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 September 30, 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 (Do not check if a
      smaller reporting company)  o
            Smaller reporting company  o





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


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 October
16, 2009 was 27,553,964.








FORM 10-QINDEX




3PART
      IFINANCIAL
      INFORMATIONItem 1.
            Financial Statements.
            3Condensed Consolidated Balance Sheets as of September 30,
      2009 and December 31, 2008
            3Condensed Consolidated Statements of Operations for the three
      months ended September 30, 2009 and 2008
            5Condensed
      Consolidated Statements of Operations for the nine months endedSeptember
      30, 2009 and 2008
            6Condensed Consolidated Statements of Changes in
      Shareholders’ Equity and Comprehensive Income (Loss) for the nine months
      ended September 30, 2009 and the year ended December 31,
      2008
            7Condensed Consolidated
      Statements of Cash Flowsfor
      the nine months ended  September 30, 2009 and
      2008
            8Notes to Condensed Consolidated Financial
      Statements
            9Item 2.
            Management’s Discussion and
      Analysis of Financial Condition and Results of Operations.
            17Item 3.
            Quantitative and Qualitative Disclosures about Market
      Risk.
            30Item 4.
            Controls and Procedures.
            31PART
      IIOTHER
      INFORMATION
            31Item 1.
            Legal Proceedings.
            31Item 1A.
            Risk Factors.Item 2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds.
            43Item 3.
            Defaults Upon Senior Securities.
            43Item 4.
            Submission of Matters to a Vote of Security
      Holders.
            43Item 5.
            Other Information.
            43Item 6.
            Exhibits.
            43SIGNATURES
            44









-2-








PART
I                                      FINANCIAL INFORMATION





ITEM
1.  FINANCIALSTATEMENTS





JAMES
RIVER COAL COMPANY


AND
SUBSIDIARIES





CondensedConsolidated Balance Sheets


(in
thousands)





September
      30, 2009
              
              
              December
      31, 2008Assets
              
              (unaudited)Current
      assets:Cash and cash
      equivalents
              
              $
              7,635
              
              
              
              3,324Receivables:Trade
              
              
              46,372
              
              
              
              33,086Other
              
              
              211
              
              
              
              475Total
      receivables
              
              
              46,583
              
              
              
              33,561Inventories:Coal
              
              
              28,379
              
              
              
              6,847Materials and
      supplies
              
              
              11,279
              
              
              
              9,581Total
      inventories
              
              
              39,658
              
              
              
              16,428Prepaid
      royalties
              
              
              5,023
              
              
              
              2,803Other current
      assets
              
              
              5,422
              
              
              
              5,094Total current
      assets
              
              
              104,321
              
              
              
              61,210Property, plant, and
      equipment, at cost:Land
              
              
              7,239
              
              
              
              6,693Mineral
      rights
              
              
              230,932
              
              
              
              229,841Buildings, machinery
      and equipment
              
              
              353,560
              
              
              
              320,982Mine development
      costs
              
              
              40,178
              
              
              
              39,596Total property,
      plant, and equipment
              
              
              631,909
              
              
              
              597,112Less accumulated
      depreciation, depletion, and amortization
              
              
              285,193
              
              
              
              252,264Property, plant and
      equipment, net
              
              
              346,716
              
              
              
              344,848Goodwill
              
              
              26,492
              
              
              
              26,492Other
      assets
              
              
              30,255
              
              
              
              30,996Total
      assets
              
              $
              507,784
              
              
              
              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)





September
      30, 2009
              
              
              December
      31, 2008Liabilities
      and Shareholders' Equity
              
              (unaudited)Current
      liabilities:Current maturities
      of long-term debt (note 2)
              
              $
              -
              
              
              
              18,000Accounts
      payable
              
              
              51,947
              
              
              
              57,068Accrued salaries,
      wages, and employee benefits
              
              
              10,015
              
              
              
              6,642Workers'
      compensation benefits
              
              
              9,300
              
              
              
              9,300Black lung
      benefits
              
              
              1,539
              
              
              
              1,539Accrued
      taxes
              
              
              5,729
              
              
              
              4,457Other current
      liabilities
              
              
              16,497
              
              
              
              19,165Total current
      liabilities
              
              
              95,027
              
              
              
              116,171Long-term debt, less
      current maturities
              
              
              150,000
              
              
              
              150,000Other
      liabilities:Noncurrent portion
      of workers' compensation benefits
              
              
              48,707
              
              
              
              46,477Noncurrent portion
      of black lung benefits
              
              
              30,330
              
              
              
              29,029Pension
      obligations
              
              
              20,097
              
              
              
              19,693Asset retirement
      obligations
              
              
              39,370
              
              
              
              36,409Other
              
              
              586
              
              
              
              529Total other
      liabilities
              
              
              139,090
              
              
              
              132,137Total
      liabilities
              
              
              384,117
              
              
              
              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 27,553,964 and 27,393,493 sharesas of September 30,
      2009 and December 31, 2008, respectively
              
              
              276
              
              
              
              274Paid-in-capital
              
              
              275,431
              
              
              
              272,366Accumulated
      deficit
              
              
              (133,555
              )
              
              
              (187,712
              )Accumulated other
      comprehensive loss
              
              
              (18,485
              )
              
              
              (19,690
              )Total shareholders'
      equity
              
              
              123,667
              
              
              
              65,238Total liabilities
      and shareholders' equity
              
              $
              507,784
              
              
              
              463,546See
      accompanying notes to condensed consolidated financial
      statements.





-4-





JAMES
RIVER COAL COMPANY


AND
SUBSIDIARIES





CondensedConsolidated Statements of Operations


(in
thousands, except per share data)


(unaudited)





Three
      Months
              
              
              Three
      MonthsEnded
              
              
              EndedSeptember
      30, 2009
              
              
              September
      30, 2008Revenues
              
              $
              168,320
              
              
              
              151,842Cost of
      sales:Cost of coal
      sold
              
              
              128,361
              
              
              
              138,873Depreciation,
      depletion and amortization
              
              
              15,572
              
              
              
              17,158Total cost of
      sales
              
              
              143,933
              
              
              
              156,031Gross profit
      (loss)
              
              
              24,387
              
              
              
              (4,189
              )Selling, general and
      administrative expenses
              
              
              10,266
              
              
              
              9,057Total operating
      income (loss)
              
              
              14,121
              
              
              
              (13,246
              )Interest expense
      (note 2)
              
              
              3,923
              
              
              
              4,625Interest
      income
              
              
              (5
              )
              
              
              (55
              )Charges associated
      with repayment and amendment of debt (note 2)
              
              
              -
              
              
              
              4,223Miscellaneous
      income, net
              
              
              (43
              )
              
              
              (327
              )Total other expense,
      net
              
              
              3,875
              
              
              
              8,466Income (loss) before
      income taxes
              
              
              10,246
              
              
              
              (21,712
              )Income tax
      expense
              
              
              438
              
              
              
              -Net income
      (loss)
              
              $
              9,808
              
              
              
              (21,712
              )Earnings (loss) per
      common share (note 5)Basic earnings
      (loss) per common share
              
              $
              0.36
              
              
              
              (0.86
              )Diluted earnings
      (loss) per common share
              
              $
              0.36
              
              
              
              (0.86
              )See
      accompanying notes to condensed consolidated financial
      statements.





