  (5)
              Earnings
      (loss) Per Share
  Basic
earnings (loss) per share is computed by dividing net income (loss) available to
common shareholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is calculated based on the
weighted average number of common shares outstanding during the period and, when
dilutive, potential common shares from the exercise of stock options and
restricted common stock subject to continuing vesting requirements, pursuant to
the treasury stock method.
 
 The
following table provides a reconciliation of the number of shares used to
calculate basic and diluted earnings (loss) per share (in
thousands):
   12
  Three
      Months EndedMarch
      31,
                                
                                
                                March
      31,2009
                                
                                
                                2008Basic
      earnings per common shareNet
      income (loss)
                                
                                $
                                28,171
                                
                                
                                
                                (16,688
                                )Income
      allocated to participating securities
                                
                                
                                (722
                                )
                                
                                
                                -Net
      income (loss) available to common shareholders
                                
                                $
                                27,449
                                
                                
                                
                                (16,688
                                )Weighted
      average number of common andcommon
      equivalent shares outstandingBasic
      number of common shares outstanding
                                
                                
                                26,692
                                
                                
                                
                                21,492Dilutive
      effect of unvested restricted stock (participatingsecurities)
                                
                                
                                701
                                
                                
                                
                                -Dilutive
      effect of stock options
                                
                                
                                23
                                
                                
                                
                                -Diluted
      number of common shares andcommon
      equivalent shares outstanding
                                
                                
                                27,416
                                
                                
                                
                                21,492Basic
      earnings (loss) per common share
                                
                                $
                                1.03
                                
                                
                                
                                (0.78
                                )Diluted
      net income per common shareNet
      income (loss)
                                
                                $
                                28,171
                                
                                
                                
                                (16,688
                                )Income
      allocated to participating securities
                                
                                
                                -
                                
                                
                                
                                -Net
      income (loss) available to potential  commonshareholders
                                
                                $
                                28,171
                                
                                
                                
                                (16,688
                                )Diluted
      net earnings (loss) per share
                                
                                $
                                1.03
                                
                                
                                
                                (0.78
                                )
  For
periods in which there was a loss, the Company has excluded from its diluted
loss per share calculation options to purchase shares with underlying exercise
prices less than the average market prices and the unvested portion of time
vested restricted shares, as inclusion of these securities would have reduced
the net loss per share.  The excluded instruments would have increased
the diluted weighted average number of common shares by approximately 0.7
million for the three months March 31, 2008.  In addition, in periods
of net losses, the Company has not allocated any portion of such losses to
participating securities holders for its basic loss per share calculation as
such participating securities holders are not contractually obligated to fund
such losses.
  (6)
              Pension
      Expense
  In 2007,
the Company froze pension plan benefit accruals for all employees covered under
its qualified non-contributory defined benefit pension plan.  The components of net
periodic benefit cost are as follows (amounts in thousands):
 
 Three
      Months EndedMarch
      31,
                            2009
                          
                          
                          March
      31,
                            2008Interest
      cost
                          
                          
                          915
                          
                          
                          
                          911Expected
      return on plan assets
                          
                          
                          (775
                          )
                          
                          
                          (1,089
                          )Amortization
      of actuarial loss
                          
                          
                          402
                          
                          
                          
                          —Net
      periodic (benefit) cost
                          
                          $
                          542
                          
                          
                          
                          (178
                          )
 
  (7)
              Pneumoconiosis
      (Black Lung) Benefits
  The
expense for black lung benefits consists of the following (amounts in
thousands):
 
 Three
      Months EndedMarch
      31,
                            2009
                          
                          
                          March
      31,
                            2008Service
      cost
                          
                          $
                          306
                          
                          
                          
                          120Interest
      cost
                          
                          
                          428
                          
                          
                          
                          491Amortization
      of actuarial gain
                          
                          
                          —
                          
                          
                          
                          (141
                          )Total
      expense
                          
                          $
                          734
                          
                          
                          
                          470
   13
 
 (8)
              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).
 
  Three
      Months EndedMarch
      31,2009
                                
                                
                                2008RevenuesCAPP
                                
                                $
                                167,635
                                
                                
                                $
                                115,479Midwest
                                
                                
                                24,486
                                
                                
                                
                                22,709Corporate
                                
                                
                                -
                                
                                
                                
                                -Total
                                
                                $
                                192,121
                                
                                
                                $
                                138,188Depreciation,
      depletion and amortizationCAPP
                                
                                $
                                11,157
                                
                                
                                $
                                13,539Midwest
                                
                                
                                3,301
                                
                                
                                
                                3,717Corporate
                                
                                
                                15
                                
                                
                                
                                34Total
                                
                                $
                                14,473
                                
                                
                                $
                                17,290Total
      operating income (loss)CAPP
                                
                                $
                                41,666
                                
                                
                                $
                                (5,134
                                )Midwest
                                
                                
                                (584
                                )
                                
                                
                                (3,110
                                )Corporate
                                
                                
                                (5,428
                                )
                                
                                
                                (3,922
                                )Total
                                
                                $
                                35,654
                                
                                
                                $
                                (12,166
                                )Net
      earnings (loss) (1)CAPP
                                
                                $
                                41,666
                                
                                
                                $
                                (5,134
                                )Midwest
                                
                                
                                (584
                                )
                                
                                
                                (3,110
                                )Corporate
                                
                                
                                (12,911
                                )
                                
                                
                                (8,444
                                )Total
                                
                                $
                                28,171
                                
                                
                                $
                                (16,688
                                )
  (1)  Income
and expense items that are not included in income (loss) from operations are not
allocated to the segments.
  14
  
 March
      31,
                                                        
                                                        
                                                        December
      31,2009
                                                        
                                                        
                                                        2008Total
      AssetsCAPP
                                                        
                                                        $
                                                        386,429
                                                        
                                                        
                                                        
                                                        336,631Midwest
                                                        
                                                        
                                                        89,804
                                                        
                                                        
                                                        
                                                        89,792Corporate
                                                        
                                                        
                                                        20,539
                                                        
                                                        
                                                        
                                                        37,123Total
                                                        
                                                        $
                                                        496,772
                                                        
                                                        
                                                        
                                                        463,546GoodwillCAPP
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        
                                                        -Midwest
                                                        
                                                        
                                                        26,492
                                                        
                                                        
                                                        
                                                        26,492Corporate
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Total
                                                        
                                                        $
                                                        26,492
                                                        
                                                        
                                                        
                                                        26,492
  
  
         15
  
 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, 2008.
 
 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 90% of our total revenues (contract and spot) in the
three months ended March 31, 2009 from coals sales to electric utility customers
and the remaining 10% from coal sales to industrial and other
companies.
 
 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, 2009, CAPP produced 2.1 million tons of coal
(including contract coal and purchased coal). Of the CAPP tons produced, 82%
came from Company operated underground mines. For the three months ended March
31, 2009, we shipped 1.8 million tons of coal and generated coal sale revenues
of $167.6 million from our CAPP segment. For the three months ended March 31,
2009, Georgia Power Company and South Carolina Public Service Authority were our
largest customers, representing approximately 36% and 37% 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, 2009, our Midwest mines produced 0.8
million tons of coal. Of the Midwest tons produced, 83% came from Company
operated surface mines. For the three months ended March 31, 2009, we shipped
0.8 million tons of coal and generated coal sale revenues of $24.5 million from
our Midwest segment. For the three months ended March 31, 2009, our Midwest
segment’s largest customer was Indiana Power and Light which represented
approximately 4% of our total revenues.
  Results
of Operations
 
 Three
Months Ended March 31, 2009 Compared with the Three Months Ended March 31,
2008
 
 The
following tables show selected operating results for the three months ended
March 31, 2009 compared to the three months ended March 31, 2008 (in thousands
except per ton amounts).
  16
  Three
      Months Ended March 312009
                                
                                
                                2008
                                
                                
                                ChangeTotal
                                
                                
                                Per
      Ton
                                
                                
                                Total
                                
                                
                                Per
      Ton
                                
                                
                                TotalVolume
      shipped (tons)
                                
                                
                                2,631
                                
                                
                                
                                
                                
                                
                                2,922
                                
                                
                                
                                
                                
                                
                                -10
                                %Revenues
                                
                                $
                                192,121
                                
                                
                                
                                73.02
                                
                                
                                $
                                138,188
                                
                                
                                
                                47.29
                                
                                
                                
                                39
                                %Cost
      of coal sold
                                
                                
                                132,707
                                
                                
                                
                                50.44
                                
                                
                                
                                125,730
                                
                                
                                
                                43.03
                                
                                
                                
                                6
                                %Depreciation,
      depletion and amortization
                                
                                
                                14,473
                                
                                
                                
                                5.50
                                
                                
                                
                                17,290
                                
                                
                                
                                5.92
                                
                                
                                
                                -16
                                %Gross
      profit (loss)
                                
                                
                                44,941
                                
                                
                                
                                17.08
                                
                                
                                
                                (4,832
                                )
                                
