Overview

Weakness in the U.S. thermal coal markets continued to impact our results in the second quarter of 2012, resulting from an increased build in power generator coal stockpiles year to date. U.S. coal consumption for power generation declined 75 million tons through the first half of 2012, and could decline by more than 100 million tons for the full year. Contributing to domestic thermal market weakness during the first half of 2012 was increased substitution of gas for coal at power generators, driven by decade-low natural gas prices, and unseasonably warm weather in the winter of 2012.

We expect that thermal coal exports will somewhat offset the weakness in domestic markets. We have increased export volumes over 2011 levels in the first half of 2012, exporting 7 million tons. China and India remain on pace to surpass record coal import levels set in 2011, although we believe a softening of the pace will occur in the second half of 2012.

Metallurgical coal demand has been affected by weakening in the global and U.S. steel mill capacity utilization, due to slowing economic growth, particularly from the uncertainty in Europe resulting from the sovereign debt crisis, which is affecting consumer demand and reducing steel production and raw material consumption.

In response to these market conditions, we curtailed our production expectations for 2012 and we have taken steps to increase operational efficiency and productivity. In total, we expect to reduce annual volumes by approximately 25 million tons in 2012 compared to originally planned levels. In the Powder River Basin, we have idled three draglines, with one being redeployed into reclamation efforts, limited railcar loadings from the West loadout at the Black Thunder mine, and reduced labor costs through scheduling changes and attrition. In Appalachia, we closed five higher-cost thermal operations and further curtailed production at other thermal mines. We are also taking steps to control costs by eliminating discretionary spending, reducing headcount and consolidating operations. We are controlling capital spending at thermal coal mines and controlling maintenance capital, but we are proceeding with metallurgical coal development projects, namely the Leer mine (previously known as the Tygart mine) in Appalachia, and supporting efforts to expand our coal exporting network.

More recently, domestic thermal coal demand trends have been more favorable. The summer weather has been hot in much of the U.S. and natural gas prices have risen. In addition, increased domestic supply reductions have occurred. Mine Safety and Health Administration data released to date suggests that second quarter 2012 U.S. coal production totaled approximately 241 million tons, a decline of 26 million tons versus the first quarter.

Results of Operations

Items Affecting Comparability of Results

The comparability of our operating results between the three and six months ended June 30, 2012 and 2011 is affected by the acquisition of ICG on June 15, 2011. Coal sales revenues attributed to acquired ICG operations were $272.4 million in the second quarter of 2012 and $510.6 million in the first half of 2012, compared with $48.4 million in 2011.

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

Summary. Our results during the second quarter of 2012 when compared to the second quarter of 2011 were impacted substantially by our mine closures and production cutbacks in response to weak market conditions.

Revenues. Our revenues consist of coal sales and revenues from our ADDCAR subsidiary acquired with ICG. The following table summarizes information about coal sales during the three months ended June 30, 2012 and compares it with the information for the three months ended June 30, 2011:

                                    Three Months Ended June 30,               Increase (Decrease)
                                     2012                   2011             Amount            %
                                   (Amounts in thousands, except per ton data and percentages)

Coal sales                   $          1,048,221     $        985,087    $     63,134            6.4 %
Tons sold                                  31,514               37,126          (5,612 )        (15.1 )%
Coal sales realization
per ton sold                 $              33.26     $          26.53    $       6.73           25.4 %

Coal sales increased in the second quarter of 2012 from the second quarter of 2011, due to an increase in the overall average price per ton sold. Higher pricing was partially the result of an increase in export shipments, some of which are priced on a delivered basis, increasing the sales price, but also increasing our transportation costs (see cost of sales discussion below). In addition, an increase in higher-priced metallurgical coal sales volumes from the contribution of the ICG operations, as well as the impact of changes in regional mix improved our average coal sales realizations. These factors were offset by the impact of lower thermal coal demand in all operating segments. We have provided more information about the tons sold and the coal sales realizations per ton by operating segment under the heading "Operating segment results".