-5-





JAMES
RIVER COAL COMPANY


AND
SUBSIDIARIES





CondensedConsolidated Statements of Operations


(in
thousands, except per share data)


(unaudited)





Nine
      Months
              
              
              Nine
      MonthsEnded
              
              
              EndedSeptember
      30, 2009
              
              
              September
      30, 2008Revenues
              
              $
              532,090
              
              
              
              427,733Cost of
      sales:Cost of coal
      sold
              
              
              388,789
              
              
              
              393,470Depreciation,
      depletion and amortization
              
              
              45,967
              
              
              
              52,000Total cost of
      sales
              
              
              434,756
              
              
              
              445,470Gross profit
      (loss)
              
              
              97,334
              
              
              
              (17,737
              )Selling, general and
      administrative expenses
              
              
              30,112
              
              
              
              25,123Total operating
      income (loss)
              
              
              67,222
              
              
              
              (42,860
              )Interest expense
      (note 2)
              
              
              11,790
              
              
              
              13,700Interest
      income
              
              
              (55
              )
              
              
              (317
              )Charges associated
      with repayment and amendment of debt (note 2)
              
              
              -
              
              
              
              7,236Miscellaneous
      income, net
              
              
              (187
              )
              
              
              (1,073
              )Total other expense,
      net
              
              
              11,548
              
              
              
              19,546Income (loss) before
      income taxes
              
              
              55,674
              
              
              
              (62,406
              )Income tax
      expense
              
              
              1,517
              
              
              
              -Net income
      (loss)
              
              $
              54,157
              
              
              
              (62,406
              )Earnings (loss) per
      common share (note 5)Basic earnings
      (loss) per common share
              
              $
              1.97
              
              
              
              (2.62
              )Diluted earnings
      (loss) per common share
              
              $
              1.97
              
              
              
              (2.62
              )See
      accompanying notes to condensed consolidated financial
      statements.





-6-








JAMES
RIVER COAL COMPANY


AND
SUBSIDIARIES


CondensedConsolidated Statements of Changes in
Shareholders’


Equity
and Comprehensive Income (Loss)


(in
thousands)


(unaudited)








Common
                stock
                shares
              
              
              Common
                stock
      par
                value
              
              
              Paid-in-
                capital
              
              
              Retained
                earnings
      (accumulated
                deficit)
              
              
              Accumulated
      other comprehensive income (loss)
              
              
              TotalBalances,
      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
              
              
              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
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              54,157
              
              
              
              -
              
              
              
              54,157Amortization of
      pension actuarial amount
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,205
              
              
              
              1,205Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              55,362Issuance of
      restricted stock awards, net of forfeitures
              
              
              234
              
              
              
              2
              
              
              
              (2
              )
              
              
              -
              
              
              
              -
              
              
              
              -Repurchase of shares
      for tax withholding
              
              
              (78
              )
              
              
              -
              
              
              
              (1,541
              )
              
              
              -
              
              
              
              -
              
              
              
              (1,541
              )Exercise of Stock
      Options
              
              
              5
              
              
              
              -
              
              
              
              75
              
              
              
              -
              
              
              
              -
              
              
              
              75Stock based
      compensation
              
              
              -
              
              
              
              -
              
              
              
              4,533
              
              
              
              -
              
              
              
              -
              
              
              
              4,533Balances,
      September 30, 2009
              
              
              27,554
              
              
              $
              276
              
              
              
              275,431
              
              
              
              (133,555
              )
              
              
              (18,485
              )
              
              
              123,667See
      accompanying notes to condensed consolidated financial
      statements.








-7-










JAMES
RIVER COAL COMPANY


AND
SUBSIDIARIES





CondensedConsolidated Statements of Cash Flows


(in
thousands)


(unaudited)





Nine
      Months
              
              
              Nine
      MonthsEnded
              
              
              EndedSeptember
      30, 2009
              
              
              September
      30, 2008Cash flows from
      operating activities:Net income
      (loss)
              
              $
              54,157
              
              
              
              (62,406
              )Adjustments to
      reconcile net income (loss) to net cash provided  by operating
      activitiesDepreciation,
      depletion, and amortization
              
              
              45,967
              
              
              
              52,000Accretion of asset
      retirement obligations
              
              
              2,385
              
              
              
              2,018Amortization of
      deferred financing costs
              
              
              880
              
              
              
              1,118Stock-based
      compensation
              
              
              4,533
              
              
              
              3,614Gain on sale or
      disposal of property, plant, and equipment
              
              
              (24
              )
              
              
              (163
              )Deferred income
      taxes
              
              
              150
              
              
              
              -Write-off of
      deferred financing costs
              
              
              -
              
              
              
              2,383Changes in operating
      assets and liabilities:Receivables
              
              
              (13,022
              )
              
              
              5,661Inventories
              
              
              (21,096
              )
              
              
              (3,740
              )Prepaid royalties
      and other current assets
              
              
              (2,548
              )
              
              
              (2,033
              )Other
      assets
              
              
              (289
              )
              
              
              662Accounts
      payable
              
              
              (5,121
              )
              
              
              5,958Accrued salaries,
      wages, and employee benefits
              
              
              3,373
              
              
              
              2,107Accrued
      taxes
              
              
              (269
              )
              
              
              (1,265
              )Other current
      liabilities
              
              
              (3,025
              )
              
              
              6,327Workers'
      compensation benefits
              
              
              2,230
              
              
              
              1,828Black lung
      benefits
              
              
              1,301
              
              
              
              1,027Pension
      obligations
              
              
              1,609
              
              
              
              (1,218
              )Asset retirement
      obligation
              
              
              (422
              )
              
              
              (978
              )Other
      liabilities
              
              
              57
              
              
              
              161Net cash provided by
      operating activities
              
              
              70,826
              
              
              
              13,061Cash flows from
      investing activities:Additions to
      property, plant, and equipment
              
              
              (48,651
              )
              
              
              (59,498
              )Proceeds from sale
      of property, plant, and equipment
              
              
              61
              
              
              
              1,108Net cash used in
      investing activities
              
              
              (48,590
              )
              
              
              (58,390
              )Cash flows from
      financing activities:Borrowings under
      Revolver
              
              
              12,500
              
              
              
              21,500Repayments under
      Revolver
              
              
              (30,500
              )
              
              
              (8,500
              )Repayment of
      long-term debt
              
              
              -
              
              
              
              (22,025
              )Net proceeds from
      issuance of common stock
              
              
              -
              
              
              
              93,955Debt issuance
      costs
              
              
              -
              
              
              
              (486
              )Proceeds from
      exercise of stock option
              
              
              75
              
              
              
              542Net cash provided by
      (used in) financing activities
              
              
              (17,925
              )
              
              
              84,986Increase in
      cash
              
              
              4,311
              
              
              
              39,657Cash at beginning of
      period
              
              
              3,324
              
              
              
              5,413Cash at end of
      period
              
              $
              7,635
              
              
              
              45,070





See
accompanying notes to condensed consolidated financial statements.