                                
                                (1.65
                                )
                                
                                
                                N/ASelling,
      general and administrative
                                
                                
                                9,287
                                
                                
                                
                                3.53
                                
                                
                                
                                7,334
                                
                                
                                
                                2.51
                                
                                
                                
                                27
                                %
 
 Volume
and Revenues by Segment
  Three
      Months Ended March 31,2009
                                                                        
                                                                        
                                                                        2008CAPP
                                                                        
                                                                        
                                                                        Midwest
                                                                        
                                                                        
                                                                        CAPP
                                                                        
                                                                        
                                                                        MidwestVolume
      (tons shipped)
                                                                        
                                                                        
                                                                        1,844
                                                                        
                                                                        
                                                                        
                                                                        787
                                                                        
                                                                        
                                                                        
                                                                        2,197
                                                                        
                                                                        
                                                                        
                                                                        725Coal
      sales revenue
                                                                        
                                                                        $
                                                                        167,635
                                                                        
                                                                        
                                                                        
                                                                        24,486
                                                                        
                                                                        
                                                                        
                                                                        115,479
                                                                        
                                                                        
                                                                        
                                                                        22,709Average
      sales price per ton
                                                                        
                                                                        $
                                                                        90.91
                                                                        
                                                                        
                                                                        
                                                                        31.11
                                                                        
                                                                        
                                                                        
                                                                        52.56
                                                                        
                                                                        
                                                                        
                                                                        31.32
 
 Coal
sales revenue for the three months ended March 31, increased from $138.2 million
in 2008 to $192.1 million in 2009. This increase was due to an increase in the
average sales price per ton in the CAPP region and an increase in tons shipped
in the Midwest region.  This increase was partially offset by a
decrease in tons shipped in the CAPP region.
 
 For the
three months ended March 31, 2009, the CAPP region sold approximately 1.6
million tons of coal under long-term contracts (88% of total CAPP sales volume)
at an average selling price of $91.65 per ton. For the three months ended March
31, 2008, the CAPP region sold approximately 1.0 million tons of coal under
long-term contracts (44% of total CAPP sales volume) at an average selling price
of $48.64 per ton.  For the three months ended March 31, 2009, the
CAPP region sold 0.2 million tons of coal (12% of total CAPP sales volume) under
short term contracts (includes spot sales) at an average selling price of $85.75
per ton. For the three months ended March 31, 2008, the CAPP region sold 1.2
million tons of coal (56% of total CAPP sales volume) under short term contracts
(includes spot sales) at an average selling price of $55.60 per
ton.
 
 The
Midwest’s region sales of coal were under long term contracts for both the 2009
and 2008 periods.  For the three months ended March 31, 2009, the
Midwest region sold 787,000 tons at an average sales price of
$31.11.  For the three months ended March 31, 2008, the Midwest region
sold 725,000 tons at an average sales price of $31.32.
 
 Operating
Costs by Segment
  Three
      Months Ended March 31,2009
                          
                          
                          2008CAPP
                          
                          
                          Midwest
                          
                          
                          Corporate
                          
                          
                          CAPP
                          
                          
                          Midwest
                          
                          
                          CorporateCost
      of coal sold
                          
                          $
                          111,484
                          
                          
                          
                          21,223
                          
                          
                          
                          -
                          
                          
                          
                          104,110
                          
                          
                          
                          21,620
                          
                          
                          
                          -Per
      ton
                          
                          
                          60.46
                          
                          
                          
                          26.97
                          
                          
                          
                          -
                          
                          
                          
                          47.39
                          
                          
                          
                          29.82
                          
                          
                          
                          -Depreciation,
      depletion and amortization
                          
                          
                          11,157
                          
                          
                          
                          3,301
                          
                          
                          
                          15
                          
                          
                          
                          13,539
                          
                          
                          
                          3,717
                          
                          
                          
                          34Per
      ton
                          
                          
                          6.05
                          
                          
                          
                          4.19
                          
                          
                          
                          -
                          
                          
                          
                          6.16
                          
                          
                          
                          5.13
                          
                          
                          
                          -
 
  17
   Cost of Coal Sold
  For the
three months ended March 31, the cost of coal sold, excluding depreciation,
depletion and amortization, increased from $125.7 million in 2008 to $132.7
million in 2009.  Our cost per ton of coal sold in the CAPP region
increased from $47.39 per ton in the 2008 period to $60.46 per ton in the 2009
period.  This $13.07 increase in cost per ton of coal sold was
primarily the result of lower productivity due to increased federal and state
regulatory scrutiny which caused an increase in labor costs as compared to prior
year, an increase in machine parts and repairs costs, and the impact of
increased average sales prices on our sales related costs (primarily royalties
and severance taxes). The major components of this increase include an increase
in the Company’s labor and benefit costs of $2.87 per ton, variable costs of
$2.91 per ton and sales related costs of $4.52 per
ton.    For more detail regarding the increased regulatory
activity see “Part II – Item 1A – Risk Factors – Underground mining is subject
to increased regulation, and may require us to incur additional
cost.”
 
 Our cost
per ton of coal sold in the Midwest decreased $2.85 per ton to $26.97 per ton in
the 2009 period.  The decrease in cost per ton of coal sold was
primarily due to a $2.67 decrease in variable costs.  The decrease in
the variable costs was due to a decrease in diesel and explosives
costs.
 
 Depreciation,
depletion and amortization
  For the
three months ended March 31, depreciation, depletion and amortization decreased
from $17.3 million in 2008 to $14.5 million in 2009.  In the CAPP
region, depreciation, depletion and amortization decreased $2.4 million to $11.2
million or $6.05 per ton.  In the Midwest, depreciation, depletion and
amortization decreased $0.4 million to $3.3 million or $4.19 per
ton.
  Selling,
general and administrative
  Selling,
general and administrative expenses increased from $7.3 million for the three
months ended March 31, 2008 to $9.3 million for the three months ended March 31,
2009.  The increase was primarily due to higher letter of credit fees,
and an increase in certain salary and benefit amounts, including stock
compensation.
  Income
Taxes
 
 Our
effective tax rate for the three months ended March 31, 2009 and 2008 was 11.1%
and 0.0%, respectively.  Our effective income tax rate is impacted
primarily by changes in the amount of the valuation allowance recorded and the
effects of percentage depletion.  For 2008, our effective tax rate was
impacted by the conclusion that a benefit from the expected net operating
loss was not more likely than not to be realized.  For 2009, we expect
that a portion of the net operating loss carryforward will be utilized to reduce
current tax expense, and therefore the valuation allowance will be
reduced.  The criteria for recording a valuation allowance are
described in “Critical Accounting Estimates – Income Taxes.”  As of
March 31, 2009, we had a $50.7 million 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.
 
 Liquidity
and Capital Resources
 
 The
following chart reflects the components of our debt as of March 31, 2009 and
December 31, 2008:
 
 March
      31,
                        2009
                      
                      
                      December
      31,
                        2008Senior
      Notes
                      
                      $
                      150,000
                      
                      
                      $
                      150,000Revolver
                      
                      
                      9,000
                      
                      
                      
                      18,000Total
      long-term debt
                      
                      
                      159,000
                      
                      
                      
                      168,000Less
      amounts classified as current
                      
                      
                      9,000
                      
                      
                      
                      18,000Total
      long-term debt, less current maturities
                      
                      $
                      150,000
                      
                      
                      $
                      150,000
  The
Senior Notes are due on June 1, 2012.  The Senior Notes are unsecured
and accrue interest at 9.375% per annum. Interest payments on the Senior Notes
are required semi-annually. We may redeem the Senior Notes, in whole or in part,
at any time on or after June 1, 2009 at redemption prices from 104.86% in 2009
to 100% in 2011. The Senior Notes limit our ability, among other things, to pay
cash dividends. In addition, if a change of control occurs (as defined in the
Indenture), each holder of the Senior Notes will have the right to require us to
repurchase all or a part of the Senior Notes at a price equal to 101% of their
principal amount, plus any accrued interest to the date of
repurchase.
  18
  
 In 2007,
we entered into a $35.0 million Revolving Credit Agreement (the Revolver) and a
Term Credit Agreement (collectively the Facilities). The Term Credit Agreement
consists of a term facility (the Term Facility) and a $60.0 million letter of
credit facility (the Letter of Credit Facility).  We repaid the
outstanding balance of the Term Facility in October 2008 and used $5.2 million
of our cash to secure letters of credit under the Letter of Credit
Facility.  The $5.2 million of cash used to secure the letters of
credit under the Letter of Credit Facility is included in other assets on our
consolidated balance sheets as of March 31, 2009 and December 31,
2008.   The Letter of Credit Facility does not constitute a loan
and accordingly is not available for borrowing.  The Letter of Credit
Facility supports the issuance of up to $60.0 million of letters of
credit.
 
 The
following is a summary of significant terms of the outstanding portion of our
Facilities, as amended, as of March 31, 2009.
 