Costs, expenses and other. The following table summarizes costs, expenses and other components of operating income for the three months ended June 30, 2012 and compares it with the information for the three months ended June 30, 2011:

                                                                          Increase (Decrease) in Net
                                      Three Months Ended June 30,                   Income
                                         2012              2011              Amount              %
                                               (Amounts in thousands, except percentages)
Cost of sales                      $        881,259    $     715,590    $        (165,669 )      (23.2 )%
Depreciation, depletion and
amortization                                132,868           97,236              (35,632 )      (36.6 )%
Amortization of acquired sales
contracts, net                               (4,451 )          1,262                5,713        452.7 %
Mine closure and asset
impairment costs                            525,762                -             (525,762 )
Goodwill impairment                         115,791                -             (115,791 )
Selling, general and
administrative expenses                      35,178           29,040               (6,138 )      (21.1 )%
Change in fair value of coal
derivatives and coal trading
activities, net                             (32,054 )          2,672               34,726
Acquisition and transition
costs related to ICG                              -           48,666               48,666        100.0 %
Other operating income, net                  (1,831 )         (4,292 )             (2,461 )       57.3 %
                                   $      1,652,522    $     890,174    $        (762,348 )      (85.6 )%

Cost of coal sales. Our cost of sales increased in the second quarter of 2012 from the second quarter of 2011 primarily from an increase in transportation costs as a result of the increase in export shipments and the impact of the acquisition of the ICG operations. We have provided more information about the performance and profitability of our operating segments under the heading "Operating segment results".

Depreciation, depletion and amortization. When compared with the second quarter of 2011, higher depreciation, depletion and amortization costs in 2012 resulted primarily from the acquired ICG operations, partially offset by the impact of lower depreciation and amortization on assets amortized or depleted on the basis of tons produced, processed, or sold.

Amortization of acquired sales contracts, net. The fair values of acquired sales contracts are amortized over the tons of coal shipped during the term of the contracts. In the second quarter of 2011, amortization income related to the contracts we acquired with the ICG operations was offset by amortization expense related to contracts we acquired in 2009 with the Jacobs Ranch operations in the PRB.

Mine closure and asset impairment costs. The following costs are reflected in the line "Mine closure and asset impairment costs" for the three months ended June 30, 2012 relating to the closed Appalachia operations:

                                                                     In millions
Parts and supplies inventory writedown                             $           2.6
Impairment of property, plant and equipment                                   95.6
Impairment of coal properties and deferred development costs                 403.3
Royalty obligations                                                           11.6
Employee termination benefits                                                 12.3
Pension, postretirement and occupational disease curtailment
charge, net                                                                    0.4
                                                                   $         525.8

The majority of the employee termination costs will be paid in the third quarter. The operations had ceased production prior to June 30, 2012, and will incur minimal ongoing annual maintenance costs customary with idling operations. The terms of customer contracts will be fulfilled by other operations.

Goodwill Impairment. We recorded a preliminary write-off of our goodwill related to our Black Thunder mining complex during the second quarter of 2012 due to expectations of lower thermal coal demand and its impact on near-term sales volumes and pricing. The write-off will not be final until an allocation of fair value to individual and assets and liabilities is complete. See further discussion in Note 5 to the condensed consolidated financial statements in "Part I, Item 1. Financial Statements" of this Form 10-Q. Further weakening of coal markets, particularly metallurgical coal volumes and pricing could affect the value of goodwill allocated to complexes in Appalachia.

Selling, general and administrative expenses. Selling, general and administrative expenses increased compared with the second quarter of 2011. Our growth in the Appalachia operating region and through sales offices in Singapore and London has resulted in an increase in salary and benefit costs, travel costs, and other professional service fees. In addition, the change in our net obligation under the deferred compensation plan resulted in an increase in expense of $2.1 million. These were partially offset by a decrease in incentive compensation costs of $1.2 million.