-8-








JAMES
RIVER COAL COMPANY


AND
SUBSIDIARIES





Notesto Condensed Consolidated Financial Statements





(Unaudited)







(1)
            Summary
      of Significant Accounting Policies and Other
  Information




Description
of Business and Principles of Consolidation




James River Coal Company
and its wholly owned subsidiaries (collectively the Company) mine, process and
sell bituminous, steam- and industrial-grade coal through five operating
complexes located throughout eastern Kentucky and one in southern Indiana.
Substantially all coal sales and account receivables relate to the electric
utility and industrial markets.





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





The Company’s management
has evaluated the period from October 1, 2009 through November 2,
2009, for subsequent events requiring recognition or disclosure in the
financial statements. During this period, no material recognizable subsequent
events were identified.





Recent
Accounting Pronouncements




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





The
guidance in Earnings
Per Share Topic, ASC 260-10-45, addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting,
and therefore need to be included in the earnings allocation in computing
earnings per share under the two-class method. Unvested share-based payment
awards that contain non-forfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in
the computation of earnings per share pursuant to the two-class method. The
Company’s unvested restricted stock awards are considered “participating
securities” because they contain non-forfeitable rights to
dividends.  The guidance in ASC 260-10-45-59(A) is effective for the
Company’s financial statements January 1, 2009, and all prior-period earnings
per share data presented has been adjusted retrospectively (note
5).





-9-








(2)
            Long
      Term Debt and Interest Expense





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





September
      30,
              2009
            
            
            December
      31,
              2008Senior
      Notes
            
            $
            150,000
            
            
            $
            150,000Revolver
            
            
            -
            
            
            
            18,000Total
      long-term debt
            
            
            150,000
            
            
            
            168,000Less amounts
      classified as current
            
            
            -
            
            
            
            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 on the Company’s consolidated balance
sheets as of September 30, 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 September 30, 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.(c)
            The outstanding
      balances on the Revolver, if any, is classified as current on our balance
      sheet based on our intent to pay the balance within the next
      year.








-10-








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 Adjusted EBITDA 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.





Effective July 1, 2009,
the $10.0 million minimum liquidity reserve as defined under the Company’s
credit agreements was no longer required.  As of September 30, 2009,
the Company has $35.0 million of borrowing capacity under the Revolver. 
The Company was in compliance with all of the financial covenants under the
Facilities and Senior Notes as of September 30, 2009.





Interest
Expense and Other





During
the three and nine months ended September 30, 2009, the Company paid
approximately $0.1 million and $7.4 million, respectively, in
interest.  During the three and nine months ended September 30, 2008,
the Company paid $0.7 million and $9.3 million, respectively, in
interest.





In
connection with mandatory tenders and repayments of a portion of the Term
Facility in 2008, the Company expensed approximately $1.3 million and $2.4
million of unamortized financing charges on the Term Facility in the three and
nine months ended September 30, 2008, respectively.  The write-off of
the unamortized financing charges is included in charges associated with
repayment and amendment of debt in the Company’s condensed consolidated
financials statements.


In
connection with amendments to the Term Facility and Letter of Credit Facility in
2008, the Company expensed $3.0 million and $4.9 million of fees paid in the
three and nine months ended September 30, 2008, respectively.  These
fees were included in charges associated with repayment and amendment of debt in
the Company’s condensed consolidated financial statements.





(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 2,400,000, and no more
than 1,000,000 of the shares reserved under the Plan may be granted in the form
of incentive stock options.  The Company currently has the following
types of equity awards outstanding under the Plan.





-11-








Restricted
Stock Awards





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





Stock
Option Awards





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





Shares
awarded or subject to purchase under the Plan that are not delivered or
purchased, or revert to the Company as a result of forfeiture or termination,
expiration or cancellation of an award or that are used to exercise an award or
for tax withholding, will be again available for issuance under the Plan. At
September 30, 2009, there were 834,730 shares available under the Plan for
future awards.





The
following table highlights the expense related to share-based payment for the
periods ended September 30


(in
thousands):







Three
      months ended
              
              
              Nine
      months endedSeptember
      30,
              
              
              September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Restricted
      stock
              
              $
              1,375
              
              
              $
              1,415
              
              
              $
              4,293
              
              
              
              3,376Stock
      options
              
              
              72
              
              
              
              79
              
              
              
              240
              
              
              
              238Stock based
      compensation
              
              $
              1,447
              
              
              $
              1,494
              
              
              $
              4,533
              
              
              
              3,614




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 expects no significant
forfeitures of its restricted shares or options before vesting. The fair value
of stock options was estimated using the Black-Scholes option pricing model. The
Company used a risk free rate of 2.6% and a volatility of 90% for options issued
during 2009. The Company uses historical experience to estimate its volatility.
The Company has assumed no dividends would be issued in valuing its
options.





The
following is a summary of restricted stock and stock option awards for the nine
months ended September 30, 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
              
              
              234,311
              
              
              
              13.87
              
              
              
              20,000
              
              
              
              13.87Exercised/Vested
              
              
              (192,308
              )
              
              
              14.33
              
              
              
              (5,000
              )
              
              
              15.00Canceled
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -September 30,
      2009
              
              
              744,052
              
              
              
              22.18
              
              
              
              276,000
              
              
              
              16.34






The
following table summarizes additional information about the stock options
outstanding at September 30, 2009.