 Revolver
                      Letter
      of Credit FacilityMaturity
                      February
      2012(c)
                      February
      2013Interest/Usage
      Rate
                      Our
      option of Base Rate(a)
      plus 1.75% or LIBOR plus 2.75% per annum
                      10.0%
      effective January 1, 2009; and 12.5% effective April 1, 2009 to the Letter
      of Credit Facility’s maturity date.Maximum
      Availability
                      Lesser
      of $35.0 million or the borrowing base (b)
                      $60.0
      millionPeriodic
      Principal Payments
                      None
                      Not
      applicable
 
 (a)
                Base
      rate is the higher of (1) the Federal Fund Rate plus 0.5%, and (2) the
      prime rate.(b)
                The
      Revolver’s borrowing base is the sum of up to 85% of the eligible accounts
      receivable plus the lesser of (1) up to 60% of eligible inventory and (2)
      up to 85% of the net orderly liquidation value of eligible inventory;
      minus reserve from time to time set by administrative
      agent.  Amount available is also subject to a minimum liquidity
      covenant.(c)
                The
      Revolver is classified as current on our balance sheet based on our intent
      to pay the balance within the next
year.
  The
Revolver provides that we can use up to $10.0 million of the Revolver
availability to issue letters of credit. The Revolver provides for a 2.75% fee
on any outstanding letters of credit issued under the Revolver and a 0.75% fee
on the unused portion of the Revolver. The Facilities require certain mandatory
prepayments from certain asset sales, incurrence of indebtedness and excess cash
flow. The Facilities include financial covenants that require us to maintain a
minimum EBITDA, a minimum liquidity level and a maximum leverage ratio and
limits capital expenditures, each as defined by the agreement. The Facilities
are secured by substantially all of our assets.
 
 As of
March 31, 2009, we had $35.0 million of availability under our
Revolver.  We are currently required to maintain minimum liquidity as
defined under our credit agreements of $10.0 million and as a result had $16.0
million of borrowing capacity at March 31, 2009.   At March 31, 2009,
we also had $9.8 million of cash and cash equivalents.
 
 We were
in compliance with all of the financial covenants under the Facilities and
Senior Notes as of March 31, 2009.  We cannot assure you that we will
remain in compliance in subsequent periods.  If necessary, we will
consider seeking a waiver or other alternatives to remain
in compliance with the covenants.  For more detail regarding the
covenants under the Facilities, see Part II - Item 1A - Risk Factors - “We may
be unable to comply with restrictions imposed by the terms of our indebtedness,
which could result in a default under these
instruments.”
 
 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 with state regulatory departments to guarantee these
payments and have issued letters of credit to secure these bonds. We believe
that our Letter of Credit Facility and Revolver provide us with the ability to
meet the necessary bonding requirements.
  19
  
 Our
secondary source of cash is the Revolver.  We believe that cash
generated from operations, borrowings under our credit facilities and future
debt and equity offerings, if any, will be sufficient to meet working capital
requirements, anticipated capital expenditures and scheduled debt payments
throughout 2009 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 Senior Notes and the Facilities
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.
 
 Net cash
from operating activities reflects net income or loss adjusted for non-cash
charges and changes in net working capital (including non-current operating
assets and liabilities). Net cash provided by operating activities was $27.9
million for the three months ended March 31, 2009 and net cash used by operating
activities was $1.0 million for the three months ended March 31,
2008.  We had net income of $28.2 million in the three months ended
March 31, 2009 as compared to a net loss of $16.7 million in the three months
ended March 31, 2008.  In reconciling our net income (loss) to cash
provided by operating activities, $17.1 million was added for non cash
charges during 2009, as compared to a $19.2 million during
2008.  During 2009, our net income, as adjusted for non cash charges,
was decreased by a $19.1 million decrease in cash from our operating assets and
liabilities.  The $17.4 million change in our operating assets and
liabilities for 2009, includes an $18.0 million increase in accounts receivable
and a $14.9 million increase in inventory.  During 2008, our net loss,
as adjusted for non cash charges, was offset by a $3.5 million decrease in cash
from our operating assets and liabilities.
 
 Net cash
used in investing activities increased by $4.1 million to $12.4 million for the
three months ended March 31, 2009 as compared to the same period in
2008.  Capital expenditures primarily consisted of new and replacement
mine equipment and various projects to improve the production and efficiency of
our mining operations.
 
 Net cash
used by financing activities was $9.0 million for the three months ended March
31, 2009 and consisted of net repayments on the Revolver.  Net cash
provided by financing activities was $49.7 million for the three months ended
March 31, 2008. The cash provided by financing in the three months ended March
31, 2008 was primarily the result of the receipt of $50.1 million of net
proceeds from the issuance of common stock.
 
  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.
  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”.
 
  20
  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, 2009, we estimate that, as of March 31, 2009, we
controlled approximately 232.8 million tons of proven and probable coal reserves
in the CAPP region and 41.6 millions tons in the Midwest region.  The
following table provides additional information regarding changes to our
reserves since December 31, 2008 (in millions of tons):
 
 CAPP
                                                  
                                                  
                                                  Midwest
                                                  
                                                  
                                                  TotalProven
      and Probable Reserves, as of December 31, 2008 (1)
                                                  
                                                  
                                                  235.1
                                                  
                                                  
                                                  
                                                  42.0
                                                  
                                                  
                                                  
                                                  277.1Coal
      Extracted
                                                  
                                                  
                                                  (2.0
                                                  )
                                                  
                                                  
                                                  (0.8
                                                  )
                                                  
                                                  
                                                  (2.8
                                                  )Acquisitions
      (2)
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  0.3
                                                  
                                                  
                                                  
                                                  0.3Adjustments
      (3)
                                                  
                                                  
                                                  (0.3
                                                  )
                                                  
                                                  
                                                  0.1
                                                  
                                                  
                                                  
                                                  (0.2
                                                  )Divesture
      (4)
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Proven
      and Probable Reserves, as of March 31, 2009 (1)
                                                  
                                                  
                                                  232.8
                                                  
                                                  
                                                  
                                                  41.6
                                                  
                                                  
                                                  
                                                  274.4
 
 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 leases.
 
 
 Key
Performance Indicators
 
 We manage
our business through several key performance metrics that provide a summary of
information in the areas of sales, operations, and general and administrative
costs.
 
 In the
sales area, our long-term metrics are the volume-weighted average remaining term
of our contracts and our open contract position for the next several years.
During periods of high prices, we may seek to lengthen the average remaining
term of our contracts and reduce the open tonnage for future periods. In the
short-term, we closely monitor the Average Selling Price per Ton (ASP), and the
mix between our spot sales and contract sales.
 
 In the
operations area, we monitor the volume of coal that is produced by each of our
principal sources, including company mines, contract mines, and purchased coal
sources. For our company mines, we focus on both operating costs and operating
productivity. We closely monitor the cost per ton of our mines against our
budgeted costs and against our other mines.
 
 EBITDA
and Adjusted EBITDA are also measures used by management to measure operating
performance. We define EBITDA as net income (loss) plus interest expense (net),
income tax expense (benefit) and depreciation, depletion and amortization. We
regularly use EBITDA to evaluate our performance as compared to other companies
in our industry that have different financing and capital structures and/or tax
rates. In addition, we use EBITDA in evaluating acquisition targets. EBITDA is
not a recognized term under US GAAP and is not an alternative to net income,
operating income or any other performance measures derived in accordance with US
GAAP or an alternative to cash flow from operating activities as a measure of
operating liquidity.  Adjusted EBITDA is used in calculating
compliance with our debt covenants and adjusts EBITDA for certain items as
defined in our debt agreements, including stock compensation and certain bank
fees.  See “Other Supplemental Information  — 
Reconciliation of Non-US GAAP Measures.”
  21
  
 In the
selling, general and administrative area, we closely monitor the gross dollars
spent per mine operation and in support functions. We also regularly measure our
performance against our internally-prepared budgets.
 
 Trends
In Our Business
 
 Near-term,
the global economic slowdown has lowered demand for coal which has resulted in a
decline in spot coal prices.  The price of spot coal has also been
impacted by a decrease in the price of competing fuel sources including oil and
natural gas.  Recently, the coal industry has announced cutbacks in
supply in response to decrease in demand for coal.  Due to the
uncertainties in the global market place, we are unable to forecast the price or
demand for coal over the next few years.  Long-term, we believe that
the demand for coal worldwide will continue to be strong as supply challenges
will continue in the regions that we mine coal.  We also believe that
in the United States coal will continue to be one of the most economical energy
sources.   A number of factors beyond our control impact coal
prices, including:
 
 ·
                the supply of domestic and
      foreign coal;
 ·
                the demand for
      electricity;
 ·
                the demand for steel and the
      continued financial viability of the domestic and foreign steel
      industries;
 ·
                the cost of transporting coal to
      the customer;
 ·
                domestic
      and foreign governmental regulations and
taxes;
 ·
                world
      economic conditions
 ·
                air emission standards for
      coal-fired power plants;
and
 ·
                the price and availability of
      alternative fuels for electricity
  generation.
 