Change in fair value of coal derivatives and coal trading activities, net. The gains reflected in the second quarter of 2012 relate primarily to API-2 positions entered into to manage price risk on physical export sales into Europe. These positions are not accounted for as hedges, so the change in the positions' fair value prior to settlement is reflected in the results of operations.

Other operating income, net. When compared with the three months ended June 30, 2011, other operating income, net decreased in the three months ended June 30, 2012 primarily due to the following:

                                                                       In millions
Coal derivative settlements - risk management, non-hedges             $          8.5
Unrealized mark to market losses on diesel risk management program             (14.7 )
Commercial related income, net                                                   3.4
Income from equity method investees                                             (1.8 )

We enter into derivative positions to manage price risk with respect to future coal sales and diesel purchases. Because we do not apply hedge accounting to these positions, the gains and losses from these activities may not be tied to the underlying activity in the statement of operations as if they qualified for hedge accounting.

Operating segment results. The following table shows results by operating segment for three months ended June 30, 2012 and compares it with the information for the three months ended June 30, 2011:

                              Three Months Ended June 30,            Increase (Decrease)
                                2012               2011                $               %
Powder River Basin
Tons sold (in
thousands)                          21,833             28,042           (6,209 )        (22.1 )%
Coal sales realization
per ton sold(1)            $         13.65    $         13.70    $       (0.05 )         (0.4 )%
Operating margin per
ton sold(2)                $          0.94    $          1.24    $       (0.30 )        (24.2 )%
Adjusted EBITDA(3) (in
thousands)                 $        59,564    $        82,248    $     (22,684 )        (27.6 )%
Appalachia
Tons sold (in
thousands)                           5,202              4,269              933           21.9 %
Coal sales realization
per ton sold(1)            $         85.45    $         86.94    $       (1.49 )         (1.7 )%
Operating margin per
ton sold(2)                $          4.53    $         21.73    $      (17.20 )        (79.2 )%
Adjusted EBITDA(3) (in
thousands)                 $       135,961    $       123,653    $      12,308           10.0 %
Western Bituminous
Tons sold (in
thousands)                           3,985              4,722             (737 )        (15.6 )%
Coal sales realization
per ton sold(1)            $         33.35    $         35.59    $       (2.24 )         (6.3 )%
Operating margin per
ton sold(2)                $          4.47    $          9.16    $       (4.69 )        (51.2 )%
Adjusted EBITDA(3) (in
thousands)                 $        36,589    $        65,772    $     (29,183 )        (44.4 )%

(2) Operating margin per ton sold is calculated as coal sales revenues less cost of coal sales, depreciation, depletion and amortization and sales contract amortization divided by tons sold.

(3) Adjusted EBITDA is defined as net income attributable to the Company before the effect of net interest expense, income taxes, depreciation, depletion and amortization and the amortization of acquired sales contracts. Adjusted EBITDA may also be adjusted for items that may not reflect the trend of future results. Segment Adjusted EBITDA is reconciled to net income at the end of this "Results of Operations" section.

Powder River Basin - Segment Adjusted EBITDA decreased in the second quarter of 2012 when compared to the second quarter of 2011 primarily due to the lower sales volumes in the Powder River Basin from our production cutbacks in response to the market conditions discussed previously. Per-ton costs were higher due to the lower production levels and higher diesel costs, which offset the impact of lower overall spending. Our total production costs were down in the second quarter of 2012 due to the redeployment of employees and equipment to significant reclamation activities performed during the quarter, reducing the number of contractors, and lower maintenance costs resulting from the idling of equipment. We expect this current cycle of reclamation to be largely completed in the third quarter.