-12-














Range
      of
                Exercise
      Price
              Shares
              
              Weighted
                Average
                Exercise
                Price
              Weighted
      Average
                Remaining
                Contractual
      Life
                (Years)
              Aggregate
                Intrinsic
                Value
      (1)
                (in
      000's)Outstanding
      at September 30, 2009
              
              $10.80-$36.30
              276,000
              
              $16.34
              
              5.7
              
              $      1,692Exercisable
      at September 30, 2009
              
              $10.80-$36.30
              236,004
              
              $15.47
              
              5.2
              
              $      1,539Vested
      and expected to vest at September 30, 2009
              
              276,000
              
              $16.34
              
              5.7
              
              $      1,692(1)
      The difference between a stock award's exercise price and the underlying
      stock's market price at September 30, 2009.No
      value is assigned to stock awards whose option price exceeds
      the  stock's market price at September 30,
  2009.




The
following table summarizes the Company’s total unrecognized compensation cost
related to stock based compensation as of September 30, 2009.






Weighted
      AverageRemaining PeriodUnearned
              
              
              Of
      ExpenseCompensation
              
              
              Recognition(in
      000's)
              
              
              (in
      years)Stock
      Options
              
              $
              486
              
              
              1.9Restricted
      Stock
              
              
              11,210
              
              
              2.8Total
              
              $
              11,696








(4)
            Commitments
      and Contingencies




The
Company has established irrevocable letters of credit totaling $59.1 million as
of September 30, 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 condensed
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.








-13-





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





Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30,
              
              
              September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Basic earnings per
      common share:Net income
      (loss)
              
              $
              9,808
              
              
              
              (21,712
              )
              
              $
              54,157
              
              
              
              (62,406
              )Income allocated to
      participating securities
              
              
              (265
              )
              
              
              -
              
              
              
              (1,504
              )
              
              
              -Net income (loss)
      available to common shareholders
              
              $
              9,543
              
              
              
              (21,712
              )
              
              $
              52,653
              
              
              
              (62,406
              )Weighted average
      number of common andcommon equivalent
      shares outstanding:Basic number of
      common shares outstanding
              
              
              26,810
              
              
              
              25,173
              
              
              
              26,745
              
              
              
              23,793Dilutive effect of
      unvested restricted stock(participating
      securities)
              
              
              744
              
              
              
              -
              
              
              
              764
              
              
              
              -Dilutive effect of
      stock options
              
              
              50
              
              
              
              -
              
              
              
              44
              
              
              
              -Diluted number of
      common shares andcommon equivalent
      shares outstanding
              
              
              27,604
              
              
              
              25,173
              
              
              
              27,553
              
              
              
              23,793Basic earnings
      (loss) per common share
              
              $
              0.36
              
              
              
              (0.86
              )
              
              $
              1.97
              
              
              
              (2.62
              )Diluted net income
      per common share:Net income
      (loss)
              
              $
              9,808
              
              
              
              (21,712
              )
              
              $
              54,157
              
              
              
              (62,406
              )Income allocated to
      participating securities
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net income (loss)
      available to potential commonshareholders
              
              $
              9,808
              
              
              
              (21,712
              )
              
              $
              54,157
              
              
              
              (62,406
              )Diluted net earnings
      (loss) per share
              
              $
              0.36
              
              
              
              (0.86
              )
              
              $
              1.97
              
              
              
              (2.62
              )




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 and common equivalent shares
outstanding by approximately 0.9 million and 0.8 million for the three and nine
months September 30, 2008, respectively.  In addition, in periods of
net losses, the Company has not allocated any portion of such losses to
participating securities holders for its basic loss per share calculation as
such participating securities holders are not contractually obligated to fund
such losses.







-14-








(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 Ended
              
              
              Nine
      Months EndedSeptember
      30,
              
              
              September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Interest
      cost
              
              $
              915
              
              
              
              911
              
              
              
              2,745
              
              
              
              2,734Expected return on
      plan assets
              
              
              (775
              )
              
              
              (1,089
              )
              
              
              (2,324
              )
              
              
              (3,268
              )Amortization of
      actuarial amount
              
              
              402
              
              
              
              —
              
              
              
              1,205
              
              
              
              —Net periodic cost
      (benefit)
              
              $
              542
              
              
              
              (178
              )
              
              
              1,626
              
              
              
              (534
              )





(7)
              Pneumoconiosis
      (Black Lung) Benefits




The
expense for black lung benefits consists of the following (amounts in
thousands):




Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30,
              
              
              September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Service
      Cost
              
              $
              306
              
              
              
              120
              
              
              
              919
              
              
              
              360Interest
      cost
              
              
              428
              
              
              
              491
              
              
              
              1,284
              
              
              
              1,472Amortization of
      actuarial amount
              
              
              —
              
              
              
              (141
              )
              
              
              —
              
              
              
              (422
              )Total
      expense
              
              $
              734
              
              
              
              470
              
              
              
              2,203
              
              
              
              1,410




(8)
            Financial
      Instruments





The
estimated fair value of financial instruments has been determined by the Company
using available market information. As of September 30, 2009 and December 31,
2008, except for long-term debt obligations, the carrying amounts of all
financial instruments approximate their fair values due to their short
maturities.





The
Company believes that the fair value of its Senior Notes was $145.1 million and
$112.1 million at September 30, 2009 and December 31, 2008, respectively, based
on available market information at that date.  The Company believes
that the carrying amount of the Revolver approximated the fair value at December
31, 2008, due to the variable interest rate and recent amendment to that
facility.





(9)
            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).





-15-










Three Months
      Ended
              
              
              Nine Months
      EndedSeptember
      30,
              
              
              September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008RevenuesCAPP
              
              $
              141,371
              
              
              
              123,691
              
              
              
              453,859
              
              
              
              353,388Midwest
              
              
              26,949
              
              
              
              28,151
              
              
              
              78,231
              
              
              
              74,345Corporate
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              $
              168,320
              
              
              
              151,842
              
              
              
              532,090
              
              
              
              427,733Depreciation,
      depletion and amortizationCAPP
              
              $
              12,616
              
              
              
              13,700
              
              
              
              36,424
              
              
              
              41,087Midwest
              
              
              2,943
              
              
              
              3,441
              
              
              
              9,504
              
              
              
              10,848Corporate
              
              
              13
              
              
              
              17
              
              
              
              39
              
              
              
              65Total
              
              $
              15,572
              
              
              
              17,158
              
              
              
              45,967
              
              
              
              52,000Total operating
      income (loss)CAPP
              
              $
              20,883
              
              
              
              (6,756
              )
              
              
              87,422
              
              
              
              (20,035
              )Midwest
              
              
              (1,138
              )
              
              
              (1,773
              )
              
              
              (2,623
              )
              
              
              (9,171
              )Corporate
              
              
              (5,624
              )
              
              
              (4,717
              )
              
              
              (17,577
              )
              
              
              (13,654
              )Total
              
              $
              14,121
              
              
              
              (13,246
              )
              
              
              67,222
              
              
              
              (42,860
              )Net
      earnings (loss) (1)CAPP
              
              $
              20,883
              
              
              