 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.  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.
 
 We use
surety bonds to secure reclamation, workers’ compensation and other
miscellaneous obligations. At March 31, 2009, we had $103.4 million of
outstanding surety bonds with third parties. These bonds were in place to secure
obligations as follows: post-mining reclamation bonds of $59.6 million, workers’
compensation bonds of $40.3 million, wage payment, collection bonds, and other
miscellaneous obligation bonds of $3.5 million. Recently, surety bond costs have
increased and the market terms of surety bonds have generally become less
favorable. To the extent that surety bonds become unavailable, we would seek to
secure obligations with letters of credit, cash deposits, or other suitable
forms of collateral.
 
 We also
use bank letters of credit to secure our obligations for workers’ compensation
programs, various insurance contracts and other obligations.  At March
31, 2009, we had $60.0 million of letters of credit outstanding.  The
letters of credits were issued under our Letter of Credit
Facility.  In addition, we may use up to $10 million of our $35
million Revolver for the issuance of additional letters of credit, if
necessary.
 
  22
  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.  U.S. generally accepted accounting principles
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 list and describe our significant accounting
policies.  The following critical accounting policies have a material
affect on amounts reported in our condensed consolidated financial
statements.
 
 Workers'
Compensation
 
 We are
liable under various state statutes for providing workers’ compensation
benefits. To fulfill these obligations, we have used self-insurance programs
with varying excess insurance levels, and, since June 7, 2002, a
high-deductible, fully insured program. The high deductible, fully insured
program is comparable to a self-insured program where the excess insurance
threshold equals the deductible level. In June of 2005, we became self insured
for workers’ compensation for our Kentucky operations.
 
 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 6.0% at
December 31, 2008.  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 6.0% to 5.5%, all other things
being equal, the present value of our workers’ compensation obligation would
increase by approximately $1.7 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, 2009 was $56.8
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 these
benefits through self-insurance programs and, for those claims incurred with
last exposure after June 6, 2002, a high-deductible, fully insured
program.
 
 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 5.75% at December 31, 2008. 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 5.75% to 5.25%, all other things being equal, the present value of our
black lung obligation would increase by approximately $2.1 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, 2009 was $31.2
million.
 
 Defined
Benefit Pension
 
 We have
in place a non-contributory defined benefit pension plan under which all
benefits were frozen in 2007.  The estimated cost and benefits of our
non-contributory defined benefit pension plans are determined annually by
independent actuaries, who, with our review and approval, use various actuarial
assumptions, including discount rate and expected long-term rate of return on
pension plan assets. In estimating the discount rate, we look to rates of return
on high-quality, fixed-income investments with comparable maturities. At
December 31, 2008, the discount rate used to determine the obligation was 6.0%.
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 6.0% to 5.5%, all other things being equal, the present value
of our projected benefit obligation would increase by approximately $4.4
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 periods ended March 31, 2009. Significant changes
to these rates would introduce volatility to our pension expense.  Our
accrued pension obligation as of March 31, 2009 was $19.8
million.
  23
  
 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, 2009 was $42.1 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. Unless otherwise noted,
management does not believe that the outcome or timing of current legal or
environmental matters will have a material impact on our financial condition,
results of operations, or cash flows.  See the notes to the
consolidated financial statements for further discussion on our
contingencies.
 
 Income
Taxes
 
 We
account for income taxes in accordance with FASB Statement No. 109, Accounting
for Income Taxes (“Statement No. 109”), which requires that deferred tax assets
and liabilities be recognized using enacted tax rates for the effect of
temporary differences between the book and tax bases of recorded assets and
liabilities. Statement No. 109 also requires that deferred tax assets 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
recorded no tax benefit in 2008, based on the conclusion that the benefit
of the 2008 net operating loss carryforward does not meet the more likely than
not criteria to be realized.  In 2009, the Company expects to realize
some benefit from its net operating loss carryforwards. As of March 31, 2009,
the Company had recorded a $50.7 million valuation allowance against its gross
deferred tax assets.
 
 Coal
Reserves
 
 There are
numerous uncertainties inherent in estimating quantities and values of
economically recoverable coal reserves. Many of these uncertainties are beyond
our control. As a result, estimates of economically recoverable coal reserves
are by their nature uncertain. Information about our reserves consists of
estimates based on engineering, economic and geological data initially assembled
by our staff and analyzed by Marshall Miller & Associates, Inc. (MM&A).
The reserve information has subsequently been updated by our staff. The updates
to the reserves have been calculated in the same manner, and based on similar
assumptions and qualifications, as used in the MM&A studies described above,
but these updates to the reserve estimates have not been reviewed by
MM&A.  A number of sources of information were used to determine
accurate recoverable reserves estimates, including:
 
 ·
              all
      currently available data;
 
 ·
              our
      own operational experience and that of our
  consultants;
 
 ·
              historical
      production from similar areas with similar
  conditions;
 
 ·
              previously
      completed geological and reserve
studies;
 
 ·
              the
      assumed effects of regulations and taxes by governmental agencies;
      and
 
 ·
              assumptions
      governing future prices and future operating
  costs.
  24
  
 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;·
                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.
 
  25
  Recent
Accounting Pronouncements
 In June
2008, the FASB issued FASB Staff Position Emerging Issues Task Force
No. 03-6-1,Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities (FSP EITF 03-6-1). FSP EITF 03-6-1
addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting, and therefore need to be included in
the earnings allocation in computing earnings per share under the two-class
method as described in SFAS No. 128, “Earnings per Share.” Under the
guidance of FSP EITF 03-6-1, unvested share-based payment awards that
contain non-forfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and shall be included in the
computation of earnings per share pursuant to the two-class method. Our unvested
restricted stock awards are considered “participating securities” because they
contain non-forfeitable rights to dividends. FSP EITF 03-6-1 is effective
for financial statements issued for fiscal years beginning after
December 15, 2008, and all prior-period earnings per share data presented
has been adjusted retrospectively.
  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 our debt to a
multiple of adjusted EBITDA.  Adjusted EBITDA and the leverage ratio
are used to determine compliance with financial covenants and our ability to
engage in certain activities such as incurring additional debt and making
certain payments.
 
 EBITDA,
Adjusted EBITDA, and the leverage ratio are not recognized terms under US GAAP
and are not an alternative to net income, operating income or any other
performance measures derived in accordance with US GAAP or an alternative to
cash flow from operating activities as a measure of operating liquidity. 
Because not all companies use identical calculations, this presentation of
EBITDA, Adjusted EBITDA and the leverage ratio may not be comparable to other
similarly titled measures of other companies.  Additionally, EBITDA or
Adjusted EBITDA are not intended to be a measure of free cash flow for
management’s discretionary use, as they do not reflect certain cash requirements
such as tax payments, interest payments and other contractual
obligations.
 
 The
leverage ratio is calculated as the Company’s Senior Funded Indebtedness divided
by annualized adjusted EBITDA as calculated below.  The Senior Funded
Indebtedness as of March 31, 2009 is $63.8 million and includes the amounts
outstanding under our revolver and amounts of the letters of credit available to
be issued under our letter of credit facility as of March 31, 2009.
 
 Three
      months endedMarch
      31
                        
                        
                        March
      312009
                        
                        
                        2008Net
      income (loss)
                        
                        $
                        28,171
                        
                        
                        
                        (16,688
                        )Income
      tax expense
                        
                        
                        3,509
                        
                        
                        
                        -Interest
      expense
                        
                        
                        4,053
                        
                        
                        
                        4,889Interest
      income
                        
                        
                        (25
                        )
                        
                        
                        (88
                        )Depreciation,
      depletion, and amortization
                        
                        
                        14,473
                        
                        
                        
                        17,290EBITDA
      (before adjustments)
                        
                        $
                        50,181
                        
                        
                        
                        5,403Other
      adjustments specifiedin
      our current debt agreement:Other
      adjustments
                        
                        
                        3,013
                        
                        
                        
                        2,252Adjusted
      EBITDA
                        
                        $
                        53,194
                        
                        
                        
                        7,655
   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 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;
      and
 
 ·
              our plans and objectives for future operations and
      expansion or consolidation.
 
 Any forward-looking statements are
subject to the risks and uncertainties that could cause actual cash flows,
results of operations, financial condition, cost reductions, acquisitions,
dispositions, financing transactions, operations, expansion, consolidation and
other events to differ materially from those expressed or implied in such
forward-looking statements. Any forward-looking statements are also subject to a
number of assumptions regarding, among other things, future economic,
competitive and market conditions generally. These assumptions would be based on
facts and conditions as they exist at the time such statements are made as well
as predictions as to future facts and conditions, the accurate prediction of
which may be difficult and involve the assessment of events beyond our
control.
 