Appalachia - Segment Adjusted EBITDA increased slightly from the second quarter of 2011 primarily as a result of an increase in the volumes and pricing of metallurgical-quality coal sold. We sold 1.9 million tons of metallurgical-quality coal in the second quarter of 2012 compared to 1.7 million tons in the second quarter of 2011. The volume contributions from the acquired ICG operations were partially offset by the impact of unfavorable market conditions, and the related production cutbacks and mine closings. Per-ton realizations in the second quarter of 2012 were slightly lower due to a lower percentage of metallurgical coal sales volumes in relation to total sales volumes. In addition, higher per-ton costs were impacted by higher cost production from operations acquired from ICG, lower production levels at other operations, and inflation in labor and commodity costs. Mine closure and asset impairment costs are excluded from the per-ton costs and operating margins above.

Western Bituminous -Segment Adjusted EBITDA decreased from the second quarter of 2011 due to lower sales volumes, due to weaker demand in the region. Longwall moves during the quarter were extended in response to market conditions. The Skyline mine will recommence longwall mining in October and the Dugout mine will begin mining its final longwall panel of the current seam in August. Future production decisions will be based on market conditions.

Net interest expense. The increase in interest expense during the second quarter of 2012 when compared with the second quarter of 2011 is the result of the ICG acquisition financing in 2011 and the refinancing transactions in the second quarter of 2012, discussed in the "Liquidity" section.

Other nonoperating expense. Amounts reported as nonoperating consist of expenses resulting from financing activities, other than interest costs. During the second quarter of 2012, nonoperating expense consists of the net loss resulting from the early retirement of $450.0 million principal amount of our subsidiary's 6 ¾% Senior Notes due 2013. During 2011, nonoperating expense represents financing related costs of the ICG acquisition, including the cost to maintain a bridge financing facility, which was not utilized. See further description of financing activities in "Liquidity".

Income taxes. Our effective income tax rate is sensitive to changes in and the relationship between annual profitability and the deduction for percentage depletion. The income tax benefit in the second quarter of 2012

reflects our pretax loss combined with percentage depletion deductions, offset by an increase in our valuation allowance against state tax loss carryforwards of approximately $8.0 million.

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

Summary. Our results during first half of 2012 when compared to the first half of 2011 were impacted substantially by our production cutbacks and mine closures in response to weak market conditions and the impact of the ICG acquisition.

Revenues. Our revenues consist of coal sales and revenues from our ADDCAR subsidiary acquired with ICG. The following table summarizes information about coal sales during the six months ended June 30, 2012 and compares it with the information for the six months ended June 30, 2011:

                                    Six Months Ended June 30,                  Increase (Decrease)
                                    2012                  2011                Amount               %
                                     (Amounts in thousands, except per ton data and percentages)
Coal sales                   $         2,085,361     $     1,858,466    $           226,895          12.2 %
Tons sold                                 67,174              73,734                 (6,560 )        (8.9 )%
Coal sales realization
per ton sold                 $             31.04     $         25.21    $              5.84          23.2 %

Coal sales increased in the first half of 2012 from the first half of 2011, due to an increase in the overall average price per ton sold, the result of improved pricing on metallurgical-quality coal sold and the increase in export sales, as well as the contribution from the ICG operations, including higher-priced metallurgical coal sales volumes, as well as the impact of changes in regional mix on our average coal sales realization. These factors were offset by lower thermal coal demand in all operating segments. We have provided more information about the tons sold and the coal sales realizations per ton by operating segment under the heading "Operating segment results".

Costs, expenses and other. The following table summarizes costs, expenses and other components of operating income for the six months ended June 30, 2012 and compares it with the information for the six months ended June 30, 2011:

                                                                  Increase (Decrease) in Net
                                 Six Months Ended June 30,                  Income
                                    2012            2011             Amount             %
                                         (Amounts in thousands, except percentages)
Cost of sales                  $    1,732,130    $ 1,369,274    $       (362,856 )       (26.5 )%
Depreciation, depletion and
amortization                          272,834        180,773             (92,061 )       (50.9 )%
Amortization of acquired
sales contracts, net                  (18,468 )        7,206              25,674         356.3 %
Mine closure and asset
impairment costs                      525,762              -            (525,762 )
Goodwill impairment                   115,791              -            (115,791 )
Selling, general and
administrative expenses                66,039         59,474              (6,565 )       (11.0 )%
Change in fair value of
coal derivatives and coal
trading activities, net               (35,667 )          888              36,555
Acquisition and transition
costs related to ICG                        -         48,666              48,666         100.0 %