              (6,756
              )
              
              
              87,422
              
              
              
              (20,035
              )Midwest
              
              
              (1,138
              )
              
              
              (1,773
              )
              
              
              (2,623
              )
              
              
              (9,171
              )Corporate
              
              
              (9,937
              )
              
              
              (13,183
              )
              
              
              (30,642
              )
              
              
              (33,200
              )Total
              
              $
              9,808
              
              
              
              (21,712
              )
              
              
              54,157
              
              
              
              (62,406
              )





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





September
      30,
              
              
              December
      31,2009
              
              
              2008Total
      AssetsCAPP
              
              $
              405,890
              
              
              
              336,631Midwest
              
              
              93,198
              
              
              
              89,792Corporate
              
              
              8,696
              
              
              
              37,123Total
              
              $
              507,784
              
              
              
              463,546GoodwillCAPP
              
              $
              -
              
              
              
              -Midwest
              
              
              26,492
              
              
              
              26,492Corporate
              
              
              -
              
              
              
              -Total
              
              $
              26,492
              
              
              
              26,492







-16-







ITEM2.  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 92% of our total revenues (contract and spot) in the nine
months ended September 30, 2009 from coals sales to electric utility customers
and the remaining 8% 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 nine
months ended September 30, 2009, our CAPP segment produced 5.4 million tons of
coal (including contract coal and purchased coal). Of the CAPP tons produced,
83% came from Company operated underground mines. For the nine months ended
September 30, 2009, we shipped 5.1 million tons of coal and generated coal sale
revenues of $453.9 million from our CAPP segment. For the nine months ended
September 30, 2009, Georgia Power Company and South Carolina Public Service
Authority were our largest customers, representing approximately 38% 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 nine months ended September 30, 2009, our Midwest mines produced 2.4
million tons of coal. Of the Midwest tons produced, 81% came from Company
operated surface mines. For the nine months ended September 30, 2009, we shipped
2.4 million tons of coal and generated coal sale revenues of $78.2 million from
our Midwest segment. For the nine months ended September 30, 2009, our Midwest
segment’s largest customer represented approximately 6% of our total
revenues.





Results
of Operations





Three
Months Ended September 30, 2009 Compared with the Three Months Ended September
30, 2008





The
following tables show selected operating results for the three months ended
September 30, 2009 compared to the three months ended September 30, 2008 (in
thousands except per ton amounts).





-17-








Three
      Months Ended September 30,2009
              
              
              2008Total
              
              
              Per
      Ton
              
              
              Total
              
              
              Per
      TonVolume shipped
      (tons)
              
              
              2,439
              
              
              
              
              
              
              2,777Revenues
              
              $
              168,320
              
              
              
              69.01
              
              
              $
              151,842
              
              
              
              54.68Cost of coal
      sold
              
              
              128,361
              
              
              
              52.63
              
              
              
              138,873
              
              
              
              50.01Depreciation,
      depletion and amortization
              
              
              15,572
              
              
              
              6.38
              
              
              
              17,158
              
              
              
              6.18Gross profit
      (loss)
              
              
              24,387
              
              
              
              10.00
              
              
              
              (4,189
              )
              
              
              (1.51
              )Selling, general and
      administrative
              
              
              10,266
              
              
              
              4.21
              
              
              
              9,057
              
              
              
              3.26





Volume
and Revenues by Segment


Three
      Months Ended September 30,2009
                  
                  
                  2008CAPP
                  
                  
                  Midwest
                  
                  
                  CAPP
                  
                  
                  MidwestVolume (tons
      shipped)
                  
                  
                  1,647
                  
                  
                  
                  792
                  
                  
                  
                  1,932
                  
                  
                  
                  845Coal sales
      revenue
                  
                  $
                  141,371
                  
                  
                  
                  26,949
                  
                  
                  
                  123,691
                  
                  
                  
                  28,151Average sales price
      per ton
                  
                  $
                  85.84
                  
                  
                  
                  34.03
                  
                  
                  
                  64.02
                  
                  
                  
                  33.31





Coal
sales revenue for the three months ended September 30, increased from $151.8
million in 2008 to $168.3 million in 2009. This increase was due to an increase
in the average sales price per ton in the CAPP region, which was partially
offset by a decrease in tons shipped in the CAPP and Midwest
regions.





For
the three months ended September 30, 2009, the CAPP region sold approximately
1.5 million tons of coal under long-term contracts (92% of total CAPP sales
volume) at an average selling price of $87.06 per ton. For the three months
ended September 30, 2008, the CAPP region sold approximately 1.1 million tons of
coal under long-term contracts (56% of total CAPP sales volume) at an average
selling price of $52.08 per ton.  For the three months ended September
30, 2009, the CAPP region sold 0.1 million tons of coal (8% of total CAPP sales
volume) under short term contracts (includes spot sales) at an average selling
price of $70.43 per ton. For the three months ended September 30, 2008, the CAPP
region sold 0.8 million tons of coal (44% of total CAPP sales volume) under
short term contracts (includes spot sales) at an average selling price of $78.97
per ton.





The
Midwest’s region sales of coal were under long term contracts for the 2009 and
2008.  For the three months ended September 30, 2009, the Midwest
region sold 0.8 million tons at an average sales price of $34.03 per
ton.  For the three months ended September 30, 2008, the Midwest
region sold 0.8 million tons at an average sales price of $33.31 per
ton.





Operating
Costs by Segment




Three
      Months Ended September 30,2009
              
              
              2008CAPP
              
              
              Midwest
              
              
              Corporate
              
              
              CAPP
              
              
              Midwest
              
              
              CorporateCost
      of coal sold
              
              $
              103,946
              
              
              
              24,415
              
              
              
              -
              
              
              
              113,187
              
              
              
              25,686
              
              
              
              -Per
      ton
              
              
              63.11
              
              
              
              30.83
              
              
              
              -
              
              
              
              58.59
              
              
              
              30.40
              
              
              
              -Depreciation,
      depletion and amortization
              
              
              12,616
              
              
              
              2,943
              
              
              
              13
              
              
              
              13,700
              
              
              
              3,441
              
              
              
              17Per
      ton
              
              
              7.66
              
              
              
              3.72
              
              
              
              -
              
              
              
              7.09
              
              
              
              4.07
              
              
              
              -





-18-







Cost of
Coal Sold




For the
three months ended September 30, the cost of coal sold, excluding depreciation,
depletion and amortization, decreased from $138.9 million in 2008 to $128.4
million in 2009 due to less tons sold.  Our cost per ton of coal sold in
the CAPP region increased from $58.59 per ton in the 2008 period to $63.11 per
ton in the 2009 period.  This $4.52 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
the prior year, a decrease in tons produced in response to market conditions and
the impact of increased average sales prices on our sales related costs
(primarily royalties and severance taxes). The major components of this increase
include an increase in the Company’s sales related costs of $3.17 per ton,
preparation and loading costs of $1.41 per ton and labor and benefit costs of
$0.46 per ton.  These increases were offset by a decrease in variable
costs of $0.93 per ton, primarily due to a decrease in certain raw material
costs.  For more detail regarding the increased regulatory activity see
“Part II – Item 1A – Risk Factors – Underground mining is subject to increased
regulation, and may require us to incur additional cost.”


