UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q


(Mark
One)




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





For the
quarterly period ended March 31, 2010


OR





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





For the
transition period from __________________ to __________________





Commission
File Number _000-51129




JAMES
      RIVER COAL COMPANY


(Exact
name of registrant as specified in its charter)





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





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





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




Yes  ý        No   o





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


Yes  o       
No   o





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




Large accelerated
      filer o
            Accelerated
      filer  ýNon-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 April 19,
2010 was 27,543,278.












FORM
10-Q INDEX




PagePART IFINANCIAL
      INFORMATION
              3Item 1.
              Financial
      Statements.
              3Condensed
      Consolidated Balance Sheets as of March 31, 2010 and December 31,
      2009
              3Condensed
      Consolidated Statements of Operations for the three months endedMarch
      31, 2010 and 2009
              5Condensed
      Consolidated Statements of Changes in Shareholders’ Equity andComprehensive
      Income (Loss) for the three months ended March 31, 2010 and the yearended
      December 31, 2009
              6Condensed
      Consolidated Statements of Cash Flows for the three months endedMarch
      31, 2010 and 2009
              7Notes to Condensed
      Consolidated Financial Statements
              8Item 2.
              Management’s Discussion and
      Analysis of Financial Condition and Results of Operations.
              16Item 3.
              Quantitative and Qualitative
      Disclosures about Market Risk.
              28Item 4.
              Controls and
      Procedures.
              28PART IIOTHER
    INFORMATION
              29Item 1.
              Legal
    Proceedings.
              29Item 1A.
              Risk Factors.
              29Item 2.
              Unregistered Sales of Equity
      Securities and Use of Proceeds.
              42Item 3.
              Defaults Upon Senior
      Securities.
              42Item 4.
              Other
    Information.
              42Item 5.
              Exhibits.
              42SIGNATURES
              43








-2-





PART
I FINANCIAL
INFORMATION





ITEM 1.  FINANCIAL
STATEMENTS





JAMES
RIVER COAL COMPANY


AND
SUBSIDIARIES





Condensed
Consolidated Balance Sheets


(in
thousands)




March
      31, 2010
              
              
              December
      31, 2009AssetsCurrent
      assets:Cash
      and cash equivalents
              
              $
              153,129
              
              
              
              107,931Receivables:Trade
              
              
              67,295
              
              
              
              43,289Other
              
              
              111
              
              
              
              260Total
      receivables
              
              
              67,406
              
              
              
              43,549Inventories:Coal
              
              
              16,172
              
              
              
              22,727Materials
      and supplies
              
              
              11,103
              
              
              
              10,462Total
      inventories
              
              
              27,275
              
              
              
              33,189Prepaid
      royalties
              
              
              5,671
              
              
              
              6,045Other
      current assets
              
              
              3,119
              
              
              
              3,292Total
      current assets
              
              
              256,600
              
              
              
              194,006Property,
      plant, and equipment, at cost:Land
              
              
              7,444
              
              
              
              7,194Mineral
      rights
              
              
              231,919
              
              
              
              231,919Buildings,
      machinery and equipment
              
              
              374,847
              
              
              
              362,654Mine
      development costs
              
              
              42,580
              
              
              
              41,069Total
      property, plant, and equipment
              
              
              656,790
              
              
              
              642,836Less
      accumulated depreciation, depletion, and amortization
              
              
              304,580
              
              
              
              288,748Property,
      plant and equipment, net
              
              
              352,210
              
              
              
              354,088Goodwill
              
              
              26,492
              
              
              
              26,492Restricted
      cash (note 4)
              
              
              32,135
              
              
              
              62,042Other
      assets
              
              
              32,800
              
              
              
              32,684Total
      assets
              
              $
              700,237
              
              
              
              669,312








See
accompanying notes to condensed consolidated financial statements.






-3-




JAMES
RIVER COAL COMPANY


AND
SUBSIDIARIES




Condensed
Consolidated Balance Sheets


(in
thousands, except share amounts)




March
      31, 2010
              
              
              December
      31, 2009Liabilities
      and Shareholders' EquityCurrent
      liabilities:Accounts
      payable
              
              $
              38,395
              
              
              
              46,472Accrued
      salaries, wages, and employee benefits
              
              
              10,657
              
              
              
              6,982Workers'
      compensation benefits
              
              
              8,950
              
              
              
              8,950Black
      lung benefits
              
              
              1,782
              
              
              
              1,782Accrued
      taxes
              
              
              7,321
              
              
              
              4,383Other
      current liabilities
              
              
              20,217
              
              
              
              15,439Total
      current liabilities
              
              
              87,322
              
              
              
              84,008Long-term
      debt
              
              
              279,650
              
              
              
              278,268Other
      liabilities:Noncurrent
      portion of workers' compensation benefits
              
              
              51,053
              
              
              
              50,385Noncurrent
      portion of black lung benefits
              
              
              41,124
              
              
              
              31,017Pension
      obligations
              
              
              14,123
              
              
              
              14,827Asset
      retirement obligations
              
              
              40,540
              
              
              
              39,843Other
              
              
              622
              
              
              
              622Total
      other liabilities
              
              
              147,462
              
              
              
              136,694Total
      liabilities
              
              
              514,434
              
              
              
              498,970Commitments
      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 27,543,278 and 27,544,878 sharesas
      of March 31, 2010 and December 31, 2009, respectively
              
              
              275
              
              
              
              275Paid-in-capital
              
              
              321,499
              
              
              
              320,079Accumulated
      deficit
              
              
              (113,513
              )
              
              
              (136,758
              )Accumulated
      other comprehensive loss
              
              
              (22,458
              )
              
              
              (13,254
              )Total
      shareholders' equity
              
              
              185,803
              
              
              
              170,342Total
      liabilities and shareholders' equity
              
              $
              700,237
              
              
              
              669,312




See
accompanying notes to consolidated financial statements.
 -4-




JAMES
RIVER COAL COMPANY


AND
SUBSIDIARIES





Condensed
Consolidated Statements of Operations


(in
thousands, except per share data)


(unaudited)




Three
      Months
                
                
                Three
      MonthsEnded
                
                
                EndedMarch
      31, 2010
                
                
                March
      31, 2009Revenues
                
                $
                184,601
                
                
                
                192,121Cost
      of sales:Cost
      of coal sold
                
                
                129,317
                
                
                
                132,707Depreciation,
      depletion and amortization
                
                
                16,358
                
                
                
                14,473Total
      cost of sales
                
                
                145,675
                
                
                
                147,180Gross
      profit
                
                
                38,926
                
                
                
                44,941Selling,
      general and administrative expenses
                
                
                9,319
                
                
                
                9,287Total
      operating income
                
                
                29,607
                
                
                
                35,654Interest
      expense (note 2)
                
                
                7,381
                
                
                
                4,053Interest
      income
                
                
                (4
                )
                
                
                (25
                )Miscellaneous
      income, net
                
                
                (42
                )
                
                
                (54
                )Total
      other expense, net
                
                
                7,335
                
                
                
                3,974Income
      before income taxes
                
                
                22,272
                
                
                
                31,680Income
      tax (benefit) expense
                
                
                (973
                )
                
                
                3,509Net
      income
                
                $
                23,245
                
                
                
                28,171Earnings
      per common share (note 5)Basic
      earnings per common share
                
                $
                0.84
                
                
                
                1.03Diluted
      earnings per common share
                
                $
                0.84
                
                
                
                1.03






See
accompanying notes to condensed consolidated financial statements.






-5-





JAMES
RIVER COAL COMPANY


AND
SUBSIDIARIES


Condensed
Consolidated Statements of Changes in Shareholders’


Equity
and Comprehensive Income (Loss)


(in
thousands)


(unaudited)






Common
                  stock
                  shares
                
                
                Common
                  stock
      par
                  value
                
                
                Paid-in-
                  capital
                
                
                Retained
      earnings (accumulated deficit)
                
                
                Accumulated
      other comprehensive income (loss)
                
                
                TotalBalances,
      January 1, 2009
                
                
                27,393
                
                
                $
                274
                
                
                
                272,366
                
                
                
                (187,712
                )
                
                
                (19,690
                )
                
                
                65,238Net
      Income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                50,954
                
                
                
                -
                
                
                
                50,954Amortization
      of pension actuarial amount
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,606
                
                
                
                1,606Black
      lung obligation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (574
                )
                
                
                (574
                )Pension
      liability adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,404
                
                
                
                5,404Comprehensive
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                57,390Equity
      component of convertible debt offering, net of offeringcosts of
      $1,433
                
                
                -
                
                
                
                -
                
                
                
                43,385
                
                
                
                -
                
                
                
                -
                
                
                
                43,385Issuance
      of restricted stock awards, net of forfeitures
                
                
                234
                
                
                
                2
                
                
                
                (2
                )
                
                
                -
                
                
                
                -
                
                
                
                -Repurchase
      of shares for tax withholding
                
                
                (87
                )
                
                
                (1
                )
                
                
                (1,712
                )
                
                
                -
                
                
                
                -
                
                
                
                (1,713
                )Exercise
      of stock options
                
                
                5
                
                
                
                -
                
                
                
                75
                
                
                
                -
                
                
                
                -
                
                
                
                75Stock
      based compensation
                
                
                -
                
                
                
                -
                
                
                
                5,967
                
                
                
                -
                
                
                
                -
                
                
                
                5,967Balances,
      December 31, 2009
                
                
                27,545
                
                
                $
                275
                
                
                
                320,079
                
                
                
                (136,758
                )
                
                
                (13,254
                )
                
                
                170,342Net
      Income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                23,245
                
                
                
                -
                
                
                
                23,245Amortization
      of pension actuarial amount
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                196
                
                
                
                196Black
      lung obligation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (9,400
                )
                
                
                (9,400
                )Comprehensive
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                14,041Issuance
      of restricted stock awards, net of forfeitures
                
                
                (2
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Stock
      based compensation
                
                
                -
                
                
                
                -
                
                
                
                1,420
                
                
                
                -
                
                
                
                -
                
                
                
                1,420Balances,
      March 31, 2010
                
                
                27,543
                
                
                $
                275
                
                
                
                321,499
                
                
                
                (113,513
                )
                
                
                (22,458
                )
                
                
                185,803





See
accompanying notes to condensed consolidated financial statements.








