Cautionary Notice Regarding Forward-Looking Statements This report and other materials filed or to be filed by Patriot Coal Corporation include statements of our expectations, intentions, plans and beliefs that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are intended to come within the safe harbor protection provided by those sections. You can identify these forward-looking statements by the use of forward-looking words such as "outlook," "believes," "expects," "potential," "continues," "may," "will," "should," "seeks," "approximately," "predicts," "intends," "plans," "estimates," "anticipates," "foresees" or the negative version of those words or other comparable words and phrases. Any forward-looking statements contained in this report are based upon our historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved.
Without limiting the foregoing, all statements relating to our future outlook, anticipated capital expenditures, future cash flows and borrowings, and sources of funding are forward-looking statements. These forward-looking statements are based on numerous assumptions that we believe are reasonable, but are subject to a wide range of uncertainties and business risks, and actual risks may differ materially from those discussed in the statements. Among the factors that could cause actual results to differ materially are:
• U.S. and international financial, economic and political conditions;

• coal price volatility and demand, particularly in higher margin products;

• geologic, equipment and operational risks associated with mining;

• reductions of purchases or deferral of shipments by major customers;

• changes in general economic conditions, including coal, power and steel market conditions;

• availability and prices of competing energy resources for electricity generation;

• changes in the interpretation, enforcement or application of existing and potential laws and regulations affecting the production and use of our products;

• environmental laws and regulations and changes in the interpretation or enforcement thereof, including those affecting selenium-related matters, those affecting our operations and those affecting our customers' coal usage;

• failure to comply with debt covenants;

• availability and costs of credit, surety bonds and letters of credit;

• weather patterns and conditions affecting energy demand or disrupting supply;

• our ability to identify and implement cost-effective solutions for selenium water treatment;

• regulatory and court decisions including, but not limited to, those impacting permits issued pursuant to the Clean Water Act;

• developments in greenhouse gas emission regulation and treatment, including any development of commercially successful carbon capture and storage techniques or market-based mechanisms, such as a cap-and-trade system, for regulating greenhouse gas emissions;

• the outcome of pending or future litigation;

• the impact of the restatement of our consolidated financial statements for the years ended December 31, 2011 and 2010 and the related material weakness associated with the accounting treatment for the Apogee FBR and Hobet ABMet water treatment facilities;

• changes to the costs to provide healthcare to eligible active employees and certain retirees under postretirement benefit obligations;

• increases to contribution requirements to multi-employer retiree healthcare and pension plans;

• our ability to attract and retain qualified personnel;

• negotiation of labor contracts, labor availability and relations;

• customer performance and credit risks;

• inflationary trends, including those impacting materials used in our business;

• downturns in consumer and company spending;

• supplier and contract miner performance, and the availability and cost of key equipment and commodities;

• availability and costs of transportation;

• difficulty in implementing our business strategy;

• our ability to replace proven and probable coal reserves;

• the outcome of commercial negotiations involving sales contracts or other transactions;

• our ability to respond to changing customer preferences;

• the effects of mergers, acquisitions and divestitures, including our ability to successfully integrate mergers and acquisitions;

• competition in our industry;

• interest rate fluctuation;

• wars and acts of terrorism or sabotage;

• impact of pandemic illness; and

• other factors, including those discussed in Legal Proceedings set forth in

These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in Part I, Item 1A. Risk Factors of our 2011 Annual Report on Form 10-K/A and in this report. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Consequently, actual events and results may vary significantly from those included in, contemplated or implied by our forward-looking statements. We do not undertake any obligation (and expressly disclaim any such obligation) to update or revise the forward-looking statements, except as required by federal securities laws.