Our
cost per ton of coal sold in the Midwest increased $0.43 per ton from $30.43 in
the 2008 period to $30.83 per ton in the 2009 period.





Depreciation,
depletion and amortization




For
the three months ended September 30, depreciation, depletion and amortization
decreased from $17.2 million in 2008 to $15.6 million in 2009.  In the
CAPP region, depreciation, depletion and amortization decreased $1.1 million to
$12.6 million or $7.66 per ton.  In the Midwest, depreciation,
depletion and amortization decreased $0.5 million to $2.9 million or $3.72 per
ton.




Selling,
general and administrative




Selling, general and
administrative expenses increased from $9.1 million for the three months ended
September 30, 2008 to $10.3 million for the three months ended September 30,
2009.  The increase was primarily due to higher letter of credit fees
and an increase in certain salary and benefit amounts, including stock
compensation.  The increase in the letter of credit fees is due to an
increase in the usage fee under our Letter of Credit Facility.




Income
Taxes





Our
effective tax rate for the three months ended September 30, 2009 and 2008 was
4.3% 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 2009, we expect that a
portion of our available net operating loss carryforward will be utilized to
reduce current tax expense, and therefore the previously established valuation
allowance will be reduced.  The criteria for recording a valuation
allowance are described in “Critical Accounting Estimates – Income
Taxes.”  As of September 30, 2009, we had a $47.7 million valuation
allowance against gross deferred tax assets.  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.  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.





Nine
Months Ended September 30, 2009 Compared with the Nine Months Ended September
30, 2008





The
following tables show selected operating results for the nine months ended
September 30, 2009 compared to the nine months ended September 30, 2008 (in
thousands except per ton amounts).





-19-





Nine
      Months Ended September 30,2009
              
              
              2008Total
              
              
              Per
      Ton
              
              
              Total
              
              
              Per
      TonVolume shipped
      (tons)
              
              
              7,477
              
              
              
              
              
              
              8,591Revenues
              
              $
              532,090
              
              
              
              71.16
              
              
              $
              427,733
              
              
              
              49.79Cost of coal
      sold
              
              
              388,789
              
              
              
              52.00
              
              
              
              393,470
              
              
              
              45.80Depreciation,
      depletion and amortization
              
              
              45,967
              
              
              
              6.15
              
              
              
              52,000
              
              
              
              6.05Gross profit
      (loss)
              
              
              97,334
              
              
              
              13.02
              
              
              
              (17,737
              )
              
              
              (2.06
              )Selling, general and
      administrative
              
              
              30,112
              
              
              
              4.03
              
              
              
              25,123
              
              
              
              2.92





Volume
and Revenues by Segment





Nine
      Months Ended September 30,2009
              
              
              2008CAPP
              
              Midwest
              
              
              CAPP
              
              
              MidwestVolume (tons
      shipped)
              
              
              5,092
              
              
              
              2,385
              
              
              
              6,290
              
              
              
              2,301Coal sales
      revenue
              
              $
              453,859
              
              
              
              78,231
              
              
              
              353,388
              
              
              
              74,345Average sales price
      per ton
              
              $
              89.13
              
              
              
              32.80
              
              
              
              56.18
              
              
              
              32.31





Coal
sales revenue for the nine months ended September 30, increased from $427.7
million in 2008 to $532.1 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, which was partially offset by a decrease in tons
shipped in the CAPP region.





For
the nine months ended September 30, 2009, the CAPP region sold approximately 4.7
million tons of coal under long-term contracts (92% of total CAPP sales volume)
at an average selling price of $89.84 per ton. For the nine months ended
September 30, 2008, the CAPP region sold approximately 3.2 million tons of coal
under long-term contracts (52% of total CAPP sales volume) at an average selling
price of $50.65 per ton.  For the nine months ended September 30,
2009, the CAPP region sold 0.4 million tons of coal (8% of total CAPP sales
volume) under short term contracts (includes spot sales) at an average selling
price of $81.06 per ton. For the nine months ended September 30, 2008, the CAPP
region sold 3.1 million tons of coal (48% of total CAPP sales volume) under
short term contracts (includes spot sales) at an average selling price of $62.01
per ton.





The
Midwest’s region sales of coal were under long term contracts for both 2009 and
2008.  For the nine months ended September 30, 2009, the Midwest
region sold 2.4 million tons at an average sales price of $32.80 per
ton.  For the nine months ended September 30, 2008, the Midwest region
sold 2.3 million tons at an average sales price of $32.31 per
ton.





Operating
Costs by Segment





Nine
      Months Ended September 30,2009
              
              
              2008CAPP
              
              
              Midwest
              
              
              Corporate
              
              
              CAPP
              
              
              Midwest
              
              
              CorporateCost
      of coal sold
              
              $
              319,382
              
              
              
              69,407
              
              
              
              -
              
              
              
              322,549
              
              
              
              70,921
              
              
              
              -Per
      ton
              
              
              62.72
              
              
              
              29.10
              
              
              
              -
              
              
              
              51.28
              
              
              
              30.82
              
              
              
              -Depreciation,
      depletion and amortization
              
              
              36,424
              
              
              
              9,504
              
              
              
              39
              
              
              
              41,087
              
              
              
              10,848
              
              
              
              65Per
      ton
              
              
              7.15
              
              
              
              3.98
              
              
              
              -
              
              
              
              6.53
              
              
              
              4.71
              
              
              
              -







-20-







Cost of
Coal Sold




For
the nine months ended September 30, the cost of coal sold, excluding
depreciation, depletion and amortization, decreased from $393.5 million in 2008
to $388.8 million in 2009 due to less tons sold.  Our cost per ton of
coal sold in the CAPP region increased from $51.28 per ton in the 2008 period to
$62.72 per ton in the 2009 period.  This $11.44 increase in cost per
ton of coal sold was primarily the result of lower productivity due to increased
federal and state regulatory scrutiny which caused an increase in labor costs as
compared to prior year, a decrease in tons produced in response to market
conditions, an increase in machine parts and repairs costs, and the impact of
increased average sales prices on our sales related costs (primarily royalties
and severance taxes). The major components of this increase include an increase
in the Company’s sales related costs of $4.29 per ton, labor and benefit costs
of $2.96 per ton, preparation and loading costs of $1.74 per ton and other
variable costs of $1.52 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 $1.72 per ton from $30.82 in
the 2008 period to $29.10 per ton in the 2009 period.  The decrease in
cost per ton of coal sold was due to a $2.34 decrease in variable
costs.  The decrease in the variable costs was primarily due to a
decrease in diesel and explosives costs.