-6-


JAMES
RIVER COAL COMPANY


AND
SUBSIDIARIES




Condensed
Consolidated Statements of Cash Flows


(in
thousands)


(unaudited)




Three
      Months
              
              
              Three
      MonthsEnded
              
              
              EndedMarch
      31,
              
              
              March
      31,2010
              
              
              2009Cash
      flows from operating activities:Net
      income
              
              $
              23,245
              
              
              
              28,171Adjustments
      to reconcile net incometo net cash provided by operating
      activitiesDepreciation,
      depletion, and amortization
              
              
              16,358
              
              
              
              14,473Accretion
      of asset retirement obligations
              
              
              821
              
              
              
              793Amortization
      of debt discount and issue costs
              
              
              1,882
              
              
              
              293Stock-based
      compensation
              
              
              1,420
              
              
              
              1,514Changes
      in operating assets and liabilities:Receivables
              
              
              (23,857
              )
              
              
              (18,014
              )Inventories
              
              
              5,406
              
              
              
              (14,883
              )Prepaid
      royalties and other current assets
              
              
              547
              
              
              
              933Restricted
      cash
              
              
              29,907
              
              
              
              -Other
      assets
              
              
              549
              
              
              
              2,871Accounts
      payable
              
              
              (8,077
              )
              
              
              1,921Accrued
      salaries, wages, and employee benefits
              
              
              3,675
              
              
              
              2,490Accrued
      taxes
              
              
              2,938
              
              
              
              5,079Other
      current liabilities
              
              
              4,671
              
              
              
              229Workers'
      compensation benefits
              
              
              668
              
              
              
              1,027Black
      lung benefits
              
              
              707
              
              
              
              592Pension
      obligations
              
              
              (508
              )
              
              
              536Asset
      retirement obligations
              
              
              (17
              )
              
              
              (210
              )Other
      liabilities
              
              
              -
              
              
              
              43Net
      cash provided by operating activities
              
              
              60,335
              
              
              
              27,858Cash
      flows from investing activities:Additions
      to property, plant, and equipment
              
              
              (13,972
              )
              
              
              (12,413
              )Net
      cash used in investing activities
              
              
              (13,972
              )
              
              
              (12,413
              )Cash
      flows from financing activities:Proceeds
      from Revolver
              
              
              -
              
              
              
              5,000Repayments
      of Revolver
              
              
              -
              
              
              
              (14,000
              )Debt
      issuance costs
              
              
              (1,165
              )
              
              
              -Net
      cash used in financing activities
              
              
              (1,165
              )
              
              
              (9,000
              )Increase
      in cash
              
              
              45,198
              
              
              
              6,445Cash
      and cash equivalents at beginning of period
              
              
              107,931
              
              
              
              3,324Cash
      and cash equivalents at end of period
              
              $
              153,129
              
              
              
              9,769











See
accompanying notes to condensed consolidated financial statements.




-7-





JAMES
RIVER COAL COMPANY


AND
SUBSIDIARIES





Notes to
Condensed Consolidated Financial Statements





(Unaudited)




(1)
            Summary
      of Significant Accounting Policies and Other
  Information




Description
of Business and Principles of Consolidation




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, 2009. The balances presented as of
or for the year ended December 31, 2009 are derived from the Company’s audited
consolidated financial statements.





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




(2)
            Long
      Term Debt and Interest Expense




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




March
      31,
              2010
            
            
            December
      31,
              2009Senior
      Notes
            
            $
            150,000
            
            
            $
            150,000Convertible
      Senior Notes, net of discount
            
            
            129,650
            
            
            
            128,268Revolver
            
            
            -
            
            
            
            -Total
      long-term debt
            
            $
            279,650
            
            
            $
            278,268




Senior
Notes




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




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




-8-




Convertible
Senior Notes




During
the fourth quarter of 2009, the Company issued $172.5 million of 4.5%
Convertible Senior Notes due on December 1, 2015 (the “Convertible Senior
Notes”).   The Convertible Senior Notes are shown net of a $42.9
million discount on the consolidated financials statements as of March 31,
2010.  The discount on the Convertible Senior Notes relates to the
$44.8 million of the proceeds that were allocated to the equity component of the
Convertible Senior Notes at issuance.  The Convertible Senior Notes
are unsecured and are convertible under certain circumstances and during certain
periods at an initial conversion rate of 38.7913 shares of the Company’s common
stock per $1,000 principal amount of Convertible Senior Notes, representing an
initial conversion price of approximately $25.78 per share of the Company’s
stock.  Interest payments on the Convertible Senior Notes are required
semi-annually.





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





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




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




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




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





Revolving
Credit Agreement





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





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





(a)
            Base
      rate is the higher of (1) the Federal Fund Rate plus 3.0%, (2) the prime
      rate and (3) a LIBOR rate plus 1.0%.(b)
            The
      Revolver’s borrowing base is based on the sum of 85% of the Company’s
      eligible accounts receivable plus 65% of the eligible inventory minus
      reserves from time to time set by administrative agent.  The
      eligible accounts receivable and inventories are further adjusted as
      specified in the agreement.  The Company’s borrowing base can
      also be increased by 95% of any cash collateral that the Company maintains
      in a cash collateral account.





The
Revolver provides that the Company can use the Revolver availability to issue
letters of credit. The Revolver provides for a 4.25% fee on any outstanding
letters of credit issued under the Revolver and a 0.5% fee on the unused portion
of the Revolver. The Revolver requires certain mandatory prepayments from
certain asset sales, incurrence of indebtedness and excess cash flow. The
Revolver includes financial covenants that require the Company to maintain a
minimum Adjusted EBITDA and a maximum Leverage Ratio and limit capital
expenditures, each as defined by the agreement. However, the minimum EBITDA and
maximum Leverage Ratio covenants are only applicable if the Company’s
unrestricted cash balance falls below $75.0 million and would remain in effect
until the Company’s unrestricted cash exceeds $75 million for 90 consecutive
days.





As of
March 31, 2010, the Company has used $27.3 million of the $63.5 million
available under the Revolver’s availability to secure outstanding letters of
credits.  The Company intends to use the Revolver to support the
remaining $30.6 million of existing letters of credit that are currently secured
by cash held in a restricted account.   As the Company secures
the additional letters of credit with the Revolver, the cash that is currently
being held as security for the letters of credit will become
unrestricted.  A portion of this cash may be used to ensure that the
Company has adequate capacity under the Revolver to support its outstanding
letters of credit.




-9-




Interest
Expense and Other





During
the three months ended March 31, 2010, the Company had no cash payments for
interest.  During the three months ended March 31, 2009, the Company
paid approximately $0.5 million in interest.





In
connection with the amendment to the Revolver, the Company capitalized $1.2
million of costs in the first quarter of 2010.





The
Company was in compliance with all of the financial covenants under its
outstanding debt instruments as of March 31, 2010.




(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.





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





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





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




Equity
Based Compensation




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





Restricted
Stock Awards





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





Stock
Option Awards





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




-10-




Shares
awarded or subject to purchase under the Plan that are not delivered or
purchased, or revert to the Company as a result of forfeiture or termination,
expiration or cancellation of an award or that are used to exercise an award or
for tax withholding, will be again available for issuance under the Plan. At
March 31, 2010, there were 845,416 shares available under the Plan for future
awards.