Other operating income, net           (20,329 )       (5,407 )            14,922        (276.0 )%
                               $    2,638,092    $ 1,660,874    $       (977,218 )       (58.8 )%

Cost of coal sales. Our cost of sales increased in the first half of 2012 from the first half of 2011 primarily from the impact of the acquisition of the ICG operations and an increase in transportation costs as a result of the increase in export shipments. We have provided more information about the performance and profitability of our operating segments under the heading "Operating segment results".

Depreciation, depletion and amortization. When compared with the first half of 2011, higher depreciation, depletion and amortization costs in 2012 resulted primarily from the acquired ICG operations, partially offset by the impact of lower depreciation and amortization on assets amortized or depleted on the basis of tons produced, processed, or sold.

Amortization of acquired sales contracts, net. The fair values of acquired sales contracts are amortized over the tons of coal shipped during the term of the contracts. In the first half of 2011, amortization expense related to contracts we acquired in 2009 with the Jacobs Ranch operations in the PRB was offset by amortization income related to the contracts we acquired with the ICG operations.

Mine closure and asset impairment costs and goodwill impairment. These items are discussed in the results of operations for the three months ended June 30, 2012.

Selling, general and administrative expenses. Selling, general and administrative expenses were essentially flat when compared with the first half of 2011. Our growth in 2012 has resulted in an increase in salary and benefit costs, travel costs, and other professional service fees. These were offset by a decrease in incentive compensation costs of $3.8 million.

Change in fair value of coal derivatives and coal trading activities, net. The gains reflected in the first half of 2012 relate primarily to API-2 positions entered into to manage price risk on physical export sales into Europe. These positions are not accounted for as hedges, so the change in the positions' fair value prior to settlement is reflected in the results of operations.

Other operating income, net. When compared with the six months ended June 30, 2011, other operating income, net increased in the six months ended June 30, 2012 primarily due to the following:

                                                                       In millions
Gain on sale of non-core assets                                       $         11.6
Coal derivative settlements - risk management, non-hedges                       11.7
Unrealized mark to market losses on diesel risk management program             (14.4 )
Commercial related income, net                                                   4.5
Income from equity method investees                                             (1.8 )

Operating segment results. The following table shows results by operating segment for six months ended June 30, 2012 and compares it with the information for the six months ended June 30, 2011:

                                  Six Months Ended June 30,            Increase (Decrease)
                                    2012              2011               $              %
Powder River Basin
Tons sold (in thousands)               49,048            56,872           (7,824 )       (13.8 )%
Coal sales realization per
ton sold(1)                    $        13.77    $        13.60    $        0.17           1.3 %
Operating margin per ton
sold(2)                        $         1.05    $         1.42    $       (0.37 )       (26.1 )%
Adjusted EBITDA(3) (in
thousands)                     $      133,747    $      175,964    $     (42,217 )       (24.0 )%
Appalachia
Tons sold (in thousands)                9,867             7,860            2,007          25.5 %
Coal sales realization per
ton sold(1)                    $        86.98    $        84.20    $        2.78           3.3 %
Operating margin per ton
sold(2)                        $         3.53    $        19.12    $      (15.59 )       (81.5 )%
Adjusted EBITDA(3) (in
thousands)                     $      219,201    $      201,639    $      17,562           8.7 %
Western Bituminous
Tons sold (in thousands)                7,246             8,908           (1,662 )       (18.7 )%
Coal sales realization per
ton sold(1)                    $        35.27    $        35.25    $        0.02           0.1 %
. . .