Depreciation,
depletion and amortization




For
the nine months ended September 30, depreciation, depletion and amortization
decreased from $52.0 million in 2008 to $46.0 million in 2009.  In the
CAPP region, depreciation, depletion and amortization decreased $4.7 million to
$36.4 million or $7.15 per ton.  In the Midwest, depreciation,
depletion and amortization decreased $1.3 million to $9.5 million or $3.98 per
ton.




Selling,
general and administrative




Selling, general and
administrative expenses increased from $25.1 million for the nine months ended
September 30, 2008 to $30.1 million for the nine months ended September 30,
2009.  The increase was primarily due to higher letter of credit fees,
and an increase in certain salary and benefit amounts. The increase in the
letter of credit fees is due to an increase in the usage fee under our Letter of
Credit Facility.




Income
Taxes





Our
effective tax rate for the nine months ended September 30, 2009 and 2008 was
2.7% 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 2009, we
expect that a portion of our available net operating loss carryforward will be
utilized to reduce current tax expense, and therefore the previously established
valuation allowance will be reduced.  The criteria for recording a
valuation allowance are described in “Critical Accounting Estimates – Income
Taxes.”  As of September 30, 2009, we had a $47.7 million valuation
allowance against gross deferred tax assets.  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.    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 September 30, 2009 and
December 31, 2008:





September
      30,
              2009
            
            
            December
      31,
              2008Senior
      Notes
            
            $
            150,000
            
            
            $
            150,000Revolver
            
            
            -
            
            
            
            18,000Total
      long-term debt
            
            
            150,000
            
            
            
            168,000Less amounts
      classified as current
            
            
            -
            
            
            
            18,000Total
      long-term debt, less current maturities
            
            $
            150,000
            
            
            $
            150,000








-21-





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.





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 September 30, 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 September 30, 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.(c)
            The outstanding
      balances on the Revolver, if any, 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 Adjusted EBITDA 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.





Effective July 1, 2009,
the $10.0 million minimum liquidity reserve as defined under our credit
agreements was no longer required.  As a result as of September 30,
2009, we had total liquidity of approximately $42.6 million, consisting of $35.0
million of borrowing capacity under our Revolver and $7.6 million of cash and
cash equivalents.





We
were in compliance with all of the financial covenants under the Facilities and
Senior Notes as of September 30, 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.





-22-





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 $70.8
million and $13.1 million for the nine months ended September 30, 2009 and 2008,
respectively.  We had net income of $54.2 million in the nine months
ended September 30, 2009 as compared to a net loss of $62.4 million in the nine
months ended September 30, 2008.  In reconciling our net income (loss)
to cash provided by operating activities, $53.9 million was added for non
cash charges during 2009, as compared to a $61.0 million during
2008.  During 2009, our net income, as adjusted for non cash charges,
was reduced by $37.2 million as a result of changes in cash from our operating
assets and liabilities.  The change in our operating assets and
liabilities for 2009 includes a $13.0 million increase in accounts receivable
and a $21.1 million increase in inventory.  During 2008, our net loss,
as adjusted for non cash charges, was offset by a $14.5 million increase in cash
from our operating assets and liabilities.





Net
cash used in investing activities decreased by $9.8 million to $48.6 million for
the nine months ended September 30, 2009 as compared to the same period in 2008
and consisted primarily of capital expenditures.  Capital expenditures
primarily consisted of new and replacement mine equipment and various projects
to improve the production and efficiency of our mining operations.





Net
cash used by financing activities was $17.9 million for the nine months ended
September 30, 2009 and consisted primarily of net repayments on the
Revolver.  Net cash provided by financing activities was $85.0 million
for the nine months ended September 30, 2008. During the nine months ended
September 30, 2008, our primary financing activities were the receipt of $94.0
million of net proceeds from the issuance of our common stock, net borrowings
under our Revolver of $13.0 million and the repayment $22.0 million under our
Term Loan.




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”.





-23-





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
September 30, 2009, we estimate that, as of September 30, 2009, we controlled
approximately 232.4 million tons of proven and probable coal reserves in the
CAPP region and 40.6 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
              
              
              (5.4
              )
              
              
              (2.4
              )
              
              
              (7.8
              )Acquisitions
      (2)
              
              
              0.7
              
              
              
              0.9
              
              
              
              1.6Adjustments
      (3)
              
              
              2.4
              
              
              
              0.1
              
              
              
              2.5Divesture
      (4)
              
              
              (0.4
              )
              
              
              -
              
              
              
              (0.4
              )Proven and Probable
      Reserves, as of September 30, 2009 (1)
              
              
              232.4
              
              
              
              40.6
              
              
              
              273.0





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.”








-24-





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 condensed 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 September 30, 2009, we had $104.9 million of
outstanding surety bonds with third parties. These bonds were in place to secure
obligations as follows: post-mining reclamation bonds of $61.1 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 September 30, 2009, we had $59.1 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.





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.








-25-





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 September 30, 2009 was $58.0
million.





Coal
Miners' Pneumoconiosis





We are
required under the Federal Mine Safety and Health Act of 1977, as amended, as
well as various state statutes, to provide pneumoconiosis (black lung) benefits
to eligible current and former employees and their dependents. We provide 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 September 30, 2009 was
$31.9 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 September 30, 2009.
Significant changes to these rates would introduce volatility to our pension
expense.  Our accrued pension obligation as of September 30, 2009 was $20.1
million.








-26-





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 September 30, 2009 was $44.8
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 condensed
consolidated financial statements for further discussion on our
contingencies.





Income
Taxes





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





We
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
September 30, 2009, the Company had recorded a $47.7 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.








-27-





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.





Recent
Accounting Pronouncements







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





-28-







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 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 September 30, 2009 is $54.8 million and includes the amounts
outstanding under our revolver, if any, and amounts of the letters of credit
available to be issued under our letter of credit facility as of September 30,
2009.