 We wish
to caution readers that forward-looking statements, including disclosures which
use words such as “believe,” “intend,” “expect,” “may,” “should,” “anticipate,”
“could,” “estimate,” “plan,” “predict,” “project,” or their negatives, and
similar statements, are subject to certain risks and uncertainties which could
cause actual results to differ materially from expectations. These risks and
uncertainties include, but are not limited to, the following: a change in the
demand for coal by electric utility customers; the loss of one or more of our
largest customers; inability to secure new coal supply agreements or to extend
existing coal supply agreements at market prices; our dependency on one railroad
for transportation of a large percentage of our products; failure to exploit
additional coal reserves; the risk that reserve estimates are inaccurate;
failure to diversify our operations; increased capital expenditures;
encountering difficult mining conditions; increased costs of complying with mine
health and safety regulations; bottlenecks or other difficulties in transporting
coal to our customers; delays in the development of new mining projects;
increased costs of raw materials; the effects of litigation, regulation and
competition; lack of availability of financing sources; our compliance with debt
covenants; the risk that we are unable to successfully integrate acquired assets
into our business; and the risk factors set forth in this 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
 
 Our $150
million Senior Notes have a fixed interest rate and are not sensitive to changes
in the general level of interest rates.  Our Revolver has floating
interest rates based on our option of either the base rate or LIBOR
rate.  As of March 31, 2009, we had $9 million 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 87% for the three month
ended March 31, 2009.
 
 All of
our transactions are denominated in U.S. dollars, and, as a result, we do not
have material exposure to currency exchange-rate risks.
 
 We are
not engaged in any foreign currency exchange rate or commodity price-hedging
transactions and we have no trading market risk.
 
 ITEM
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, 2009 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.
 
 
 
 
  28
  
 PART
II
 OTHER
INFORMATION
 
 
 
 ITEM
1.  LEGAL PROCEEDINGS
 
 We are
party to a number of legal proceedings incidental to our normal business
activities, including a large number of workers’ compensation
claims.  While we cannot predict the outcome of these proceedings, in
our opinion, any liability arising from these matters individually and in the
aggregate should not have a material adverse effect on our consolidated
financial position, cash flows or results of operations.
 
 
 ITEM
1A. RISK FACTORS
 
 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 90% of our total revenues (contract and spot) for the three months ended
March 31, 2009 and 81% of our total revenues in 2008, from our electric utility
customers. Fuel cost is a significant component of the cost associated with
coal-fired power generation, with respect to not only the price of the coal, but
also the costs associated with emissions control and credits (i.e., sulfur dioxide,
nitrogen oxides, etc.), combustion by-product disposal (i.e., ash) and equipment
operations and maintenance (i.e., materials handling
facilities). All of these costs must be considered when choosing between coal
generation and alternative methods, including natural gas, nuclear,
hydroelectric and others.
 
 Weather
patterns also can greatly affect electricity generation. Extreme temperatures,
both hot and cold, cause increased power usage and, therefore, increased
generating requirements from all sources. Mild temperatures, on the other hand,
result in lower electrical demand, which allows generators to choose the
lowest-cost sources of power generation when deciding which generation sources
to dispatch. Accordingly, significant changes in weather patterns could reduce
the demand for our coal.
  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
   29
  Any
decrease in the amount of coal exported from the United States, or any increase
in the amount of coal imported into the United States, could have a material
adverse impact on the demand for our coal, our pricing and our
profitability.
 
 Increased
consolidation and competition in the U.S. coal industry may adversely affect our
revenues and profitability.
  During
the last several years, the U.S. coal industry has experienced increased
consolidation, which has contributed to the industry becoming more competitive.
Consequently, many of our competitors in the domestic coal industry are major
coal producers who have significantly greater financial resources than us. The
intense competition among coal producers may impact our ability to retain or
attract customers and may therefore adversely affect our future revenues and
profitability.
  Fluctuations
in transportation costs and the availability and dependability of transportation
could affect the demand for our coal and our ability to deliver coal to our
customers.
  Increases
in transportation costs could have an adverse effect on demand for our coal.
Customers choose coal supplies based, primarily, on the total delivered cost of
coal. Any increase in transportation costs would cause an increase in the total
delivered cost of coal. That could cause some of our customers to seek less
expensive sources of coal or alternative fuels to satisfy their energy needs. In
addition, significant decreases in transportation costs from other
coal-producing regions, both domestic and international, could result in
increased competition from coal producers in those regions. For instance, coal
mines in the western United States could become more attractive as a source of
coal to consumers in the eastern United States, if the costs of transporting
coal from the West were significantly reduced.
 
 Our
Central Appalachia mines generally ship coal via rail systems. During 2008, we
shipped in excess of 95% of our coal from our Central Appalachia mines via CSX.
In the Midwest, we shipped approximately 63% of our produced coal by truck and
the remainder via rail systems.  We believe that our 2009
transportation modes will be comparable to those used in 2008.  Our
dependence upon railroads and third party trucking companies impacts our ability
to deliver coal to our customers. Disruption of service due to weather-related
problems, strikes, lockouts, bottlenecks and other events could temporarily
impair our ability to supply coal to our customers, resulting in decreased
shipments. Decreased performance levels over longer periods of time could cause
our customers to look elsewhere for their fuel needs, negatively affecting our
revenues and profitability.
  In past
years, the major eastern railroads (CSX and Norfolk Southern) have experienced
periods of increased overall rail traffic due to an expanding economy and
shortages of both equipment and personnel. This increase in traffic could impact
our ability to obtain the necessary rail cars to deliver coal to our customers
and have an adverse impact on our financial results.
 
 Shortages or
increased costs of skilled labor in the Central Appalachian coal region may
hamper our ability to achieve high labor productivity and competitive
costs.
  Coal
mining continues to be a labor-intensive industry. As the demand for coal has
increased, many producers have attempted to increase coal production, which has
resulted in a competitive market for the limited supply of trained coal miners
in the Central Appalachian region. In some cases, this market situation has
caused compensation levels to increase, particularly for “skilled” positions
such as electricians and mine foremen. To maintain current production levels, we
may be forced to respond to these 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.
   30
  
 Complying
with these requirements, including the terms of our permits, has had, and will
continue to have, a significant effect on our costs of operations. We could
incur substantial costs, including clean up costs, fines, civil or criminal
sanctions and third party claims for personal injury or property damage as a
result of violations of or liabilities under these laws and
regulations.
  The coal
industry is also affected by significant legislation mandating specified
benefits for retired miners. In addition, the utility industry, which is the
most significant end user of coal, is subject to extensive regulation regarding
the environmental impact of its power generating activities. Coal contains
impurities, including sulfur, mercury, chlorine and other elements or compounds,
many of which are released into the air when coal is burned. Stricter
environmental regulations of emissions from coal-fired electric generating
plants could increase the costs of using coal, thereby reducing demand for coal
as a fuel source or the volume and price of our coal sales, or making coal a
less attractive fuel alternative in the planning and building of utility power
plants in the future.
  New
legislation, regulations and orders adopted or implemented in the future (or
changes in interpretations of existing laws and regulations) may materially
adversely affect our mining operations, our cost structure and our customers’
operations or ability to use coal.
  The
majority of our coal supply agreements contain provisions that allow the
purchaser to terminate its contract if legislation is passed that either
restricts the use or type of coal permissible at the purchaser’s plant or
results in too great an increase in the cost of coal. These factors and
legislation, if enacted, could have a material adverse effect on our financial
condition and results of operations.
 
 The
passage of legislation responsive to the Framework Convention on Global Climate
Change or similar governmental initiatives could result in restrictions on coal
use.
  The
United States and more than 160 other nations are signatories to the 1992
Framework Convention on Global Climate Change, commonly known as the Kyoto
Protocol, which is intended to limit or capture emissions of greenhouse gases,
such as carbon dioxide. In December 1997, the signatories to the convention
established a potentially binding set of emissions targets for developed
nations. Although the specific emissions targets vary from country to country,
the United States would be required to reduce emissions to 93% of 1990 levels
over a five-year budget period from 2008 through 2012. The U.S. Senate has not
ratified the treaty commitments.  The current administration could
support the effort to ratify the treaty. With Russia’s ratification of the Kyoto
Protocol in 2004, it became binding on all ratifying countries. The
implementation of the Kyoto Protocol in the United States and other countries,
and other emissions limits, such as those adopted by the European Union, could
affect demand for coal outside the United States. If the Kyoto Protocol or other
comprehensive legislation focusing on greenhouse gas emissions is enacted by the
United States, it could have the effect of restricting the use of
coal.  Other efforts to reduce emissions of greenhouse gases and
federal initiatives to encourage the use of natural gas also may affect the use
of coal as an energy source.
  We
are subject to the federal Clean Water Act and similar state laws which impose
treatment, monitoring and reporting obligations.
  The
federal Clean Water Act and corresponding state laws affect coal mining
operations by imposing restrictions on discharges into regulated waters. Permits
requiring regular monitoring and compliance with effluent limitations and
reporting requirements govern the discharge of pollutants into regulated waters.
New requirements under the Clean Water Act and corresponding state laws could
cause us to incur significant additional costs that adversely affect our
operating results.
  Regulations
have expanded the definition of black lung disease and generally made it easier
for claimants to assert and prosecute claims, which could increase our exposure
to black lung benefit liabilities.
  In
January 2001, the United States Department of Labor amended the regulations
implementing the federal black lung laws to give greater weight to the opinion
of a claimant’s treating physician, expand the definition of black lung disease
and limit the amount of medical evidence that can be submitted by claimants and
respondents. The amendments also alter administrative procedures for the
adjudication of claims, which, according to the Department of Labor, results in
streamlined procedures that are less formal, less adversarial and easier for
participants to understand. These and other changes to the federal black lung
regulations could significantly increase our exposure to black lung benefits
liabilities.
  In recent
years, legislation on black lung reform has been introduced but not enacted in
Congress and in the Kentucky legislature. It is possible that this legislation
will be reintroduced for consideration by Congress. If any of the proposals
included in this or similar legislation is passed, the number of claimants who
are awarded benefits could significantly increase. Any such changes in black
lung legislation, if approved, may adversely affect our business, financial
condition and results of operations.
   31
  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 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.
 
