Overview

Weakness in the U.S. thermal coal markets continued to impact our results in the third quarter of 2012. Coal stockpiles at generators remain at higher than normal levels, though levels declined during the quarter. Driving the weakness in the domestic thermal market during 2012 were an increase in the substitution of natural gas for coal as fuel for power generators and an unseasonably warm winter.

We also expect that thermal coal exports will somewhat offset the weakness in domestic markets. We exported over 10 million tons through the third quarter of 2012. More than half of these exports have been into Europe, with approximately 20% reaching Asia, and the remainder into the Americas. We expect China and India to import increasing volumes of metallurgical and thermal coal in the foreseeable future, even taking into account the potential for slower economic growth.

Metallurgical coal demand has been affected by weakening in the global and U.S. steel mill capacity utilization, due to slowing economic growth. Constraints resulting from the recession in Europe and slower-than-expected growth in China have affected consumer demand and reduced steel production and raw material consumption. Announced infrastructure spending in China and Brazil and stimulus spending in developed economies, when combined with global production curtailments, could benefit metallurgical markets in the future.

In response to these market conditions, we curtailed production and have taken steps to increase operational efficiency and productivity. In the Powder River Basin, two draglines remain idled, after we redeployed one into production in the third quarter. We have also limited railcar loadings from the West loadout at the Black Thunder mine and we have reduced labor costs through scheduling changes and attrition. In Appalachia, we closed or idled eight higher-cost operations and curtailed production at other mines. We are also controlling costs by eliminating discretionary spending, reducing headcount and consolidating operations. We are controlling capital spending at thermal coal mines, redeploying idle assets and reducing maintenance capital, but we are proceeding with metallurgical coal development projects, namely the Leer mine in Appalachia, and supporting efforts to expand our coal exporting network.

Results of Operations

Items Affecting Comparability of Results

The comparability of our operating results between the nine months ended September 30, 2012 and 2011 is also affected by the acquisition of ICG on June 15, 2011 and the mine closures and idlings and production curtailments mentioned previously.

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

Summary. Our results during the third quarter of 2012, when compared to the third quarter of 2011, were impacted substantially by our mine closures and idlings and production curtailments in response to weak market conditions. In the third quarter of 2012, we also recognized a benefit from a reduction in a legal contingency liability of $79.5 million.

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 September 30, 2012 and compares it with the information for the three months ended September 30, 2011:

                                            Three Months Ended September 30,              Increase (Decrease)
                                               2012                    2011               Amount            %
                                              (Amounts in thousands, except per ton data and percentages)
Coal sales                             $          1,087,266     $        1,196,540    $     (109,274 )       (9.1 )%
Tons sold                                            37,549                 40,301            (2,752 )       (6.8 )%
Coal sales realization per ton sold    $              28.96     $            29.69    $        (0.73 )       (2.5 )%

Coal sales decreased in the third quarter of 2012 from the third quarter of 2011, primarily due to a decrease in sales volumes resulting from the operational changes we made in response to weak market conditions and a decrease in the overall average price per ton sold. Lower pricing was partially the result of a change in our regional mix towards volumes from our western operating segments and lower pricing on metallurgical coal sales due to product mix, which offset the impacts of slightly higher pricing on thermal coal sales and an increase in export shipments. Some exports are priced on a delivered basis,

increasing the sales price, but also increasing our transportation costs (see cost of sales discussion below). 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 September 30, 2012 and compares it with the information for the three months ended September 30, 2011:

                                       Three Months Ended September 30,          Increase (Decrease) in Net Income
                                         2012                 2011                   Amount                  %
                                                       (Amounts in thousands, except percentages)
Cost of sales                       $       896,809    $           952,850    $             56,041                5.9 %
Depreciation, depletion and
amortization                                126,838                139,547                  12,709                9.1 %
Amortization of acquired sales
contracts, net                               (4,093 )              (12,698 )                (8,605 )             67.8 %
Change in fair value of coal
derivatives and coal trading
activities, net                               5,840                  8,360                   2,520               30.1 %
Selling, general and
administrative expenses                      33,266                 33,275                       9                  -
Legal contingencies                         (79,532 )                    -                  79,532                N/A
Mine closure and asset
impairment costs                             (2,194 )                    -                   2,194                N/A
Acquisition and transition costs
- ICG                                             -                  4,694                   4,694              100.0 %
Other operating income, net                 (25,276 )               (3,611 )                21,665             (600.0 )%
                                    $       951,658    $         1,122,417    $            170,759               15.2 %