Overview
We are a leading producer of thermal coal in the eastern U.S., with operations and coal reserves in the Appalachia and the Illinois Basin coal regions. We are also a leading U.S. producer of metallurgical quality coal. Our principal business is the mining and preparation of thermal coal, also known as steam coal, and metallurgical coal. Thermal coal is primarily sold to electricity generators, and metallurgical coal is sold to steel mills and independent coke producers.
Our operations consist of thirteen active mining complexes. Our operations include company-operated mines, contractor-operated mines and coal preparation facilities. The Appalachia and Illinois Basin segments consist of our operations in West Virginia and Kentucky, respectively. We control approximately 1.9 billion tons of proven and probable coal reserves. Our proven and probable coal reserves include metallurgical coal and medium and high-Btu thermal coal, with low, medium and high sulfur content.
We ship coal to electricity generators, industrial users, steel mills and independent coke producers. In the first three months of 2012, we sold 6.3 million tons of coal, of which 79% was sold to domestic and global electricity generators and industrial customers and 21% was sold to domestic and global steel and coke producers. Our export sales accounted for 40% of our total tons sold during the three months ended March 31, 2012. In 2011, we sold 31.1 million tons of coal, of which 76% was sold to domestic electricity generators and industrial customers and 24% was sold to domestic and global steel and coke producers. Export sales were 29% of our total volume in 2011. Coal is shipped via various company-owned and third-party loading facilities, multiple rail and river transportation routes and ocean-going vessels.

Our mining operations and coal reserves are as follows:
•Appalachia. In southern West Virginia, we have nine mining complexes located in Boone, Clay, Lincoln, Logan and Kanawha counties. In northern West Virginia, we have one complex located in Monongalia County. In Appalachia, we sold 4.4 million and 23.9 million tons of coal in the three months ended March 31, 2012 and the year ended December 31, 2011, respectively. As of December 31, 2011, we controlled 1.2 billion tons of proven and probable coal reserves in Appalachia, of which 491 million tons were assigned to current operations. In the first three months of 2012, we idled a portion of our metallurgical production in response to reduced demand. In February 2012, we also closed the Big Mountain mining complex in response to weaker thermal coal demand.
•Illinois Basin. In the Illinois Basin, we have three mining complexes located in Union and Henderson counties in western Kentucky. In the Illinois Basin, we sold 1.9 million and 7.3 million tons of coal in the three months ended March 31, 2012 and the year ended December 31, 2011, respectively. As of December 31, 2011, we controlled 722 million tons of proven and probable coal reserves in the Illinois Basin, of which 175 million tons were assigned to current operations. In April 2012, we announced plans to idle our Freedom Underground Mine in the Bluegrass mining complex in response to continued weakness in thermal coal demand. In 2011, we produced 1.2 million tons at the Freedom Underground Mine. Results of Operations
Adjusted EBITDA
The discussion of our results of operations below includes references to and analysis of our Appalachia and Illinois Basin Segments' Adjusted EBITDA results. Adjusted EBITDA is defined as net income (loss) before deducting interest income and expense; income taxes; asset retirement obligation expense; depreciation, depletion and amortization; restructuring and impairment charge; and sales contract accretion.
Adjusted EBITDA is used by management primarily as a measure of our segments' operating performance. We believe that in our industry such information is a relevant measurement of a company's operating financial performance. Because Adjusted EBITDA and Segment Adjusted EBITDA are not calculated identically by all companies, our calculation may not be comparable to similarly titled measures of other companies. Segment Adjusted EBITDA is calculated the same as Adjusted EBITDA but also excludes selling and administrative expenses, past mining obligation expense and net gain on disposal or exchange of assets and is reconciled to its most comparable measure below, under Net Loss. Adjusted EBITDA is reconciled to its most comparable measure under generally accepted accounting principles in Note 10 to our unaudited condensed consolidated financial statements.
Three Months Ended March 31, 2012 Compared to March 31, 2011 Summary
Our Segment Adjusted EBITDA for the three months ended March 31, 2012 decreased compared to the prior year primarily due to a decrease in sales volumes as a result of lower demand driven by low natural gas prices, mild weather and weakened international and domestic economies. This decrease was partially offset by higher average sales prices, which reflected pricing under coal supply contracts entered into in early 2011 when the metallurgical coal markets were stronger and the expiration of an Illinois Basin below market coal supply contract in December 2011. In response to the lower demand, in the first quarter of 2012, we closed our Big Mountain mining complex and reduced production of metallurgical coal at our Rocklick and Wells mining complexes.