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





Three
      months endedMarch
      31,2010
              
              
              2009Restricted
      stock
              
              $
              1,348
              
              
              $
              1,435Stock
      options
              
              
              72
              
              
              
              79Stock
      based compensation
              
              $
              1,420
              
              
              $
              1,514




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





The
following is a summary of activity related to restricted stock and stock option
awards for the three months ended March 31, 2010:




Restricted
      Stock
              
              
              Stock
      OptionsWeighted
              
              
              
              
              
              WeightedAverage
              
              
              
              
              
              AverageNumber
      of
              
              
              Fair
      Value
              
              
              Number
      of
              
              
              ExerciseShares
              
              
              at
      Issue
              
              
              Shares
              
              
              PriceDecember
      31, 2009
              
              
              717,652
              
              
              $
              21.86
              
              
              
              276,000
              
              
              $
              16.34Granted
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercised/Vested
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Canceled
              
              
              (1,600
              )
              
              
              17.43
              
              
              
              -
              
              
              
              -March
      31, 2010
              
              
              716,052
              
              
              
              21.87
              
              
              
              276,000
              
              
              
              16.34




The
following table summarizes additional information about the stock options
outstanding at March 31, 2010:




Range
      of
                  Exercise
      Price
                
                
                Shares
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Weighted
                  Average
      Remaining Contractual Life (Years)
                
                
                Aggregate
      Intrinsic
                  Value
      (1)
                  (in
      000's)Outstanding
      at March 31, 2010
                
                $10.80-$36.30
                
                
                276,000
                
                
                $16.34
                
                
                5.2
                
                
                $
                849Exercisable
      at March 31, 2010
                
                $10.80-$36.30
                
                
                236,004
                
                
                $15.47
                
                
                4.7
                
                
                $
                800Vested
      and expected to vest at March 31, 2010
                
                
                
                
                276,000
                
                
                $16.34
                
                
                5.2
                
                
                $
                849
  (1)
                  The
      difference between a stock award's exercise price and the underlying
      stock's market price at March 31, 2010.
                    No value is assigned to stock awards whose option price exceeds
      the stock's market price at March 31,
2010.




-11-




The
following table summarizes the Company’s total unrecognized compensation cost
related to stock based compensation as of March 31, 2010:




Weighted
      AverageRemaining PeriodUnearned
              
              
              Of
      ExpenseCompensation
              
              
              Recognition(in
      000's)
              
              
              (in
      years)Stock
      Options
              
              $
              342
              
              
              1.4Restricted
      Stock
              
              
              8,478
              
              
              2.4Total
              
              $
              8,820




(4)
            Commitments
      and Contingencies




The
Company has established irrevocable letters of credit totaling $57.9 million as
of March 31, 2010 to guarantee performance under certain contractual
arrangements.  The Company has issued $27.3 million of the letters of
credit under the Revolver (see Note 2) and the $30.6 million of remaining
letters of credit were secured by $32.1 million of cash held in a restricted
account.




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
      Per Share




Basic
earnings per share is computed by dividing net income 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.














-12-




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




Three
      Months EndedMarch
      31,2010
              
              
              2009Basic
      earnings per common share:Net
      income
              
              $
              23,245
              
              
              
              28,171Income
      allocated to participating securities
              
              
              (605
              )
              
              
              (722
              )Net
      income available to common shareholders
              
              $
              22,640
              
              
              
              27,449Weighted
      average number of common andcommon
      equivalent shares outstanding:Basic
      number of common shares outstanding
              
              
              26,827
              
              
              
              26,692Dilutive
      effect of unvested restricted stock(participating
      securities)
              
              
              717
              
              
              
              701Dilutive
      effect of stock options
              
              
              51
              
              
              
              23Diluted
      number of common shares andcommon
      equivalent shares outstanding
              
              
              27,595
              
              
              
              27,416Basic
      earnings per common share
              
              $
              0.84
              
              
              
              1.03Diluted
      net income per common share:Net
      income
              
              $
              23,245
              
              
              
              28,171Income
      allocated to participating securities
              
              
              -
              
              
              
              -Net
      income available to potential commonshareholders
              
              $
              23,245
              
              
              
              28,171Diluted
      earnings per common share
              
              $
              0.84
              
              
              
              1.03




(6)
            Pension
      Expense




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




Three
      Months EndedMarch
      31,2010
              
              
              2009Interest
      cost
              
              $
              940
              
              
              
              915Expected
      return on plan assets
              
              
              (922
              )
              
              
              (775
              )Recognized
      net actuarial loss
              
              
              196
              
              
              
              402Net
      periodic cost
              
              $
              214
              
              
              
              542
   -13-


(7)
              Pneumoconiosis
      (Black Lung) Benefits




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




Three
      Months EndedMarch
      31,2010
              
              
              2009Service
      Cost
              
              $
              342
              
              
              
              306Interest
      cost
              
              
              459
              
              
              
              428Total
      expense
              
              $
              801
              
              
              
              734


In March
2010, The Patient Protection and Affordable Care Act of 2010 (Act) was enacted
into law and included a black lung provision that creates a rebuttable
presumption that a miner with at least 15 years of service, with totally
disabling pulmonary or respiratory lung impairment and negative radiographic
chest x-ray evidence would be disabled due to pneumoconiosis and be eligible for
black lung benefits.  The new Act also makes it easier for widows of miners
to become eligible for benefits.  The Company was able to make an initial
evaluation of the impact of these changes on a limited population of current and
potential future claimants, resulting in an estimated $9.4 million increase
to the black lung obligation. As of March 31, 2010, this estimated increase
in the black lung obligation was recorded along with an increase in the
actuarial loss included in “Accumulated other comprehensive loss” on the
Company’s balance sheet.  Beginning in the second quarter of 2010, the
Company estimates that there will be a $0.4 million increase in the quarterly
black lung expense related to the amortization of this additional actuarial loss
and increases in the service and interest cost components.  As of
March 31, 2010, the Company is not able to estimate the impact of this
legislation on the obligations related to future claims from older terminated
miners and possible re-filed claims, due to significant uncertainty around the
number of claims that will be filed and how impactful the new award criteria
will be to these claim populations.  The Company will continue to
assess the impact of this legislation on its initial estimate as additional
information becomes available and future regulations are issued.





(8)
            Financial
      Instruments





The
estimated fair value of financial instruments has been determined by the Company
using available market information. As of March 31, 2010 and December 31, 2009,
except for long-term debt obligations, the carrying amounts of all financial
instruments approximate their fair values due to their short
maturities.




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





March
      31, 2010
            
            December
      31, 2009Carrying
      Value
            Fair
      Value
            
            Carrying
      Value
            Fair
      ValueSenior
      Notes
            $150,000
            $152,625
            
            $150,000
            $153,750Convertible
      Senior Notes (excludes discount)
            $172,500
            $161,460
            
            $172,500
            $171,650




The
carrying amounts and fair values of our Senior Notes and Convertible Senior
Notes are based on available market data at the date presented.  The
carrying value of the Convertible Senior Notes reflected in long-term debt in
the table above reflects the full face amount of $172.5 million, which has been
adjusted in the Consolidated Balance Sheets for a discount related to its
convertible feature (Note 2).




(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).





-14-




Three
      Months EndedMarch
      31,2010
              
              
              2009RevenuesCAPP
              
              $
              155,564
              
              
              
              167,635Midwest
              
              
              29,037
              
              
              
              24,486Corporate
              
              
              -
              
              
              
              -Total
              
              $
              184,601
              
              
              
              192,121Depreciation,
      depletion and amortizationCAPP
              
              $
              13,488
              
              
              
              11,157Midwest
              
              
              2,855
              
              
              
              3,301Corporate
              
              
              15
              
              
              
              15Total
              
              $
              16,358
              
              
              
              14,473Total
      operating income (loss)CAPP
              
              $
              31,642
              
              
              
              41,666Midwest
              
              
              3,037
              
              
              
              (584
              )Corporate
              
              
              (5,072
              )
              
              
              (5,428
              )Total
              
              $
              29,607
              
              
              
              35,654Net
      earnings (loss) (1)CAPP
              
              $
              31,642
              
              
              
              41,666Midwest
              
              
              3,037
              
              
              
              (584
              )Corporate
              
              
              (11,434
              )
              
              
              (12,911
              )Total
              
              $
              23,245
              
              
              
              28,171


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




March
      31,
              
              
              December
      31,2010
              
              
              2009Total
      AssetsCAPP
              
              $
              459,354
              
              
              
              421,825Midwest
              
              
              95,450
              
              
              
              88,815Corporate
              
              
              145,433
              
              
              
              158,672Total
              
              $
              700,237
              
              
              
              669,312GoodwillCAPP
              
              $
              -
              
              
              
              -Midwest
              
              
              26,492
              
              
              
              26,492Corporate
              
              
              -
              
              
              
              -Total
              
              $
              26,492
              
              
              
              26,492












-15-




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







The
following discussion and analysis is provided to increase the understanding of,
and should be read in conjunction with, the Condensed Consolidated Financial
Statements and accompanying notes contained herein and the Company’s annual
report on Form 10-K for the year ended December 31, 2009.





Overview





We mine,
process and sell bituminous, steam- and industrial-grade coal through six
operating subsidiaries (“mining complexes”) located throughout eastern Kentucky
and in southern Indiana.  We have two reportable business segments
based on the coal basins in which we operate (Central Appalachia (CAPP) and the
Midwest (Midwest)).  We derived 90% of our total revenues (contract
and spot) in the three months ended March 31, 2010 from coal sales to electric
utility customers and the remaining 10% from coal sales to industrial and other
customers.  For the three months ended March 31, 2010, our mines
produced 2.3 million tons of coal.  Our coal purchased for resale was
less than 0.1 million tons for the three months ended March 31,
2010.  Of the 2.3 million tons we produced from Company operated
mines, approximately 66% came from underground mines, while the remaining 34%
came from surface mines.    For the three months ended March
31, 2010, we generated revenues of $184.6 million and net income of $23.2
million.





