PCX-9.30.2011-10Q

10-Q 1 pcx-9302011x10q.htm FORM 10-Q PCX-9.30.2011-10Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2011


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: 001-33466

PATRIOT COAL CORPORATION

(Exact name of registrant as specified in its charter)



Delaware		20-5622045
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



	12312 Olive Boulevard, Suite 400 St. Louis, Missouri		63141
	(Address of principal executive offices)		(Zip Code)

	(314) 275-3600
	(Registrant's telephone number, including area code)
	(Registrant's telephone number, including area code)
	Not Applicable
	(Former name, former address and former fiscal year, if changed since last report)

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 R 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 R 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 R		Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)		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). Yes o No R

There were 91,379,526 shares of common stock with a par value of $0.01 per share outstanding on October 28, 2011.

Table of Contents

INDEX



PART I - FINANCIAL INFORMATION
			Page
	Item 1.	Financial Statements

		Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010	1

		Condensed Consolidated Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010	2

		Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010	3

		Notes to Unaudited Condensed Consolidated Financial Statements	4

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

	Item 4.	Controls and Procedures	37

PART II - OTHER INFORMATION

	Item 1.	Legal Proceedings	38

	Item 4.	Mine Safety Disclosures	38

	Item 6.	Exhibits	38

SIGNATURE

EXHIBIT INDEX

Table of Contents

PART I - FINANCIAL INFORMATION


Item 1.	Financial Statements



PATRIOT COAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(Dollars in thousands, except share and per share data)
Revenues
Sales	$	584,145		$	496,271		$	1,778,425		$	1,494,279
Other revenues	5,250			4,412			20,154			12,653
Total revenues	589,395			500,683			1,798,579			1,506,932
Costs and expenses
Operating costs and expenses	570,850			484,168			1,646,958			1,421,862
Depreciation, depletion and amortization	47,040			44,782			138,112			144,744
Asset retirement obligation expense	12,364			31,291			61,933			53,141
Sales contract accretion	(11,380		)	(30,927		)	(45,805		)	(89,970		)
Restructuring and impairment charge	139			167			423			15,005
Selling and administrative expenses	12,788			10,323			39,392			36,295
Net gain on disposal or exchange of assets	(7,389		)	(3,531		)	(16,804		)	(45,086		)
Income from equity affiliates	(1,650		)	(3,491		)	(4,570		)	(5,183		)
Operating loss	(33,367		)	(32,099		)	(21,060		)	(23,876		)
Interest expense and other	16,453			16,952			55,896			40,779
Interest income	(73		)	(3,128		)	(171		)	(9,819		)
Loss before income taxes	(49,747		)	(45,923		)	(76,785		)	(54,836		)
Income tax provision (benefit)	(230		)	70			383			470
Net loss	$	(49,517	)	$	(45,993	)	$	(77,168	)	$	(55,306	)

Weighted average shares outstanding, basic and diluted	91,329,096			90,968,377			91,299,442			90,889,782

Loss per share, basic and diluted	$	(0.54	)	$	(0.51	)	$	(0.85	)	$	(0.61	)

See accompanying notes to unaudited condensed consolidated financial statements.

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PATRIOT COAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited)
	September 30, 2011			December 31, 2010
	(Dollars in thousands)
ASSETS
Current assets
Cash and cash equivalents	$	239,084		$	193,067
Accounts receivable and other, net of allowance for doubtful accounts of $138 and $141 as of September 30, 2011 and December 31, 2010, respectively	198,300			207,365
Inventories	96,760			97,973
Prepaid expenses and other current assets	25,256			28,648
Total current assets	559,400			527,053
Property, plant, equipment and mine development
Land and coal interests	2,919,187			2,870,182
Buildings and improvements	455,709			439,326
Machinery and equipment	764,155			679,429
Less accumulated depreciation, depletion and amortization	(950,792		)	(828,402		)
Property, plant, equipment and mine development, net	3,188,259			3,160,535
Notes receivable	—			69,540
Investments and other assets	67,520			52,908
Total assets	$	3,815,179		$	3,810,036
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses	$	442,379		$	409,284
Below market sales contracts acquired	48,515			70,917
Current portion of debt	20,444			3,329
Total current liabilities	511,338			483,530
Long-term debt, less current maturities	438,603			451,529
Asset retirement obligations	409,736			349,791
Workers' compensation obligations	230,109			220,757
Accrued postretirement benefit costs	1,279,133			1,269,168
Obligation to industry fund	36,480			38,978
Below market sales contracts acquired, noncurrent	54,821			92,253
Other noncurrent liabilities	48,730			60,949
Total liabilities	3,008,950			2,966,955
Stockholders' equity
Common stock ($0.01 par value; 300,000,000 shares authorized; 91,382,170 and 90,944,595 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively)	914			909
Preferred stock ($0.01 par value; 10,000,000 shares authorized; no shares issued and outstanding at September 30, 2011 and December 31, 2010)	—			—
Series A Junior Participating Preferred Stock ($0.01 par value; 1,000,000 shares authorized; no shares issued and outstanding at September 30, 2011 and December 31, 2010)	—			—
Additional paid-in capital	972,961			961,285
Retained earnings	111,414			188,582
Accumulated other comprehensive loss	(279,060		)	(307,695		)
Total stockholders' equity	806,229			843,081
Total liabilities and stockholders' equity	$	3,815,179		$	3,810,036