Segment Results of Operations

                                    Three Months Ended
                                         March 31,                      Increase (Decrease)
                                  2012                2011             Tons/$             %
                                  (Dollars and tons in thousands, except per ton amounts)
Tons Sold
Appalachia
Mining Operations                     4,364              6,198           (1,834 )        (29.6 )%
Illinois Basin
Mining Operations                     1,896              1,764              132            7.5  %
Total Tons Sold                       6,260              7,962           (1,702 )        (21.4 )%
Average sales price
per ton sold
Appalachia
Mining Operations          $          89.18     $        79.97     $       9.21           11.5  %
Illinois Basin
Mining Operations                     50.19              42.35             7.84           18.5  %
Revenue
Appalachia
Mining Operations          $        389,177     $      495,678     $   (106,501 )        (21.5 )%
Illinois Basin
Mining Operations                    95,161             74,700           20,461           27.4  %
Appalachia Other                     18,240              6,646           11,594          174.5  %
Total Revenues             $        502,578     $      577,024     $    (74,446 )        (12.9 )%
Segment Operating Costs
and Expenses(1)
Appalachia
Mining Operations
and Other                  $        323,619     $      399,531     $    (75,912 )        (19.0 )%
Illinois Basin
Mining Operations                    82,262             72,280            9,982           13.8  %
 Total Segment Operating
Costs and Expenses         $        405,881     $      471,811     $    (65,930 )        (14.0 )%
Segment Adjusted EBITDA
Appalachia
Mining Operations
and Other                  $         83,798     $      102,793     $    (18,995 )        (18.5 )%
Illinois Basin
Mining Operations                    12,899              2,420           10,479          433.0  %
Total Segment Adjusted
EBITDA                     $         96,697     $      105,213     $     (8,516 )         (8.1 )%

(1) Segment Operating Costs and Expenses represent consolidated operating costs and expenses of $455.3 million and $515.8 million less income (loss) from equity affiliates of $1.0 million and $(0.1) million and past mining obligation expenses of $48.5 million and $44.1 million for the three months ended March 31, 2012 and 2011, respectively.

Tons Sold and Revenues
Revenues in the Appalachia segment were lower in the three months ended March 31, 2012 compared to the prior year primarily due to lower sales volumes, partially offset by higher average sales prices. Total sales volumes in Appalachia decreased for the three months ended March 31, 2012 compared to the same period in 2011 primarily due to lower demand. In response to the weaker markets, we closed our Big Mountain mining complex and reduced production at certain metallurgical coal operations. Average sales prices in the Appalachia segment increased 12% compared to the same period in 2011, and reflected pricing under coal supply contracts entered into in early 2011 when the metallurgical coal markets were stronger.
Revenues in the Illinois Basin segment were higher for the three months ended March 31, 2012 as compared to the same period in 2011 due to higher average sales prices and higher sales volumes. In the prior year, the Illinois Basin segment supplied a below market coal supply contract that expired in December 2011. In addition, total sales volumes for the three months ended March 31, 2012 were higher compared to the prior year primarily due to an additional production unit advancing to a new area at our Highland mining complex.
Appalachia Other Revenue was higher for the three months ended March 31, 2012 primarily due to customer settlements. During the first quarter of 2012, certain customers requested to cancel or delay shipment of coal contracted for 2012 deliveries. In certain situations, we agreed to release the customer from their commitment in exchange for a cash settlement. In the first quarter of 2012, we recognized $7.0 million related to these cash settlements. Additionally, we received $8.3 million related to the settlement of a customer contract dispute concerning coal deliveries in prior years that was settled through mediation in the first quarter of 2012. In the first quarter of 2011, we recognized $2.7 million of income as underlying tons were shipped from a coal purchase option sold in a prior year.
Segment Operating Costs and Expenses
Segment operating costs and expenses for Appalachia decreased in the three months ended March 31, 2012, as compared to the same period in 2011, primarily due to the lower sales volume in 2012. The decrease reflects the closure of our Big Mountain thermal coal mining complex on February 2, 2012 ($23.3 million), reduced shipments at certain metallurgical mines during the first quarter of 2012 ($20.7 million), and lower brokerage coal volumes ($11.2 million). We experienced lower costs at our Panther mine due to better mining conditions ($10.2 million) and at our Kanawha Eagle mining complex due to idling two mines during the first quarter of 2012 ($8.3 million).
Segment operating costs and expenses for the Illinois Basin increased in the three months ended March 31, 2012 as compared to the prior year due to equipment rebuilds at our Highland mining complex, increased labor costs and increased shipments. During the three months ended March 31, 2012, we incurred higher equipment and material costs, including rebuilds and general repairs and maintenance ($1.2 million); increased labor costs ($2.3 million); and higher lease expense ($1.1 million). Additionally, during the three months ended March 31, 2012 we recognized higher royalties and sales-related taxes ($1.3 million). Segment Adjusted EBITDA
Our Segment Adjusted EBITDA for Appalachia was lower in the three months ended March 31, 2012 compared to the prior year, primarily due to decreased sales volumes resulting from reduced demand, partially offset by higher sales prices. Segment Adjusted EBITDA for the Illinois Basin increased in the three months ended March 31, 2012 from the prior year primarily due to higher revenues as a result of increased sales prices and volumes, partially offset by an increase in operating costs.