CAPP
Segment





In
Central Appalachia, our coal is primarily sold to customers in the southern
portion of the South Atlantic region of the United States.  The South
Atlantic Region includes the states of Florida, Georgia, South Carolina, North
Carolina, West Virginia, Virginia, Maryland and Delaware.  We have
been providing coal to customers in the South Atlantic region since our
formation in 1988.  For the three months ended March 31, 2010, our
CAPP segment produced 1.6 million tons of coal (including contract coal and
purchased coal). Of the CAPP tons produced, 87% came from Company operated
underground mines. For the three months ended March 31, 2010, we shipped 1.7
million tons of coal and generated coal sale revenues of $155.6 million from our
CAPP segment. For the three months ended March 31, 2010, South Carolina Public
Service Authority and Georgia Power Company were our largest customers,
representing approximately 43% and 29% of our total revenues,
respectively.  No other CAPP customer accounted for more than 10% of
our total revenues.





Midwest
Segment





In the
Midwest, the majority of our coal is sold in the East North Central Region,
which includes the states of Illinois, Indiana, Ohio, Michigan and Wisconsin.
For the three months ended March 31, 2010, our Midwest mines produced
approximately 0.8 million tons of coal. Of the Midwest tons produced, 79% came
from Company operated surface mines. For the three months ended March 31, 2010,
we shipped 0.7 million tons of coal and generated coal sale revenues of $29.0
million from our Midwest segment. For the three months ended March 31, 2010, our
Midwest segment’s largest customer, Indianapolis Power and Light, represented
approximately 11% of our total revenues. No other Midwest customer accounted for
more than 10% of our total revenues.








-16-


Results
of Operations





Three
Months Ended March 31, 2010 Compared with the Three Months Ended March 31,
2009





The
following tables show selected operating results for the three months ended
March 31, 2010 compared to the three months ended March 31, 2009 (in thousands
except per ton amounts).





Three
      Months Ended March 31,2010
              
              
              2009Total
              
              
              Per
      Ton
              
              
              Total
              
              
              Per
      TonVolume
      shipped (tons)
              
              
              2,400
              
              
              
              
              
              
              2,631Revenues
              
              $
              184,601
              
              
              
              76.92
              
              
              $
              192,121
              
              
              
              73.02Cost
      of coal sold
              
              
              129,317
              
              
              
              53.88
              
              
              
              132,707
              
              
              
              50.44Depreciation,
      depletion and amortization
              
              
              16,358
              
              
              
              6.82
              
              
              
              14,473
              
              
              
              5.50Gross
      profit
              
              
              38,926
              
              
              
              16.22
              
              
              
              44,941
              
              
              
              17.08Selling,
      general and administrative
              
              
              9,319
              
              
              
              3.88
              
              
              
              9,287
              
              
              
              3.53Operating
      income
              
              
              29,607
              
              
              
              12.34
              
              
              
              35,654
              
              
              
              13.55





Volume
and Revenues by Segment





Three
      Months Ended March 31,2010
              
              
              2009CAPP
              
              
              Midwest
              
              
              CAPP
              
              
              MidwestVolume
      shipped (tons)
              
              
              1,662
              
              
              
              738
              
              
              
              1,844
              
              
              
              787Coal
      sales revenue
              
              $
              155,564
              
              
              
              29,037
              
              
              
              167,635
              
              
              
              24,486Average
      sales price per ton
              
              $
              93.60
              
              
              
              39.35
              
              
              
              90.91
              
              
              
              31.11




Coal
sales revenue for the three months ended March 31, decreased from $192.1 million
in 2009 to $184.6 million in 2010. This decrease was due to a decrease in tons
shipped in the CAPP and Midwest regions, which was partially offset by an
increase in the average sales price per ton in the CAPP and Midwest
regions.





For the
three months ended March 31, 2010, the CAPP region sold approximately 1.3
million tons of coal under long-term contracts (79% of total CAPP sales volume)
at an average selling price of $101.27 per ton. For the three months ended March
31, 2009, the CAPP region sold approximately 1.6 million tons of coal under
long-term contracts (88% of total CAPP sales volume) at an average selling price
of $91.65 per ton.  For the three months ended March 31, 2010, the
CAPP region sold 0.4 million tons of coal (21% of total CAPP sales volume) under
short term contracts (includes spot sales) at an average selling price of $64.85
per ton. For the three months ended March 31, 2009, the CAPP region sold 0.2
million tons of coal (12% of total CAPP sales volume) under short term contracts
(includes spot sales) at an average selling price of $85.75 per
ton.





The
Midwest’s region sales of coal were under long term contracts for the three
months ended March 31, 2010 and 2009.  For the three months ended
March 31, 2010, the Midwest region sold 0.7 million tons at an average sales
price of $39.35 per ton.  For the three months ended March 31, 2009,
the Midwest region sold 0.8 million tons at an average sales price of $31.11 per
ton.





Operating
Costs by Segment




Three
      Months Ended March 31,2010
              
              
              2009CAPP
              
              
              Midwest
              
              
              Corporate
              
              
              CAPP
              
              
              Midwest
              
              
              CorporateCost
      of coal sold
              
              $
              106,740
              
              
              
              22,577
              
              
              
              -
              
              
              
              111,484
              
              
              
              21,223
              
              
              
              -Per
      ton
              
              
              64.22
              
              
              
              30.59
              
              
              
              -
              
              
              
              60.46
              
              
              
              26.97
              
              
              
              -Depreciation,
      depletion and amortization
              
              
              13,488
              
              
              
              2,855
              
              
              
              15
              
              
              
              11,157
              
              
              
              3,301
              
              
              
              15Per
      ton
              
              
              8.12
              
              
              
              3.87
              
              
              
              -
              
              
              
              6.05
              
              
              
              4.19
              
              
              
              -




-17-




Cost of Coal Sold




For the
three months ended March 31, the cost of coal sold, excluding depreciation,
depletion and amortization, decreased from $132.7 million in 2009 to $129.3
million in 2010.  Our cost per ton of coal sold in the CAPP region
increased from $60.46 per ton in the 2009 period to $64.22 per ton in the 2010
period.  The major components of the $3.76 increase in cost per ton of
coal sold include an increase in our preparation and loading costs of $1.48 per
ton, sales related costs of $1.36 per ton and labor and benefit costs of $0.63
per ton.  Our preparation and loading costs and our labor and benefit
costs were impacted by a decrease in tons produced.  The reduction in
tons produced were primarily the result of lower productivity due to increased
federal and state regulatory scrutiny which and a decrease in tons produced in
response to market conditions.   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 $3.62 per ton from $26.97 in the
2009 period to $30.59 per ton in the 2010 period.  The major
components of this increase include an increase in the variable costs of $1.14
per ton, benefit costs of $0.58 per ton and sales related costs of $0.55 per
ton.  The increase in the variable costs was primarily due to an
increase in diesel and explosives costs.





Depreciation,
depletion and amortization




For the
three months ended March 31, depreciation, depletion and amortization increased
from $14.5 million in 2009 to $16.4 million in 2010.  In the CAPP
region, depreciation, depletion and amortization increased $2.3 million to $13.5
million or $8.12 per ton.  In the Midwest, depreciation, depletion and
amortization decreased $0.4 million to $2.9 million or $3.87 per
ton.




Selling,
general and administrative




Selling,
general and administrative expenses were $9.3 million for the three months ended
March 31, 2010 and March 31, 2009.




Interest
Expense




Interest
expense for the three months ended March 31, increased from $4.1 million in 2009
to $7.4 million in 2010.  This increase was the result of an
additional $3.4 million of interest on our convertible senior notes that were
issued in the fourth quarter of 2009, including $1.4 million related to the
amortization of the debt discount recorded on this issuance.





Income
Taxes





Our
effective tax rate for the three months ended March 31, 2010 was a benefit of
4.4% and our effective tax rate for the three months ended March 31, 2009 was
11.1%.  Our effective income tax rate is impacted primarily by changes
in the amount of the valuation allowance recorded and the effects of percentage
depletion.  Our effective tax rate for the three months ended March
31, 2010 reflects a benefit for a tax election that allows us to utilize
additional alternative minimum tax net operating losses in prior years. 
For 2010, 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 March 31, 2010, we had a
$33.2 million valuation allowance against gross deferred tax
assets.    Percentage depletion is an income tax deduction
that is limited to a percentage of taxable income from each of our mining
properties.  Because percentage depletion can be deducted in excess of
cost basis in the properties, it creates a permanent difference and directly
impacts the effective tax rate.  Fluctuations in the effective tax
rate may occur due to the varying levels of profitability (and thus, taxable
income and percentage depletion) at each of our mine locations.