 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.
  Other
so-called multi-pollutant bills, which could regulate additional air pollutants,
have been proposed by various members of Congress. If such initiatives are
enacted into law, power plant operators could choose other fuel sources to meet
their requirements, reducing the demand for coal.
  The
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 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.
  For
example, in order to meet the federal Clean Air Act limits for sulfur dioxide
emissions from electric power plants, coal users may need to install scrubbers,
use sulfur dioxide emission allowances (some of which they may purchase), blend
high sulfur coal with low sulfur coal or switch to other fuels. Each option has
limitations. Lower sulfur coal may be more costly to purchase on an energy basis
than higher sulfur coal depending on mining and transportation costs. The cost
of installing scrubbers is significant and emission allowances may become more
expensive as their availability declines. Switching to other fuels may require
expensive modification of existing plants.
  In March
2005, the EPA adopted new federal rules intended to reduce the interstate
transport of fine particulate matter and ozone through reductions in sulfur
dioxides and nitrogen oxides through the eastern United States.  The
reductions were to be implemented in stages, some through a market-based
cap-and-trade program. Such new regulations would likely require some power
plants to install new equipment, at substantial cost, or discourage the use of
certain coals containing higher levels of mercury.  The particular
rules introduced by the EPA in March 2005 were subsequently struck down by the
U.S. Court of Appeals for the D.C. Circuit on July 11, 2008.  On
December 23, 2008, the U.S. Court of Appeals for the D.C. Circuit remanded
consolidated cases to the EPA without vacatur of the Clean Air Interstate Rule
in order that the EPA could remedy flaws in the Rule. The EPA continues to
address the issues raised in the Court’s opinions issued on July 11, 2008 and
December 23, 2008.  New and proposed reductions in emissions of sulfur
dioxides, nitrogen oxides, particulate matter or greenhouse gases may require
the installation of additional costly control technology or the implementation
of other measures, including trading of emission allowances and switching to
other fuels.
  In 2009,
the EPA issued a finding that carbon dioxide emissions endanger the
environment.  This could result in the federal government deciding to
cap carbon emissions and other greenhouse gases.  Current proposals
include a cap and trade system that would require the purchase of emission
permits, which could be traded on the open market. These proposals will make it
more costly to operate coal-fired plants and could make coal a less attractive
fuel alternative to the planning and building of utility power plants in the
future. To the extent that any new or proposed requirements affect our
customers, this could adversely affect our operations and
results.
 
  32
  There can
be no assurance at this time that a carbon dioxide cap and trade program, a
carbon tax or other regulatory regime, if implemented by the states in which our
customers operate or at the federal level, will not affect the future market for
coal in those regions. The permitting of new coal-fueled power plants has also
recently been contested by state regulators and environmental organizations
based on concerns relating to greenhouse gas emissions. Increased efforts to
control greenhouse gas emissions could result in reduced demand for
coal.
 
 We
must obtain governmental permits and approvals for mining operations, which can
be a costly and time consuming process and result in restrictions on our
operations.
 
 Numerous
governmental permits and approvals are required for mining operations. Our
operations are principally regulated under permits issued by state regulatory
and enforcement agencies pursuant to the federal Surface Mining Control and
Reclamation Act (SMCRA).  Regulatory authorities exercise considerable
discretion in the timing and scope of permit issuance. Requirements imposed by
these authorities may be costly and time consuming and may result in delays in
the commencement or continuation of exploration or production operations. In
addition, we often are required to prepare and present to federal, state and
local authorities data pertaining to the effect or impact that proposed
exploration for or production of coal might have on the environment. Further,
the public may comment on and otherwise engage in the permitting process,
including through intervention in the courts. Accordingly, the permits we need
may not be issued, or, if issued, may not be issued in a timely fashion, or may
involve requirements that restrict our ability to conduct our mining operations
or to do so profitably.
  Prior to
placing excess fill material in valleys in connection with surface mining
operations, coal mining companies are required to obtain a permit from the U.S.
Army Corps of Engineers (Corps) under Section 404 of the Clean Water Act (404
Permit). The permit can be either a simplified Nation Wide Permit #21 (NWP 21)
or a more complicated individual permit. Litigation respecting the validity of
the NWP 21 permit program as currently administered has been ongoing for several
years. On March 23, 2007, U.S. District Judge Robert Chambers of the Southern
District of West Virginia struck down several 404 permits that had been issued
by the Corps and found that the Corps’ decisions to issue such permits did not
conform to the requirements of the Clean Water Act or the National Environmental
Policy Act because the Corps failed to do a full assessment of all of the
impacts of eliminating headwater streams.This ruling was recently
reversed on appeal to the 4th Circuit
Court of Appeals. While the lower court ruling applied only to the permits at
issue in the case before Judge Chambers and thus would have had precedence only
with respect to certain counties in southern West Virginia (where we do not now
operate), the matters at issue in that case may be litigated in the future in
jurisdictions in which we do operate and a ruling for the plaintiffs in such
litigation or the NWP 21 litigation could have an adverse impact on our planned
surface mining operations.
  In
January 2005, a virtually identical claim to that filed in West Virginia was
filed in Kentucky. The plaintiffs in this case, Kentucky Riverkeepers, Inc., et al.
v. Colonel Robert A. Rowlette, Jr., et al., Civil Action No 05-CV-36-JBC,
seek the same relief as that sought in West Virginia. The court heard oral
arguments on plaintiffs’ preliminary injunction motion and/or motion for summary
judgment in late 2005 and those motions were denied as moot as the 2002 NWP
being challenged had expired before a decision was rendered in the
case.  The presiding judge has allowed the plaintiffs to renew the
challenge against the 2007 permits and the case continues to move forward. A
ruling for the plaintiffs in this matter could have an adverse impact on our
planned surface mining operations.
 
 Most
recently, the Environmental Protection Agency has announced publicly that it
will exercise its statutory right to more actively review 404 Permitting actions
by the Corps.  Such oversight could further delay and/or restrict the
issuance of such Permits, either of which events could have an adverse impact on
our planned surface mining operations.
 
 
 We
have significant reclamation and mine closure obligations. If the assumptions
underlying our accruals are materially inaccurate, we could be required to
expend greater amounts than anticipated.
  The SMCRA
establishes operational, reclamation and closure standards for all aspects of
surface mining as well as many aspects of underground mining. We accrue for the
costs of current mine disturbance and of final mine closure, including the cost
of treating mine water discharge where necessary. Under U.S. generally accepted
accounting principles we are required to account for the costs related to the
closure of mines and the reclamation of the land upon exhaustion of coal
reserves. Specifically, 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, 2009, we had accrued $42.1 million related to estimated mine
reclamation costs. These 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.
 
  33
  
 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 each of the last three years
and may experience losses in the future.
  We have
experienced operating losses and net losses and in the years ended December 31,
2008, 2007 and 2006.  Our operating loss and net loss increased in each of
these three years.  While we expect to be profitable in 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. 
Accordingly, we cannot assure you that we will be able to achieve profitability
in the future.
 
 The
loss of, or significant reduction in, purchases by our largest customers could
adversely affect our revenues.
 
 For the
three moths ended March 31, 2009, we generated approximately 90% of our total
revenues from several long-term contracts and spot sales with electrical
utilities, including 36% from Georgia Power Company, and 37% from South Carolina
Public Service Authority. At April 20, 2009, we had coal supply agreements with
these customers that expire in 2009 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 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.
 
  34
  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 a balance of contract sales
with spot sales, or our markets become depressed for an extended period of time,
our volumes and margins could decrease, negatively affecting our operating
results.
 
 Our
ability to operate our company effectively could be impaired if we lose senior
executives or fail to employ needed additional personnel.
  The loss
of senior executives could have a material adverse effect on our business. There
may be a limited number of persons with the requisite experience and skills to
serve in our senior management positions. We may not be able to locate or employ
qualified executives on acceptable terms. In addition, as our business develops
and expands, we believe that our future success will depend greatly on our
continued ability to attract and retain highly skilled and qualified personnel.
We might not continue to be able to employ key personnel, or to attract and
retain qualified personnel in the future. Failure to retain senior executives or
attract key personnel could have a material adverse effect on our operations and
financial results.
  Underground
mining is subject to increased regulation, and may require us to incur
additional cost.
 