Net Loss
                                      Three Months Ended March 31,            Favorable (Unfavorable)
                                                             2011
                                        2012              Restated(1)             $               %
                                                         (Dollars in thousands)
Segment Adjusted EBITDA          $        96,697       $       105,213     $     (8,516 )        (8.1 )%
Corporate and Other:
Past mining obligation expense           (48,475 )             (44,106 )         (4,369 )        (9.9 )%
Net gain on disposal or exchange
of assets                                  1,511                    43            1,468           N/A
Selling and administrative
expenses                                 (13,555 )             (12,544 )         (1,011 )        (8.1 )%
Total Corporate and Other                (60,519 )             (56,607 )         (3,912 )        (6.9 )%
Depreciation, depletion and
amortization                             (41,386 )             (44,702 )          3,316           7.4  %
Asset retirement obligation
expense                                  (32,767 )             (15,067 )        (17,700 )      (117.5 )%
Sales contract accretion                  11,628                18,610           (6,982 )       (37.5 )%
Restructuring and impairment
charge                                   (32,861 )                (147 )        (32,714 )         N/A
Interest expense and other               (16,198 )             (22,860 )          6,662          29.1  %
Interest income                              109                    46               63         137.0  %
Income tax benefit (provision)                 -                  (395 )            395         100.0  %
Net loss                         $       (75,297 )     $       (15,909 )   $    (59,388 )      (373.3 )%

(1) As discussed in Note 17, Restatement of Financial Statements, we have restated previously issued unaudited consolidated financial statements for the first quarter of 2011; accordingly, Management's Discussion and Analysis of Financial Condition and Results of Operations have been revised for the effects of the restatement. Past mining obligation expense was higher in the three months ended March 31, 2012 than the corresponding period in the prior year due to changes in assumptions, primarily discount rate, related to our actuarially-determined retiree healthcare obligations and higher funding rates for the United Mine Workers of America (UMWA) pension fund, that were effective January 1, 2012. Net gain on disposal or exchange of assets increased for the three months ended March 31, 2012 compared to the corresponding period in the prior year due to the timing of transactions. In 2012, net gain on disposal or exchange of assets included the sale of certain non-strategic oil and gas rights. We recognized a gain of $1.5 million on this transaction. There were no similar transactions in the three months ended March 31, 2011. Selling and administrative expenses increased in the three months ended March 31, 2012 compared to the same period in 2011 due to increased stock compensation expense in 2012 as a result of additional grants in late 2011 and early 2012. Depreciation, depletion and amortization decreased in the three months ended March 31, 2012 compared to the same period in the prior year primarily due to a decrease in depletion, resulting from lower sales volumes during the first quarter of 2012. Asset retirement obligation expense increased in the three months ended March 31, 2012 as compared to the same period in 2011 primarily due to additional charges related to accelerating the timing of the closure of the Big Mountain mining complex. Sales contract accretion decreased in the three months ended March 31, 2012 primarily due to the expiration of several contracts assumed in the Magnum acquisition. Restructuring and impairment charge increased in the three months ended March 31, 2012 compared to the corresponding period in the prior year due to the charge related to the closure of the Big Mountain mining complex, which primarily consisted of the write-down of fixed assets related to infrastructure, mine development and certain equipment. Interest expense and other decreased in the three months ended March 31, 2012 primarily due to the $5.9 million loss on early repayment of notes receivable recognized in February 2011. The outstanding notes receivable related to the 2006 and 2007 sales of coal reserves and surface land were repaid in full for $115.7 million prior to the scheduled maturity date.