Liquidity
and Capital Resources





The
following chart reflects the components of our debt as of March 31, 2010 and
December 31, 2009:





March
      31,
              2010
            
            
            December
      31,
              2009Senior
      Notes
            
            $
            150,000
            
            
            $
            150,000Convertible
      Senior Notes, net of discount
            
            
            129,650
            
            
            
            128,268Revolver
            
            
            -
            
            
            
            -Total
      long-term debt
            
            $
            279,650
            
            
            $
            278,268





Senior
Notes





The
Senior Notes are due on June 1, 2012.  The Senior Notes are unsecured
and accrue interest at 9.375% per annum. Interest payments on the Senior Notes
are required semi-annually. We may redeem the Senior Notes, in whole or in part,
at any time at redemption prices from 102.34% in 2010 to 100% in 2011. The
Senior Notes limit our ability, among other things, to pay cash dividends. In
addition, if a change of control occurs (as defined in the Indenture), each
holder of the Senior Notes will have the right to require us to repurchase all
or a part of the Senior Notes at a price equal to 101% of their principal
amount, plus any accrued interest to the date of repurchase.




-18-


Convertible
Senior Notes





During
the fourth quarter of 2009, we issued $172.5 million of 4.5% Convertible Senior
Notes due on December 1, 2015 (the “Convertible Senior Notes”).   The
Convertible Senior Notes are shown net of a $42.9 million discount on the
consolidated financials statements as of March 31, 2010.  The discount
on the Convertible Senior Notes relates to the $44.8 million of the proceeds
that were allocated to the equity component of the Convertible Senior Notes at
issuance.  The Convertible Senior Notes are unsecured and are
convertible under certain circumstances and during certain periods at an initial
conversion rate of 38.7913 shares of the Company’s common stock per $1,000
principal amount of Convertible Senior Notes, representing an initial conversion
price of approximately $25.78 per share of the Company’s
stock.  Interest payments on the Convertible Senior Notes are required
semi-annually.





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





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





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





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





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





Revolving
Credit Agreement





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





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





(a)
            Base
      rate is the higher of (1) the Federal Fund Rate plus 3.0%, (2) the prime
      rate and (3) a LIBOR rate plus 1.0%.(b)
            The
      Revolver’s borrowing base is based on the sum of 85% of our eligible
      accounts receivable plus 65% of the eligible inventory minus reserves from
      time to time set by administrative agent.  The eligible accounts
      receivable and inventories are further adjusted as specified in the
      agreement.  The Company’s borrowing base can also be increased
      by 95% of any cash collateral that the Company maintains in a cash
      collateral account.





The
Revolver provides that we can use the Revolver availability to issue letters of
credit. The Revolver provides for a 4.25% fee on any outstanding letters of
credit issued under the Revolver and a 0.5% fee on the unused portion of the
Revolver. The Revolver requires certain mandatory prepayments from certain asset
sales, incurrence of indebtedness and excess cash flow. The Revolver includes
financial covenants that require us to maintain a minimum Adjusted EBITDA and a
maximum Leverage Ratio and limit capital expenditures, each as defined by the
agreement. The minimum EBITDA and maximum Leverage Ratio are only applicable if
our unrestricted cash balance is falls below $75.0 million and would remain in
effect until our unrestricted cash exceeds $75.0 million for 90 consecutive
days.





As of
March 31, 2010, we had used $27.3 million of the $63.5 million available under
the Revolver to secure our outstanding letters of credit.  We intend
to place cash in a restricted account, if necessary, to provide us with the
maximum borrowing base under the Revolver.




-19-




We were
in compliance with all of the financial covenants under our outstanding debt
instruments as of March 31, 2010.  We cannot assure you that we will
remain in compliance in subsequent periods.  If necessary, we will
consider seeking a waiver or other alternatives to remain
in compliance with the covenants.  For more detail regarding the
covenants under the Facilities, see Part II - Item 1A - Risk Factors - “We may
be unable to comply with restrictions imposed by the terms of our indebtedness,
which could result in a default under these
instruments.”





Liquidity





As of
March 31, 2010, we had total liquidity of approximately $189.3 million,
consisting of $36.2 million of unused borrowing capacity under the Revolver and
$153.1 million of cash and cash equivalents.   As of March 31,
2010, we have used $27.3 million of the Revolver’s availability to secure
outstanding letters of credits.  We intend to use the Revolver to
support the remaining $30.6 million of existing letters of credit that are
currently secured by cash held in a restricted account.   As we
secure the letters of credit with the Revolver, our cash that is currently being
held as security for the letters of credit will become
unrestricted.  A portion of this cash may be used to ensure that we
have adequate capacity under the Revolver to support our outstanding letters of
credit.




Our
primary source of cash is expected to be sales of coal to our utility and
industrial customers. The price of coal received can change dramatically based
on market factors and will directly affect this source of cash.  Our
primary uses of cash include the payment of ordinary mining expenses to mine
coal, capital expenditures and benefit payments. Ordinary mining expenses are
driven by the cost of supplies, including steel prices and diesel fuel. Benefit
payments include payments for workers’ compensation and black lung benefits paid
over the lives of our employees as the claims are submitted. We are required to
pay these when due, and are not required to set aside cash for these payments.
We have posted surety bonds secured by letters of credit or issued letters of
credit with state regulatory departments to guarantee these
payments.  We believe that our Revolver provides us with the ability
to meet the necessary bonding requirements.





We
believe that cash generated from operations, borrowings under our credit
facilities and future debt and equity offerings, if any, will be sufficient to
meet working capital requirements, anticipated capital expenditures and
scheduled debt payments throughout 2010 and for the next several years.
Nevertheless, our ability to satisfy our working capital requirements and debt
service obligations, or fund planned capital expenditures, will substantially
depend upon our future operating performance (which will be affected by
prevailing economic conditions in the coal industry), debt covenants, and
financial, business and other factors, some of which are beyond our
control.





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





Net cash
from operating activities reflects net income 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 $60.3 million and
$27.9 million for the three months ended March 31, 2010 and 2009,
respectively.  We had net income of $23.2 million in the three months
ended March 31, 2010 as compared to net income of $28.2 million in the three
months ended March 31, 2009.  In reconciling our net income to cash
provided by operating activities, $20.5 million was added for non cash
charges during 2010, as compared to $17.1 million added during
2009.  During 2010, our net income, as adjusted for non cash charges,
was increased by $16.6 million as a result of changes in cash from our operating
assets and liabilities.  The change in our operating assets and
liabilities for 2010 included a $29.9 million decrease in restricted cash, a
$5.4 million decrease in inventories and a $23.9 increase in accounts
receivable.  The change in our restricted cash is the result of
replacing letters of credit that were secured by cash with letters of credit
issued against our Revolver.  During 2009, our net income, as adjusted
for non cash charges, was reduced by a $17.4 million decrease in cash from our
operating assets and liabilities.  The change in our operating assets
and liabilities for 2009 included an $18.0 million increase in accounts
receivable and a $14.9 million increase in inventory.





Net cash
used in investing activities increased by $1.6 million to $14.0 million for the
three months ended March 31, 2010 as compared to the same period in 2009 and
consisted of capital expenditures.  Capital expenditures primarily
consisted of new and replacement mine equipment and various projects to improve
the production and efficiency of our mining operations.




-20-




Net cash
used by financing activities was $1.2 million for the three months ended March
31, 2010 and consisted of debt issuance costs on the amendment to the
Revolver.  Net cash used by financing activities was $9.0 million for
the three months ended March 31, 2009 and consisted of net repayments on the
Revolver.




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”.





Based on
the MM&A reserve studies and the foregoing assumptions and qualifications,
and after giving effect to our operations from the respective dates of the
studies through March 31, 2010, we estimate that, as of March 31, 2010, we
controlled approximately 229.9 million tons of proven and probable coal reserves
in the CAPP region and 39.1 millions tons in the Midwest region.  The
following table provides additional information regarding changes to our
reserves since December 31, 2009 (in millions of tons):





CAPP
                
                
                Midwest
                
                
                TotalProven
      and Probable Reserves, as of December 31, 2009 (1)
                
                
                231.2
                
                
                
                39.9
                
                
                
                271.1Coal
      Extracted
                
                
                (1.6
                )
                
                
                (0.8
                )
                
                
                (2.4
                )Acquisitions
      (2)
                
                
                0.2
                
                
                
                -
                
                
                
                0.2Adjustments
      (3)
                
                
                0.1
                
                
                
                -
                
                
                
                0.1Divesture
      (4)
                
                
                -
                
                
                
                -
                
                
                
                -Proven
      and Probable Reserves, as of March 31, 2010 (1)
                
                
                229.9
                
                
                
                39.1
                
                
                
                269.0





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.






-21-




(3)
Represents changes in reserves due to additional information obtained from
exploration activities, production activities or discovery of new geologic
information. We calculated the adjustments to the reserves in the same manner,
and based on the same assumptions and qualifications, as used in the
MM&A studies described above, but these estimates have not been reviewed by
MM&A.





(4)
Represents changes in reserves due to expired leases.





Key
Performance Indicators





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





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





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





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





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





Trends
In Our Business





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





●
              the supply of domestic and
      foreign coal;


●
              the demand for
      electricity;


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


●
              the cost of transporting coal to
      the customer;


●
              domestic
      and foreign governmental regulations and
taxes;


●
              world
      economic conditions


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


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





As
discussed previously, our costs of production have increased in recent
years.  We expect the higher costs to continue for the next several
years, due to a number of factors, including increased governmental regulations,
high prices in worldwide commodity markets, and a highly competitive market for
a limited supply of skilled mining personnel.