Cost of coal sales. Our cost of sales decreased in the third quarter of 2012 from the third quarter of 2011 primarily due to the mine closures in the second quarter of 2012 and other market-related decreases in sales volumes, as well as a decrease in production costs at remaining operations, partially offset by 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 third quarter of 2011, depreciation, depletion and amortization costs decreased in 2012 as a result of the mine closures in Appalachia and 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. Amortization income related to the contracts we acquired with ICG was lower in the third quarter of 2012 due to amortization in the third quarter of 2011 on contracts whose term ended in 2011.

Change in fair value of coal derivatives and coal trading activities, net. In the third quarter of 2012, previously recognized unrealized gains on API-2 positions were reclassified when the positions settled during the quarter. These positions manage our price risk on physical export sales into Europe, but are not accounted for as hedges, so the change in the positions' fair value prior to settlement is reflected in this line on the consolidated statement of operations, and then reclassified to other income, net when the positions settle.

Selling, general and administrative expenses. Total selling, general and administrative expenses were consistent with the third quarter of 2011. The opening of sales offices in Singapore and London resulted in an increase in salary, benefit, and travel costs, which was offset by a decrease in incentive compensation costs.

Legal contingencies. As a result of a legal ruling in a lawsuit against former ICG subsidiaries, we changed our assessment of the probable loss related to the lawsuit. The suit is discussed in detail in Note 17 to the condensed consolidated financial statements in "Part I, Item 1. Financial Statements" of this Form 10-Q.

Mine closure and asset impairment costs. The termination of certain remaining employees at closed mining operations triggered the recognition of a gain on a postretirement benefit plan curtailment in the third quarter of 2012.

Other operating income, net. When compared with the three months ended September 30, 2011, the increase in other operating income, net for the three months ended September 30, 2012 was due to the gains on settlement of the API-2 positions discussed above, totaling $13.9 million in the third quarter of 2012, and unrealized mark to market gains of $8.8 million on

our diesel risk management program. Because we do not apply hedge accounting to these positions, accounting rules do not allow the gains and losses from these activities to be recorded with 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 the three months ended September 30, 2012 and compares it with the information for the three months ended September 30, 2011:

                                    Three Months Ended September 30,         Increase (Decrease)
                                       2012                 2011                $             %
Powder River Basin
Tons sold (in thousands)                    27,703               28,812          (1,109 )      (3.8 )%
Coal sales realization per
ton sold(1)                      $           13.79    $           13.62    $       0.17         1.2 %
Operating margin per ton
sold(2)                          $            1.30    $            1.33    $      (0.03 )      (2.3 )%
Adjusted EBITDA(3) (in
thousands)                       $          82,392    $          81,153    $      1,239         1.5 %
Appalachia
Tons sold (in thousands)                     4,661                6,696          (2,035 )     (30.4 )%
Coal sales realization per
ton sold(1)                      $           83.84    $           84.32    $      (0.48 )      (0.6 )%
Operating margin per ton
sold(2)                          $            2.23    $            9.32    $      (7.09 )     (76.1 )%
Adjusted EBITDA(3) (in
thousands)                       $         143,919    $         111,004    $     32,915        29.7 %
Western Bituminous
Tons sold (in thousands)                     4,580                4,233             347         8.2 %
Coal sales realization per
ton sold(1)                      $           35.50    $           36.09    $      (0.59 )      (1.6 )%
Operating margin per ton
sold(2)                          $            7.66    $            5.80    $       1.86        32.1 %
Adjusted EBITDA(3) (in
thousands)                       $          53,479    $          43,778    $      9,701        22.2 %