 Underground
coal mining is subject to federal and state laws and regulations relating to
safety in underground coal mines and enforcement activities by federal and state
regulators.  These laws and regulations, the most significant of which is
the federal MINER Act,  include requirements for constructing and
maintaining caches for the storage of additional self-contained self rescuers
throughout underground mines; installing rescue chambers in underground mines;
constant tracking of and communication with personnel in the mines; installing
cable lifelines from the mine portal to all sections of the mine to assist in
emergency escape; submission and approval of emergency response plans; new and
additional safety training; providing refuge alternatives; and improving
flame-resistant conveyor belts and other fire protection measures.  In
2007, implementation of the MINER Act continued with new penalty regulations
that significantly increased regular penalty amounts and special
assessments.  In addition, a new emergency temporary standard was
issued relating to mine seal requirements.  During the 2007-2008
Congressional term, additional new federal legislation known as the S-MINER Act
was proposed.  Although the bill passed in the House of
Representatives by roll call vote, the Senate referred it to the Committee on
Health, Education, Labor and Pensions and never voted on the
bill.  The outlook for 2009 includes the possibility that the S-MINER
Act could be passed which would further increase our cost structure and
materially adversely impact our operating performance.  Various states
also have enacted their own new laws and regulations addressing many of these
same subjects.   These new laws and regulations will cause us to incur
substantial additional costs, which will adversely impact our operating
performance.
  The U.S.
Department of Labor, Mine Safety and Health Administration (MSHA) notifies mines
that a potential pattern of violations may exist based upon initial screening
and pattern criteria review by MSHA.  Upon receipt of such notifications,
we conduct a comprehensive review of the operations that received the
notification and prepare and submit plans to MSHA designed to enhance employee
safety at the mines through better education, training, mining practices, and
safety management.   Following implementation of the plans, MSHA
conducts a complete inspection of each mine and further evaluates the situation
and will advise whether a potential pattern of violation still exists and
whether further action will be taken.   We have been notified by
MSHA that a potential pattern of violation exists at one of our
mines.  Failure to remediate the situation resulting in a finding that
a pattern of violation exists at the mine could have a significant impact on our
operations.
 
 Unexpected
increases in raw material costs could significantly impair our operating
results.
  Our coal
mining operations use significant amounts of steel, petroleum products and other
raw materials in various pieces of mining equipment, supplies and materials,
including the roof bolts required by the room and pillar method of mining.
Recently and historically, petroleum prices and other commodity prices have been
volatile. If the price of steel or other of these materials increase, our
operational expenses will increase, which could have a significant negative
impact on our cash flow and operating results.
 
 Coal
mining is subject to conditions or events beyond our control, which could cause
our quarterly or annual results to deteriorate.
  Our coal
mining operations are conducted, in large part, in underground mines and, to a
lesser extent, at surface mines. These mines are subject to conditions or events
beyond our control that could disrupt operations, affect production and the cost
of mining at particular mines for varying lengths of time and have a significant
impact on our operating results. These conditions or events have
included:
   35
  
 •
              variations
      in thickness of the layer, or seam, of coal;•
              variations
      in geological conditions;•
              amounts
      of rock and other natural materials intruding into the coal
      seam;•
              equipment
      failures and unexpected major repairs;•
              unexpected
      maintenance problems;•
              unexpected
      departures of one or more of our contract miners;•
              fires
      and explosions from methane and other sources;•
              accidental
      minewater discharges or other environmental accidents;•
              other
      accidents or natural disasters; and•
              weather
      conditions.
 
 Mining
in Central Appalachia is complex due to geological characteristics of the
region.
  The
geological characteristics of coal reserves in Central Appalachia, such as depth
of overburden and coal seam thickness, make them complex and costly to mine. As
mines become depleted, replacement reserves may not be available when required
or, if available, may not be capable of being mined at costs comparable to those
characteristic of the depleting mines. These factors could materially adversely
affect the mining operations and cost structures of, and customers’ ability to
use coal produced by, operators in Central Appalachia, including
us.
  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 2009, we anticipate less than 10% of our
total production will come from mines operated by independent contract mine
operators and from third party purchased coal sources. Operational difficulties,
changes in demand for contract mine operators from our competitors and other
factors beyond our control could affect the availability, pricing and quality of
coal produced for us by independent contract mine operators. Disruptions in
supply, increases in prices paid for coal produced by independent contract mine
operators or purchased from third parties, or the availability of more lucrative
direct sales opportunities for our purchased coal sources could increase our
costs or lower our volumes, either of which could negatively affect our
profitability.
 
 We
face significant uncertainty in estimating our recoverable coal reserves, and
variations from those estimates could lead to decreased revenues and
profitability.
  Forecasts
of our future performance are based on estimates of our recoverable coal
reserves. Estimates of those reserves were initially based on studies conducted
by Marshall Miller & Associates, Inc. in 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:
  36
  
 •
              currently
      available geological, mining and property control data and
      maps;•
              our
      own operational experience and that of our consultants;•
              historical
      production from similar areas with similar conditions;•
              previously
      completed geological and reserve studies;•
              the
      assumed effects of regulations and taxes by governmental agencies;
      and•
              assumptions
      governing future prices and future operating
  costs.
 
 Reserve
estimates will change from time to time to reflect, among other
factors:
 
 •
              mining
      activities;•
              new
      engineering and geological data;•
              acquisition
      or divestiture of reserve holdings; and•
              modification
      of mining plans or mining methods.
 
 Therefore,
actual coal tonnage recovered from identified reserve areas or properties, and
costs associated with our mining operations, may vary from estimates. These
variations could be material, and therefore could result in decreased
profitability.
 
 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, 2009, we had outstanding surety bonds
with third parties for post-mining reclamation totaling $59.6 million.
Furthermore, we have surety bonds for an additional $43.8 million in place for
our federal and state workers’ compensation obligations and other miscellaneous
obligations. Insurance companies have informed us, along with other participants
in the coal industry, that they no longer will provide surety bonds for workers’
compensation and other post-employment benefits without collateral. We have
satisfied our obligations under these statutes and regulations by providing
letters of credit or other assurances of payment. However, letters of credit can
be significantly more costly to us than surety bonds. The issuance of letters of
credit under our senior secured credit facility also reduces amounts that we can
borrow under our senior secured credit facility for other purposes. 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.
 
 In 2008,
our company owned mines were operated by union-free employees. However, our
subsidiaries' employees have the right at any time under the National Labor
Relations Act to form or affiliate with a union. Additionally, the current
administration has indicated that it will support legislation that may make it
easier for employees to unionize.  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.
 
 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,
2009, the current and non-current portions of these obligations included $31.2
million for coal workers’ black lung benefits and $56.8 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, 2009, we estimated that our obligation under the pension plan
was underfunded by approximately $19.8 million. If future payments are
insufficient to fund the pension plan adequately to cover our future pension
obligations, we could incur cash expenditures and costs materially higher than
anticipated. The pension obligation is calculated annually and is based on
several assumptions, including then prevailing conditions, which may change from
year to year. In any year, if our assumptions are inaccurate, we could be
required to expend greater amounts than anticipated.
  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.
 
 We
may be unable to comply with restrictions imposed by the terms of our
indebtedness, which could result in a default under these
instruments.
  Our debt
instruments impose a number of restrictions on us. A failure to comply with
these restrictions could adversely affect our ability to borrow under our
revolving credit facility or result in an event of default under our debt
instruments. Our debt instruments contain financial and other covenants that
create limitations on our ability to, among other things, borrow the full amount
on our revolver, issue letters of credit under our letter of credit facility or
incur additional debt, and require us to maintain various financial ratios and
comply with various other financial covenants. These most restrictive covenants
include the following:
 
 •
              The
      facilities require that we achieve minimum Adjusted EBITDA (as defined in
      the facilities as "Consolidated EBITDA").  Adjusted EBITDA
      is measured at the end of each quarter.  We were required
      to have Adjusted EBITDA for the 12 months ended March 31, 2009 of
      $54.1.  In order to meet the twelve month adjusted EBITDA target
      at March 31, 2009, we needed adjusted EBITDA of $44.2 million in the first
      quarter of 2009.   Our adjusted EBITDA in the first quarter
      of 2009 was $53.2 million.  The most directly comparable US GAAP
      financial measure is net income.  For the three months ended March
      31, 2009, we had net income of $28.2 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.•
              The
      facilities require that our Leverage Ratio (as defined in the facilities)
      not exceed a specified multiple at the end of each
      quarter.    The leverage ratio was permitted to be
      2.2x as of March 31, 2009 and decreases further thereafter.  Our
      leverage ratio was 1.0X as of March 31, 2009.  Leverage ratio is
      defined under “Reconciliation of Non-GAAP Measures” in Part I – Item
      2 – Management’s Discussion and Analysis of Financial Condition and
      Results of Operations.•
              The
      facilities limit the Capital Expenditures (other than Mandated Capital
      Expenditures) (as both are defined in the facilities) that we may make or
      agree to make in any fiscal year.  For the fiscal year ended December
      31, 2009, we can not make Capital Expenditures in excess of $66
      million.  For the three months ended March 31, 2009, we made
      Capital Expenditures of $12.4 million,•
              The
      facilities require that our Minimum Liquidity (as defined in the
      facilities) be no less than $10.0 million at the end of each
      quarter.  This covenant will no longer apply when Adjusted
      EBITDA exceeds $75.0 million for any twelve month period ended on the last
      day of any fiscal quarter.
 