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




-22-


Off-Balance
Sheet Arrangements





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





We use
surety bonds to secure reclamation, workers’ compensation and other
miscellaneous obligations. At March 31, 2010, we had $104.5 million of
outstanding surety bonds with third parties. These bonds were in place to secure
obligations as follows: post-mining reclamation bonds of $60.7 million, workers’
compensation bonds of $40.3 million, wage payment, collection bonds, and other
miscellaneous obligation bonds of $3.5 million. Surety bond costs have increased
over time and the market terms of surety bonds have generally become less
favorable. To the extent that surety bonds become unavailable, we would seek to
secure obligations with letters of credit, cash deposits, or other suitable
forms of collateral.





We also
use bank letters of credit to secure our obligations for workers’ compensation
programs, various insurance contracts and other obligations. As of March
31, 2010, we had $57.9 million of letters of credit outstanding.  We
have issued $27.3 of the letters of credit under our Revolver and the remaining
$30.6 million letters of credit were secured by $32.1 million of cash held in a
restricted account.





Critical
Accounting Estimates





Overview





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





Workers'
Compensation





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





We accrue
for the present value of certain workers’ compensation obligations as calculated
annually by an independent actuary based upon assumptions for work-related
injury and illness rates, discount rates and future trends for medical care
costs.  The discount rate is based on interest rates on bonds with
maturities similar to the estimated future cash flows.  The discount
rate used to calculate the present value of these future obligations was 5.3% at
December 31, 2009.  Significant changes to interest rates result in
substantial volatility to our consolidated financial statements. If we were to
decrease our estimate of the discount rate from 5.3% to 4.8%, all other things
being equal, the present value of our workers’ compensation obligation would
increase by approximately $1.9 million. A change in the law, through either
legislation or judicial action, could cause these assumptions to change. If the
estimates do not materialize as anticipated, our actual costs and cash
expenditures could differ materially from that currently estimated. Our
estimated workers’ compensation liability as of March 31, 2010 was $60.0
million.





Coal
Miners' Pneumoconiosis





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






-23-




An
independent actuary calculates the estimated pneumoconiosis liability annually
based on assumptions regarding disability incidence, medical costs, mortality,
death benefits, dependents and interest rates. The discount rate is based on
interest rates on high quality corporate bonds with maturities similar to the
estimated future cash flows. The discount rate used to calculate the present
value of these future obligations was 5.8% at December 31, 2009. Significant
changes to interest rates result in substantial volatility to our consolidated
financial statements. If we were to decrease our estimate of the discount rate
by 0.5% to 5.3%, all other things being equal, the present value of our black
lung obligation would increase by approximately $2.2 million. A change in
the law, through either legislation or judicial action, could cause these
assumptions to change. If these estimates prove inaccurate, the actual costs and
cash expenditures could vary materially from the amount currently estimated. Our
estimated pneumoconiosis liability as of March 31, 2010 was $33.5
million.





In March
2010, The Patient Protection and Affordable Care Act of 2010 (Act) was enacted
into law and included a black-lung provision that creates a rebuttable
presumption that a miner with at least 15 years of service, with totally
disabling pulmonary or respiratory lung impairment and negative radiographic
chest x-ray evidence would be disabled due to pneumoconiosis and be eligible for
black lung benefits.  The new Act also makes it easier for widows of miners
to become eligible for benefits.  We were able to make an initial
evaluation of the impact of these changes on a limited population of current and
potential future claimants, resulting in an estimated $9.4 million increase
to the black lung obligation. As of March 31, 2010, this estimated increase
in the black lung obligation was recorded along with an increase in the
actuarial loss included in “Accumulated other comprehensive loss” on our balance
sheet.  Beginning in the second quarter of 2010, we estimate that
there will be a $0.4 million increase in the quarterly black lung expense
related to the amortization of this additional actuarial loss and increases in
the service and interest cost components.  As of March 31, 2010,
we are not able to estimate the impact of this legislation on the obligations
related to future claims from older terminated miners and possible re-filed
claims, due to significant uncertainty around the number of claims that will be
filed and how impactful the new award criteria will be to these claim
populations.  We will continue to assess the impact of this
legislation on our initial estimate as additional information becomes available
and future regulations are issued.




Defined
Benefit Pension





We have
in place a non-contributory defined benefit pension plan under which all
benefits were frozen in 2007.  The estimated cost and benefits of our
non-contributory defined benefit pension plans are determined annually by
independent actuaries, who, with our review and approval, use various actuarial
assumptions, including discount rate and expected long-term rate of return on
pension plan assets. In estimating the discount rate, we look to rates of return
on high-quality, fixed-income investments with comparable maturities. At
December 31, 2009, the discount rate used to determine the obligation was 5.9%.
Significant changes to interest rates result in substantial volatility to our
consolidated financial statements. If we were to decrease our estimate of the
discount rate from 5.9% to 5.4%, all other things being equal, the present value
of our projected benefit obligation would increase by approximately $4.5
million.  The expected long-term rate of return on pension plan assets is
based on long-term historical return information and future estimates of
long-term investment returns for the target asset allocation of investments that
comprise plan assets. The expected long-term rate of return on plan assets used
to determine expense was 7.5% for the period ended December 31, 2009.
Significant changes to these rates would introduce volatility to our pension
expense.  Our accrued pension obligation as of March 31, 2010 was $14.1
million.





Reclamation
and Mine Closure Obligation





The
Surface Mining Control Reclamation Act of 1977 establishes operational,
reclamation and closure standards for all aspects of surface mining as well as
many aspects of underground mining. Our asset retirement obligation liabilities
consist of spending estimates related to reclaiming surface land and support
facilities at both surface and underground mines in accordance with federal and
state reclamation laws. Our total reclamation and mine-closing liabilities are
based upon permit requirements and our engineering estimates related to these
requirements. US GAAP requires that asset retirement obligations be initially
recorded as a liability based on fair value, which is calculated as the present
value of the estimated future cash flows. Our management and engineers
periodically review the estimate of ultimate reclamation liability and the
expected period in which reclamation work will be performed. In estimating
future cash flows, we considered the estimated current cost of reclamation and
applied inflation rates and a third party profit. The third party profit is an
estimate of the approximate markup that would be charged by contractors for work
performed on our behalf. The discount rate is our estimate of our credit
adjusted risk free rate. The estimated liability can change significantly if
actual costs vary from assumptions or if governmental regulations change
significantly. The actual costs could be different due to several reasons,
including the possibility that our estimates could be incorrect, in which case
our liabilities would differ. If we perform the reclamation work using our
personnel rather than hiring a third party, as assumed under US GAAP, then the
costs should be lower. If governmental regulations change, then the costs of
reclamation will be impacted. US GAAP recognizes that the recorded liability
could be different than the final cost of the reclamation and addresses the
settlement of the liability. When the obligation is settled, and there is a
difference between the recorded liability and the amount paid to settle the
obligation, a gain or loss upon settlement is included in earnings. Our asset
retirement obligation as of March 31, 2010 was $45.6 million.





-24-





Contingencies





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





Income
Taxes





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





We have
recorded a $33.2 million valuation allowance against our gross deferred tax
assets as of March 31, 2010 for the portion of the gross deferred tax asset that
does not meet the more likely than not criteria to be realized.  In
2009 and 2010, we recorded an income tax benefit for the reduction in our
valuation allowance related to the net operating loss carryforwards that we
expect will be utilized.





Coal
Reserves





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




●
              all
      currently available data;





●
              our
      own operational experience and that of our
  consultants;





●
              historical
      production from similar areas with similar
  conditions;





●
              previously
      completed geological and reserve
studies;





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





●
              assumptions
      governing future prices and future operating
  costs.





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





●
            mining
      activities;





●
            new
      engineering and geological data;





●
            acquisition
      or divestiture of reserve holdings;
and





●
            modification
      of mining plans or mining methods.





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.”





-25-





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




In the
three months ended March 31, 2010, there were no accounting pronouncements that
became effective that impacted our financial statements.





Other
Supplemental Information





Reconciliation
of Non-US GAAP Measures





EBITDA is
a measure used by management to measure operating performance.  We define
EBITDA as net income or loss plus interest expense (net), income tax expense
(benefit) and depreciation, depletion and amortization (EBITDA), to better
measure our operating performance.  We regularly use EBITDA to evaluate our
performance as compared to other companies in our industry that have different
financing and capital structures and/or tax rates.  In addition, we use
EBITDA in evaluating acquisition targets.





Adjusted
EBITDA and the leverage ratio are the amounts used in our current debt
covenants.  Adjusted EBITDA is defined as EBITDA further adjusted for
certain cash and non-cash charges and the leverage ratio limits are debt to a
multiple of adjusted EBITDA.  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.




-26-




The
leverage ratio is calculated as the Company’s Senior Funded Indebtedness divided
by annualized adjusted EBITDA as calculated below.  The Senior Funded
Indebtedness includes the amounts outstanding under our Revolver and the amount
of letters of credits issued under our Revolver.  As of March 31, 2010, we
had $27.3 million of Senior Funded Indebtedness outstanding.