Nine
      months endedSeptember
      302009
              
              
              2008Net
      income (loss)
              
              $
              54,157
              
              
              
              (62,406
              )Income tax
      expense
              
              
              1,517
              
              
              
              -Interest
      expense
              
              
              11,790
              
              
              
              13,700Interest
      income
              
              
              (55
              )
              
              
              (317
              )Depreciation,
      depletion, and amortization
              
              
              45,967
              
              
              
              52,000EBITDA (before
      adjustments)
              
              $
              113,376
              
              
              
              2,977Other adjustments
      specified in our current debt agreement:Charges associated
      with repayment and amendment of debt
              
              
              -
              
              
              
              7,236Other
      adjustments
              
              
              10,023
              
              
              
              7,561Adjusted
      EBITDA
              
              $
              123,399
              
              
              
              17,774




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;








-29-








●
            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.





ITEM3.  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 September 30, 2009, we had no borrowings outstanding
under the Revolver.  We currently do not use interest rate swaps to
manage this risk.  A 100 basis point (1.0%) increase in the average
interest rate for our floating rate borrowings would increase our annual
interest expense by approximately $0.1 million for each $10 million of
borrowings under the Revolver.





We
manage our commodity price risk through the use of long-term coal supply
agreements, which we define as contracts with a term of one year or more, rather
than through the use of derivative instruments.  The percentage of our
sales pursuant to long-term contracts was approximately 94% for the nine month
ended September 30, 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.





-30-





ITEM4.  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 September 30, 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.








PARTII


OTHER
INFORMATION











ITEM1.  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.





ITEM1A. 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 92% of our total revenues (contract and spot) for the nine months ended
September 30, 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.





-31-








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





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





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





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





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





●
            currency exchange
      rates;●
            growth of economic
      development;●
            price of alternative
      sources of electricity;●
            world wide demand;
      and●
            ocean freight
      rates





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





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





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





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





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





Our
Central Appalachia mines generally ship coal via rail systems. During 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.





-32-








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





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





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





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





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





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





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





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





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.





-33-








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 claims and qualify for benefits, which could increase
our exposure to black lung benefit liabilities.





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





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





Extensive
environmental laws and regulations 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 or price of our
sales.





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





-34-








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.  In the
second quarter of 2009, a bill passed the house that would reduce greenhouse-gas
emissions to 17% below 2005 levels by 2020 and 80% below 2005 levels by the
middle of the century.





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 subsequently reversed on appeal to the 4th
Circuit Court of Appeals. While the lower court ruling applied only to the
permits at issue in the case before Judge Chambers and thus would have had
precedence only with respect to certain counties in southern West Virginia
(where we do not now operate), the matters at issue in that case may be
litigated in the future in jurisdictions in which we do operate and a ruling for
the plaintiffs in such litigation or the NWP 21 litigation could have an adverse
impact on our planned surface mining operations.





-35-








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





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





The
SMCRA establishes operational, reclamation and closure standards for all aspects
of surface mining as well as many aspects of underground mining. We accrue for
the costs of current mine disturbance and of final mine closure, including the
cost of treating mine water discharge where necessary. Under U.S. generally
accepted accounting principles we are required to account for the costs related
to the closure of mines and the reclamation of the land upon exhaustion of coal
reserves. 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
September 30, 2009, we had accrued $44.8 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.








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 nine months ended September 30, 2009, we generated approximately 92% of our
total revenues from several long-term contracts and spot sales with electrical
utilities, including 38% from Georgia Power Company, and 37% from South Carolina
Public Service Authority. At September 30, 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.





-36-








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





●
            British thermal
      units (Btu’s);●
            sulfur
      content;●
            ash
      content;●
            grindability;
      and●
            ash
      fusion temperature.





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





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








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





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





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





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





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





Underground coal mining is
subject to federal and state laws and regulations relating to safety in
underground coal mines and enforcement activities by federal and state
regulators.  These laws and regulations, the most significant of which is
the federal MINER Act,  include requirements for constructing and
maintaining caches for the storage of additional self-contained self rescuers
throughout underground mines; installing rescue chambers in underground mines;
constant tracking of and communication with personnel in the mines; 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.





-37-











The
U.S. Department of Labor, Mine Safety and Health Administration (MSHA)
periodically notifies certain coal mines that a potential pattern of violations
may exist based upon an initial statistical screening of violation history and
pattern criteria review by MSHA.  Upon receipt of such a notification, we
conduct a comprehensive review of the operation that received the notification
and prepare and submit to MSHA plans designed to enhance employee safety at the
mine through better education, training, mining practices, and safety
management.   Following implementation of the plans, MSHA
conducts a complete inspection of the mine and further evaluates the situation
and then advises the operator whether a pattern of violation exists and whether
further action will be taken.   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:




●
            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.





-38-








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:





●
            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 September 30, 2009, we had outstanding surety bonds with
third parties for post-mining reclamation totaling $61.1 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.





-39-











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 September
30, 2009, the current and non-current portions of these obligations included
$31.9 million for coal workers’ black lung benefits and $58.0 million for
workers’ compensation benefits.





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





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





We
provide benefits under a defined benefit pension plan that was frozen in 2007.
As of September 30, 2009, we estimated that our obligation under the pension
plan was underfunded by approximately $20.1 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 September 30, 2009 of
      $72.2 million.  In order to meet the twelve month Adjusted
      EBITDA target at September 30, 2009, we needed Adjusted EBITDA of $54.6
      million in the nine months ended September 30, 2009.   Our
      Adjusted EBITDA in the nine months ended September 30, 2009 was $123.4
      million.  The most directly comparable US GAAP financial measure is
      net income.  For the nine months ended September 30, 2009, we had net
      income of $54.2 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.





-40-








●
            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
      1.5x as of September 30, 2009 and decreases further thereafter.  Our
      Leverage Ratio was 0.4X as of September 30, 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 $69.9 million (including unused
      carryover from the prior year).  For the nine months ended
      September 30, 2009, we made Capital Expenditures of $47.9 million
      (excludes Mandatory Capital
Expenditures).





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





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





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





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





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





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





Inability
to satisfy contractual obligations may adversely affect our
profitability.





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





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





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





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.





-41-











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





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





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





We
believe that our cash on hand, the availability under our Revolver and
cash generated from our operations will provide us with adequate
liquidity through 2010.  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.








-42-








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.





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.





ITEM2. UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS





None.





ITEM3. DEFAULTS UNDER SENIOR SECURITIES





None.


ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS


None.


ITEM5. OTHER INFORMATION


None.








ITEM 6. EXHIBITS





The
      following exhibits are filed herewith:
            ExhibitAmendment
      No. 3, dated as of November 3, 2009, to the Rights Agreement between
      the Registrant and Computershare Trust Company, N.A., successor to
      SunTrust Bank, as Rights Agent, dated as of May 25, 2009,
      incorporated herein by reference to Amendment No. 1 to the Registrant's
      Form 8-A filed November 3, 2009.
            4.9Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.
            31.1Certification
      of Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.
            31.2Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.
            32.1Certification
      of Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.
            32.2














-43-








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


November 3,
2009









-44-