 Additional
detail regarding the terms of the facilities, including these covenants and the
related definitions, can be found in our debt agreements, as amended, that have
been filed as exhibits to our SEC filings.
  37
  
 In the
event of a default, our lenders could terminate their commitments to us and
declare all amounts borrowed, together with accrued interest and fees,
immediately due and payable. If this were to occur, we might not be able to pay
these amounts or we might be forced to seek amendments to our debt agreements
which could make the terms of these agreements more onerous for us and require
the payment of amendment or waiver fees. Failure to comply with these
restrictions, even if waived by our lenders, also could adversely affect our
credit ratings, which could increase our costs of debt financings and impair our
ability to obtain additional debt financing.  While the lenders have,
to date, waived any covenant violations and amended the covenants, there is no
guarantee they will continue to do so if future violations occur.
 
 Changes
in our credit ratings could adversely affect our costs and
expenses.
  Any
downgrade in our credit ratings could adversely affect our ability to borrow and
result in more restrictive borrowing terms, including increased borrowing costs,
more restrictive covenants and the extension of less open credit. This, in turn,
could affect our internal cost of capital estimates and therefore impact
operational decisions.
 
 Defects
in title or loss of any leasehold interests in our properties could limit our
ability to mine these properties or result in significant unanticipated
costs.
  We conduct substantially all of our
mining operations on properties that we lease. The loss of any lease could
adversely affect our ability to mine the associated reserves. Because we
generally do not obtain title insurance or otherwise verify title to our leased
properties, our right to mine some of our reserves has been in the past, and may
again in the future be, adversely affected if defects in title or boundaries
exist. In order to obtain leases or rights to conduct our mining operations on
property where these defects exist, we have had to, and may in the future have
to, incur unanticipated costs. In addition, we may not be able to successfully
negotiate new leases for properties containing additional reserves. Some leases
have minimum production requirements. Failure to meet those requirements could
result in losses of prepaid royalties and, in some rare cases, could result in a
loss of the lease itself.
 
 Inability
to satisfy contractual obligations may adversely affect our
profitability.
 
 From time
to time, we have disputes with our customers over the provisions of long-term
contracts relating to, among other things, coal quality, pricing, quantity and
delays in delivery. In addition, we may not be able to produce sufficient
amounts of coal to meet our commitments to our customers. Our inability to
satisfy our contractual obligations could result in our need to purchase coal
from third party sources to satisfy those obligations or may result in customers
initiating claims against us. We may not be able to resolve all of these
disputes in a satisfactory manner, which could result in substantial damages or
otherwise harm our relationships with customers.
 
 We
may be unable to exploit opportunities to diversify our operations.
  Our
future business plan may consider opportunities other than underground and
surface mining in eastern Kentucky and southern Indiana. We will consider
opportunities to further increase the percentage of coal that comes from surface
mines. We may also consider opportunities to expand both surface and underground
mining activities in areas that are outside of eastern Kentucky and southern
Indiana. We may also consider opportunities in other energy-related areas that
are not prohibited by the Indenture governing our senior notes due 2012 or other
financing agreements. If we undertake these diversification strategies and fail
to execute them successfully, our financial condition and results of operations
may be adversely affected.
 
 There
are risks associated with our acquisition strategy, including our inability to
successfully complete acquisitions, our assumption of liabilities, dilution of
your investment, significant costs and additional financing
required.
  We may
explore opportunities to expand our operations through strategic acquisitions of
other coal mining companies. We currently have no agreement or understanding for
any specific acquisition. Risks associated with our current and potential
acquisitions include the disruption of our ongoing business, problems retaining
the employees of the acquired business, assets acquired proving to be less
valuable than expected, the potential assumption of unknown or unexpected
liabilities, costs and problems, the inability of management to maintain uniform
standards, controls, procedures and policies, the difficulty of managing a
larger company, the risk of becoming involved in labor, commercial or regulatory
disputes or litigation related to the new enterprises and the difficulty of
integrating the acquired operations and personnel into our existing
business.
  We may
choose to use shares of our common stock or other securities to finance a
portion of the consideration for future acquisitions, either by issuing them to
pay a portion of the purchase price or selling additional shares to investors to
raise cash to pay a portion of the purchase price. If shares of our common stock
do not maintain sufficient market value or potential acquisition candidates are
unwilling to accept shares of our common stock as part of the consideration for
the sale of their businesses, we will be required to raise capital through
additional sales of debt or equity securities, which might not be possible, or
forego the acquisition opportunity, and our growth could be limited. In
addition, securities issued in such acquisitions may dilute the holdings of our
current or future shareholders.
 
  38
  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 2009.  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 13.5 years at 2008
levels of production, compared to our current Central Appalachia mining
complexes, which have reserves that we believe will last an average of
approximately 29.2 years at 2008 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.
 
 Risks
Relating to our Common Stock
 
 The
market price of our common stock has been volatile and difficult to predict, and
may continue to be volatile and difficult to predict in the future, and the
value of your investment may decline.
  The
market price of our common stock has been volatile in the past and may continue
to be volatile in the future. The market price of our common stock will be
affected by, among other things:
  •
              variations
      in our quarterly operating results;•
              changes
      in financial estimates by securities analysts;•
              sales
      of shares of our common stock by our officers and directors or by our
      shareholders;•
              changes
      in general conditions in the economy or the financial
    markets;•
              changes
      in accounting standards, policies or interpretations;•
              other
      developments affecting us, our industry, clients or competitors;
      and•
              the
      operating and stock price performance of companies that investors deem
      comparable to us.
 
 Any of
these factors could have a negative effect on the price of our common stock on
the Nasdaq Global Select Market, make it difficult to predict the market price
for our common stock in the future and cause the value of your investment to
decline.
 
 Dividends
are limited by our senior secured credit facility.
  We do not
anticipate paying any cash dividends on our common stock in the near future. In
addition, covenants in our senior secured credit facility and senior
notes restrict our ability to pay cash dividends and may prohibit the
payment of dividends and certain other payments.
   39
  
 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
 
 The
following table contains information about purchases by us of our equity
securities during the period covered by this report.
  Period
                
                Total Number
                  of
      Shares
                  Purchased
      (a)
                
                Average Price
                  Paid per Share
                
                Total Number of
                  Shares
                  Purchased
      as
                  Part
      of Publicly
                  Announced
                  Plans
      or
                  Programs
                
                Maximum
                  Number
      of
                  Shares that May
                  Yet
      Be
                  Purchased
                  Under
      the Plans
                  or
      ProgramsOctober
      1 to December-31, 2006
                
                15,035
                
                $9.99
                
                
                N/A
                
                N/AOctober
      1 to December-31, 2007
                
                12,818
                
                $7.90
                
                
                N/A
                
                N/AOctober
      1 to December-31, 2008
                
                9,120
                
                $19.22
                
                
                N/A
                
                N/A
 
 (a)
              The
      “Total Number of Shares Purchased” column consists of shares that were
      purchased from participants to satisfy tax withholding obligations in
      connection with the vesting of restricted shares pursuant to our 2004
      Equity Incentive Plan.
 
  ITEM 3.
DEFAULTS UNDER SENIOR SECURITIES
 
 None.
 
 ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 None
 
 ITEM 5.
OTHER INFORMATION
 
 Amendment
to Bylaws
 
 On April
28, 2009, the Board of Directors of the Company amended the Company’s Amended
and Restated Bylaws (the “Bylaws”) to decrease the size of the Board from six to
five directors.  A copy of the Bylaws, as amended and restated, is
attached hereto as Exhibit 3.2.
 
  40
  
 
 ITEM 6.
EXHIBITS
 
 The
      following exhibits are filed herewith:
 
 ExhibitAmended
      and Restated Bylaws
                      3.2Certification
      of Chief Executive Officer pursuant to Section 302 of theSarbanes-Oxley
      Act of 2002.
                      31.1Certification
      of Chief Accounting Officer pursuant to Section 302 of theSarbanes-Oxley
      Act of 2002.
                      31.2Certification
      of Chief Executive Officer pursuant to Section 906 of theSarbanes-Oxley
      Act of 2002.
                      32.1Certification
      of Chief Accounting Officer pursuant to Section 906 of theSarbanes-Oxley
      Act of 2002.
                      32.2
 
 
 
  41
  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 4,
2009
       
 -42-