Three
      months endedMarch
      312010
              
              
              2009Net
      income
              
              $
              23,245
              
              
              
              28,171Income
      tax (benefit) expense
              
              
              (973
              )
              
              
              3,509Interest
      expense
              
              
              7,381
              
              
              
              4,053Interest
      income
              
              
              (4
              )
              
              
              (25
              )Depreciation,
      depletion, and amortization
              
              
              16,358
              
              
              
              14,473EBITDA
      (before adjustments)
              
              $
              46,007
              
              
              
              50,181Other
      adjustments specified in our current debt agreement:
              
              
              2,117
              
              
              
              3,013Adjusted
      EBITDA
              
              $
              48,124
              
              
              
              53,194




FORWARD-LOOKING
INFORMATION





From time
to time, we make certain comments and disclosures in reports and statements,
including this report, or statements made by our officers, which may be
forward-looking in nature. Examples include statements related to our future
outlook, anticipated capital expenditures, future cash flows and borrowings, and
sources of funding. These forward-looking statements could also involve, among
other things, statements regarding our intent, belief or expectation with
respect to:





●
            our
      cash flows, results of operation or financial
  condition;





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





●
            governmental
      policies and regulatory actions;





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





●
            weather
      conditions or catastrophic weather-related
  damage;





●
            our
      production capabilities;





●
            availability
      of transportation;





●
            market
      demand for coal, electricity and
steel;





●
            competition;





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





●
            employee
      workforce factors;





●
            our
      assumptions concerning economically recoverable coal reserve
      estimates;





●
            future
      economic or capital market conditions;
and





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




-27-




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.





ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Our $150
million Senior Notes and $172.5 million Convertible Senior Notes have a fixed
interest rate and are not sensitive to changes in the general level of interest
rates.  Our Revolver has floating interest rates on borrowings based
on our option of either the base rate or LIBOR rate.  Letters of
credits secured by the Revolver have a fixed interest rate.  As of
March 31, 2010, 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 88% for the three months
ended March 31, 2010.





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





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





ITEM
4.  CONTROLS AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures





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





There
were no changes in our internal control over financial reporting during the
three months ended March 31, 2010 that materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.





-28-




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





PART
II


OTHER
INFORMATION




ITEM
1.  LEGAL PROCEEDINGS





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





ITEM
1A. RISK FACTORS





Certain
Risks





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





Risks
Related to the Coal Industry





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





We
derived 85% of our total revenues (contract and spot) for the three months ended
March 31, 2010 and 92% of our total revenues in 2009, from our electric utility
customers.  Fuel cost is a significant component of the cost
associated with coal-fired power generation, with respect to not only the price
of the coal, but also the costs associated with emissions control and credits
(i.e., sulfur dioxide, nitrogen oxides, etc.), combustion by-product disposal
(i.e., ash) and equipment operations and maintenance (i.e., materials handling
facilities).  All of these costs must be considered when choosing
between coal generation and alternative methods, including natural gas, nuclear,
hydroelectric and others.





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





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





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





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




-29-




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





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





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





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





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





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





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





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





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





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





Shortages
or increased costs of skilled labor in the Central Appalachian coal region may
hamper our ability to achieve high labor productivity and competitive
costs.





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





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





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





●
            employee
      health and safety;●
            permitting
      and licensing requirements;●
            air
      quality standards;●
            water
      quality standards;●
            plant,
      wildlife and wetland protection;●
            blasting
      operations;   -30-
   ●
            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 or regulations focusing on
greenhouse gas emissions is enacted by the United States, it could have the
effect of restricting the use of coal.  Other efforts to reduce
emissions of greenhouse gases and federal initiatives to encourage the use of
natural gas also may affect the use of coal as an energy source.





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





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





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





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





-31-




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





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




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





The Clean
Air Act and similar state and local laws extensively regulate the amount of
sulfur dioxide, particulate matter, nitrogen oxides, mercury and other compounds
emitted into the air from electric power plants, which are the largest end-users
of our coal.  Compliance with such laws and regulations, which can
take a variety of forms, may reduce demand for coal as a fuel source because
they 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.





As a
result of the U.S. Supreme Court’s decision on April 2, 2007 in Massachusetts,
et al.  v. EPA, 549 U.S.  497 (2007), finding that
greenhouse gases fall within the Clean Air Act definition of “air pollutant,”
the EPA was required to determine whether emissions of greenhouse gases
“endanger” public health or welfare.  In April 2009, the EPA proposed
a finding of such endangerment and has announced plans to soon finalize its
proposed endangerment finding.  This could result in the EPA issuing a
broad regulatory program for the control of greenhouse gas emissions, including
carbon dioxide emissions.  The EPA has recently completed several
rulemaking actions indicating its intent to do so, including, among others, a
final greenhouse gas reporting rule for certain major stationary source
permitting programs, proposed regulations to control greenhouse gas emissions
from light duty vehicles, and a proposed “tailoring” rule explaining how it
would implement the Clean Air Act’s Title V and prevention of significant
deterioration permitting programs with respect to greenhouse gas emissions from
major stationary sources.  In the second quarter of 2009, a bill
passed the House that would reduce greenhouse gas emissions to 17% below 2005
levels by 2020 and 80% below 2005 levels by the middle of the century, and both
Houses of Congress are also actively considering new legislation that could
establish a national cap on, or other regulation of, carbon emissions and other
greenhouse gases.  Current proposals include a cap and trade system
that would require the purchase of emission permits, which could be traded on
the open market.  These proposals will make it more costly to operate
coal-fired plants and could make coal a less attractive fuel for future power
plants.  Any new or proposed requirements adversely affecting the use
of coal could adversely affect our operations and results.





The
permitting of new coal-fueled power plants has also recently been contested by
state regulators and environmental organizations based on concerns relating to
greenhouse gas emissions.  In addition, in September 2009, the United
States Court of Appeals for the Second Circuit issued its decision in
Connecticut v.  AEP allowing plaintiffs’ claims that public utilities’
greenhouse gas emissions created a “public nuisance” to go to trial over
defendants’ objections based upon political question, preemption and lack of
standing.  A similar ruling was issued in October 2009 by the Fifth
Circuit in Comer v.  Murphy Oil involving a lawsuit against several
coal, chemical, oil and gas, and utility companies.  The plaintiffs in
these cases are seeking various remedies, including monetary damages and
injunctive relief.  These cases expose other significant contributors
to greenhouse gas emissions to similar litigation risk.  The effect of
these recent cases may be mitigated in the event Congress adopts greenhouse gas
legislation and the EPA finalizes adoption of greenhouse gas emission
standards.  Nevertheless, increased efforts to control greenhouse gas
emissions by state, federal, judicial or international authorities could result
in reduced demand for coal.




-32-




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.





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





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





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





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





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





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





-33-




In 2009,
the Environmental Protection Agency (EPA) announced publicly that it will
exercise its statutory right to more actively review Section 404 permitting
actions by the Corps.  In the third quarter of 2009, the EPA announced
that it would further review 79 surface mining permit applications, including
four of our permits.  These 79 permits were identified as likely to
impact water quality and therefore requiring additional review under the Clean
Water Act.  EPA oversight could further delay and/or restrict the
issuance of such permits, either of which events could have an adverse impact on
our planned surface mining operations.  More recently, the EPA
announced proposed acceptable levels for the conductivity of water discharged
from permitted coal mining sites in a six-state area of Central Appalachia
including Kentucky where we operate.  If such proposed levels of
conductivity are permanently imposed, they could have a significant impact on
our ability to secure Section 404 permits and have a material impact on our
operations.





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





The SMCRA
establishes operational, reclamation and closure standards for all aspects of
surface mining as well as many aspects of underground mining.  We
accrue for the costs of current mine disturbance and of final mine closure,
including the cost of treating mine water discharge where
necessary.  Under U.S. generally accepted accounting principles we are
required to account for the costs related to the closure of mines and the
reclamation of the land upon exhaustion of coal reserves.  The fair
value of an asset retirement obligation is recognized in the period in which it
is incurred if a reasonable estimate of fair value can be made.  The
present value of the estimated asset retirement costs is capitalized as part of
the carrying amount of the long-lived asset.  At March 31, 2010, we
had accrued $45.6 million related to estimated mine reclamation
costs.  The amounts recorded are dependent upon a number of variables,
including the estimated future retirement costs, estimated proven reserves,
assumptions involving profit margins, inflation rates, and the assumed
credit-adjusted interest rates.  Furthermore, these obligations are
unfunded.  If these accruals are insufficient or our liability in a
particular year is greater than currently anticipated, our future operating
results could be adversely affected.





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





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





Risks
Related to Our Operations





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





We
experienced operating losses and net losses in the each of the years ended
December 31, 2008 and 2007.  While we were profitable in the year
ended December 31, 2009, we must continue to carefully manage our business,
including the balance of our long-term and short-term sales contracts and our
production costs.  Although we seek to balance our contract mix to
achieve optimal revenues over the long term, the market price of coal is
affected by many factors that are outside of our control.  Our
production costs have increased in recent years, and we expect higher costs to
continue for the next several years.  Additionally, certain of our
long term contracts for sales of coal are priced substantially above current
spot prices for coal.  Our profitability in the future will be
impacted by the price levels that we achieve on future long term
contracts.  Accordingly, we cannot assure you that we will be able to
achieve profitability in the future.