Outlook
Market
While most major global economies have embraced coal as a cornerstone of their electricity generation future, U.S. electricity generators are undergoing a major structural change in their operating portfolios as they respond to low natural gas prices and challenging environmental regulations. This, in turn, is resulting in a period of transition for coal mining companies, as production across the industry is reduced to match less overall U.S. utility demand. At the same time, a strong global thermal market is driving higher U.S. exports, partially offsetting the weaker domestic demand.
Domestic thermal coal demand and pricing deteriorated in the first quarter of 2012 as the mild winter and prolonged low natural gas prices resulted in lower coal burn for electricity generation. Heating degree days were 21 percent below normal in the first quarter of 2012. These factors, in turn, caused inventories at utilities to expand to over 200 million tons at the end of March 2012. Rail car loadings for the first quarter of 2012 were consequently down 10 percent year-over-year, and the lowest loadings since the beginning of 1994. As a result, U.S. coal producers are reducing coal production by closing mines and reducing operating shifts.
While the domestic market remains difficult, international thermal coal markets continue to be open to U.S. coals. We expect to ship between six and seven million tons of thermal coal oversees in 2012, including cargoes to both Europe and Asia. This represents nearly a doubling in thermal exports from the 3.8 million tons we shipped overseas in 2011.
We believe domestic combined cycle natural gas plants are already running at near-capacity in the shoulder months, so normal summer weather patterns should cause a significant increase in U.S. coal burn. Thermal coal inventory levels this summer and fall will be an important factor as electricity generators assess their needs for coal deliveries in 2013. Continued high inventory levels could result in reduced 2013 contracting, which will likely cause further cuts in coal production industry-wide.
Worldwide steel production was up 2% in March 2012 compared with a year ago. Global steel mill capacity utilization continues to move higher, with current levels in excess of 80%. Meanwhile, domestic capacity utilization has moved above 80%, with domestic steel production up nearly 6% year-over-year in the most recent four week period.
Based on recent market activity and spot pricing, metallurgical coal markets appear to be back on an upward trend. U.S. metallurgical coal exports are expected to remain at historically high levels, in part due to supply disruptions in Australia.
Longer-term, coal market fundamentals remain intact. The construction, infrastructure development and demand for electricity associated with population growth and urbanization in China, India, and other developing countries are expected to contribute to significant long-term growth in both thermal and metallurgical coal demand. Additionally, the replacement cycle for infrastructure and automobiles in developed countries should drive further growth in metallurgical coal demand.
Patriot Operations
Since the beginning of 2012, in response to new challenges facing our business, our management team has taken numerous swift and decisive actions to put us on more stable footing going forward. We have reduced thermal coal production by over four million annual tons, delayed expansions under our Met Build-Out program, implemented major cost reduction initiatives, and worked with our customers to better meet their changing requirements. We have reduced the workforce at our properties by about 1,000 employees and contractors since the beginning of 2012, and to tighten control, we have assumed full operation of several mines and facilities formerly managed by contractors, including the entire Kanawha Eagle mining complex.
On the metallurgical coal side, the fundamental global market drivers remain intact, pointing to strong metallurgical coal demand and pricing in the coming years. We have maintained several of our metallurgical coal properties in a "hot idle" state in anticipation of stronger markets. We have plans to bring certain metallurgical coal operating sections back into production, as we move through the year. Our ability to scale our production to match the market is a distinct advantage of our modular metallurgical coal production portfolio.
During the first quarter of 2012, we successfully restructured a legacy customer contract that included deliveries through 2017. The contract was previously priced not only below market, but also below cost, so this will benefit our earnings for the next six years. As a result of the negotiation, this contract volume of approximately 1.6 million annual tons will not be sold at a loss, but will instead be available for sale in the future at market prices. As discussed more fully under Part 1, Item 1A. Risk Factors in our 2011 Annual Report on Form 10-K/A, our results of operations in the near-term could be . . .