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





For the
three months ended March 31, 2010, we generated approximately 85% of our total
revenues from several long-term contracts and spot sales with electrical
utilities, including 43% from South Carolina Public Service Authority, 29% from
Georgia Power Company and 11% from Indianapolis Power and Light.  At
December 31, 2009, we had coal supply agreements with these customers that
expire in 2010 to 2012.  The execution of a substantial coal supply
agreement is frequently the basis on which we undertake the development of coal
reserves required to be supplied under the contract.





-34-




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




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




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





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





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





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





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





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





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





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





-35-




The U.S.
Department of Labor, Mine Safety and Health Administration (MSHA) periodically
notifies certain coal mines that a potential pattern of violations may exist
based upon an initial statistical screening of violation history and pattern
criteria review by MSHA.  Certain of our mines have received such notices
in the past.  Upon receipt of such a notification, we conduct a
comprehensive review of the operation that received the notification and prepare
and submit to MSHA plans designed to enhance employee safety at the mine through
better education, training, mining practices, and safety management. 
Following implementation of the plans, MSHA conducts a complete inspection of
the mine and further evaluates the situation and then advises the operator
whether a pattern of violation exists and whether further action will be
taken.  No pattern of violations has been found to exist at any of our
mines that have received such notification.  The failure to remediate the
situation resulting in a finding that a pattern of violation does exists at a
mine could have a significant impact on our operations.





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.





-36-





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





In
addition to coal we produce from our Company-operated mines, we have mines that
typically are operated by independent contract mine operators, and we purchase
coal from third parties for resale.  For 2010, we anticipate less than
10% of our total production will come from mines operated by independent
contract mine operators and from third party purchased coal
sources.  Operational difficulties, changes in demand for contract
mine operators from our competitors and other factors beyond our control could
affect the availability, pricing and quality of coal produced for us by
independent contract mine operators.  Disruptions in supply, increases
in prices paid for coal produced by independent contract mine operators or
purchased from third parties, or the availability of more lucrative direct sales
opportunities for our purchased coal sources could increase our costs or lower
our volumes, either of which could negatively affect our
profitability.





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





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





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





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





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





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





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





Federal
and state laws require bonds to secure our obligations to reclaim lands used for
mining, to pay federal and state workers’ compensation and to satisfy other
miscellaneous obligations.  As of March 31, 2010, we had outstanding
surety bonds with third parties for post-mining reclamation totaling $60.7
million.  Furthermore, we have surety bonds for an additional $43.8
million in place for our federal and state workers’ compensation obligations and
other miscellaneous obligations.  Insurance companies have informed
us, along with other participants in the coal industry, that they no longer will
provide surety bonds for workers’ compensation and other post-employment
benefits without collateral.  We have satisfied our obligations under
these statutes and regulations by providing letters of credit or other
assurances of payment.  However, letters of credit can be
significantly more costly to us than surety bonds.  The issuance of
letters of credit under our Revolver also reduces amounts that we can borrow
under our Revolver.  If we are unable to secure surety bonds for these
obligations in the future, and are forced to secure letters of credit
indefinitely, our profitability may he negatively affected.





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





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





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




-37-





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





We are
required by law to provide various long-term employee benefits.  We
accrue amounts for these obligations based on the present value of expected
future costs.  We employed an independent actuary to complete
estimates for our workers’ compensation and black lung (both state and federal)
obligations.  At March 31, 2010, the current and non-current portions
of these obligations included $33.5 million for coal workers’ black lung
benefits and $60.0 million for workers’ compensation benefits.





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





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





We
provide benefits under a defined benefit pension plan that was frozen in
2007.  As of March 31, 2010, we estimated that our obligation under
the pension plan was underfunded by approximately $14.1 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.





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





Our total
consolidated long-term debt as of March 31, 2010 was $279.7 million (net of a
discount on our convertible notes of $42.9 million).  Our level of
indebtedness could result in the following:





●
            it
      could effect our ability to satisfy our outstanding
      obligations;●
            a
      substantial portion of our cash flows from operations will have to be
      dedicated to interest and principal payments and may not be available for
      operations, working capital, capital expenditures, expansion, acquisitions
      or general corporate or other purposes;●
            it
      may impair our ability to obtain additional financing in the
      future;●
            it
      may limit our flexibility in planning for, or reacting to, changes in our
      business and industry; and●
            it
      may make us more vulnerable to downturns in our business, our industry or
      the economy in general.





Our
operations may not generate sufficient cash to enable us to service our
debt.  If we fail to make a payment on our debt, this could cause us
to be in default on our outstanding indebtedness




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





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





●
              If
      we have a Trigger Event, our revolving credit facility requires that we
      achieve a minimum Adjusted EBITDA, which is defined in that agreement as
      “Consolidated EBITDA”.  Adjusted EBITDA is measured at the end of
      each quarter for the preceding 12 months.  If measured, the required
      minimum Adjusted EBITDA would range from $94.0 million to $105.0 million
      during 2010.  In order to meet the twelve month Adjusted EBITDA
      target at March 31, 2010, we needed Adjusted EBITDA of $11.0 million in
      the three months ended March 31, 2010.   Our Adjusted
      EBITDA in the three months ended March 31, 2010 was $48.1 million. 
      The most directly comparable US GAAP financial measure is net
      income.  For the three months ended March 31, 2010, we had net income
      of $23.2 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.●
              If
      we have a Trigger Event, our revolving credit facility requires that our
      Leverage Ratio (as defined in the revolving credit facility) not exceed a
      specified multiple at the end of each quarter.  If measured, the
      Leverage Ratio would be permitted to be 0.68X to 0.62X during 2010. 
      Our Leverage Ratio was 0.19X as of March 31, 2010.●
              Our
      revolving credit facility limits the Capital Expenditures (other than
      Mandated Capital Expenditures) (as both are defined in the revolving
      credit facility) that we may make or agree to make in any fiscal
      year.  For the fiscal year ended December 31, 2010, we cannot make
      Capital Expenditures in excess of $75.0 million (excluding Mandatory
      Capital Expenditures).  For the three months ended March 31,
      2010, we made Capital Expenditures of $13.9 million (excluding Mandatory
      Capital Expenditures).


Additional
detail regarding the terms of our Revolving Credit Facility, 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.




-39-


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





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





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





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





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





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





We
believe that our cash on hand, the availability under our revolving credit
facility and cash generated from our operations will provide us with adequate
liquidity through 2010.  However, such funds, together with the
proceeds from this offering, may not provide sufficient cash to fund any future
acquisitions.  Accordingly, we may need to conduct additional debt or
equity financings in order to fund any such additional acquisitions, unless we
issue shares of our common stock as consideration for those
acquisitions.  If we are unable to obtain any such financings, we may
be required to forego future acquisition opportunities.





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





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





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




-40-


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





Section
382 of the U.S. Internal Revenue Code of 1986, as amended, imposes an annual
limit on the amount of net operating loss carryforwards that may be used to
offset taxable income when a corporation has undergone significant changes in
its stock ownership or equity structure.  Our ability to use net
operating losses is limited by prior changes in our ownership, and may be
further limited by the issuance of common stock in connection with the
convertible notes issued in 2009, or by the consummation of other
transactions.  As a result, if we earn net taxable income, our ability
to use net operating loss carryforwards to offset U.S. federal taxable income
may become subject to limitations, which could potentially result in increased
future tax liabilities for us.





Risks
Relating to our Common Stock





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





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





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





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





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





We do not
anticipate paying any cash dividends on our common stock in the near future. In
addition, covenants in our revolving credit facility, senior notes and
convertible senior notes restrict our ability to pay cash dividends and may
prohibit the payment of dividends and certain other payments.





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





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





We have a
shareholder rights agreement which, in certain circumstances, including a person
or group acquiring, or the commencement of a tender or exchange offer that would
result in a person or group acquiring, beneficial ownership of more than 20% of
the outstanding shares of our common stock, would entitle each right holder,
other than the person or group triggering the plan, to receive, upon exercise of
the right, shares of our common stock having a then-current fair value equal to
twice the exercise price of a right.  In 2009, an amendment to the
Rights Agreement reduced, until December 5, 2010, the threshold at which a
person or group becomes an “Acquiring Person” under the Rights Agreement from
20% to 4.9% of the Company’s then-outstanding shares of common
stock.





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.







-41-





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





None.





ITEM 3.
DEFAULTS UNDER SENIOR SECURITIES


None.





ITEM 4.
OTHER INFORMATION


None.





ITEM 5. EXHIBITS




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









-42-





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 CompanyBy:
              /s/ Peter
      T. SochaPeter
      T. SochaChairman,
      President and Chief Executive Officer




By:
              /s/ Samuel
      M. Hopkins, IISamuel
      M. Hopkins, IIVice
      President and Chief Accounting Officer





April 30,
2010












-43-