See accompanying notes to unaudited condensed consolidated financial statements.

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PATRIOT COAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended September 30,
	2011			2010
	(Dollars in thousands)
Cash Flows From Operating Activities
Net loss	$	(77,168	)	$	(55,306	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion and amortization	138,112			144,744
Amortization of deferred financing costs	5,510			4,843
Amortization of debt discount	7,083			6,445
Sales contract accretion	(45,805		)	(89,970		)
Loss on early repayment of notes receivable	5,868			—
Impairment charge	—			2,823
Net gain on disposal or exchange of assets	(16,804		)	(45,086		)
Income from equity affiliates	(4,570		)	(5,183		)
Distributions from equity affiliates	1,259			1,249
Stock-based compensation expense	9,566			9,023
Changes in current assets and liabilities:
Accounts receivable	(42,941		)	(13,679		)
Inventories	1,213			(6,565		)
Other current assets	2,268			(7,377		)
Accounts payable and accrued expenses	22,670			1,531
Interest on notes receivable	—			(9,691		)
Asset retirement obligations	42,687			35,010
Workers' compensation obligations	9,573			7,962
Accrued postretirement benefit costs	41,708			34,578
Obligation to industry fund	(2,219		)	(2,180		)
Federal black lung collateralization	(14,990		)	—
Restructuring charge, noncurrent	—			9,248
Other, net	(4,451		)	565
Net cash provided by operating activities	78,569			22,984
Cash Flows From Investing Activities
Additions to property, plant, equipment and mine development	(119,798		)	(94,600		)
Additions to advance mining royalties	(17,728		)	(14,768		)
Net cash paid in litigation settlement and asset acquisition	(14,787		)	—
Proceeds from disposal or exchange of assets	6,691			1,526
Proceeds from notes receivable	115,679			25,100
Investment in joint ventures	—			(300		)
Net cash used in investing activities	(29,943		)	(83,042		)
Cash Flows From Financing Activities
Proceeds from debt offering, net of discount	—			248,198
Deferred financing costs	(1,830		)	(20,972		)
Proceeds from coal reserve financing transaction	—			17,700
Long-term debt payments	(2,894		)	(6,237		)
Proceeds from employee stock programs	2,115			2,474
Net cash provided by (used in) financing activities	(2,609		)	241,163
Net increase in cash and cash equivalents	46,017			181,105
Cash and cash equivalents at beginning of period	193,067			27,098
Cash and cash equivalents at end of period	$	239,084		$	208,203

See accompanying notes to unaudited condensed consolidated financial statements.

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PATRIOT COAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(1) Basis of Presentation

Description of Business

Patriot Coal Corporation (Patriot, we, our or the Company) is engaged in the mining and preparation of thermal coal, also known as steam coal, for sale primarily to electricity generators and metallurgical coal, for sale to steel and coke producers. Our mining complexes and coal reserves are located in the eastern and midwestern United States (U.S.), primarily in West Virginia and Kentucky.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Patriot and its subsidiaries. All significant transactions, profits and balances have been eliminated between Patriot and its subsidiaries. Patriot operates in two domestic coal segments: Appalachia and the Illinois Basin. See Note 11 for our segment disclosures.

The accompanying condensed consolidated financial statements as of September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010, and the notes thereto, are unaudited. However, in the opinion of management, these financial statements reflect all normal, recurring adjustments necessary for a fair presentation of the results for the periods presented. Operating results for the three and nine months ended September 30, 2011 may not necessarily be indicative of the results for the year ending December 31, 2011.


(2)	Net Gain on Disposal or Exchange of Assets and Other Transactions

In the normal course of business, we enter into certain asset sales and exchange agreements, which involve swapping non-strategic coal mineral rights or other assets for coal mineral rights, that are strategic to our operations.

In September 2011, we entered into an agreement to exchange certain non-strategic Appalachia property for cash and coal mineral rights near our Big Mountain mining complex. We recognized a gain of $4.9 million on this transaction.

Also in September 2011, we sold certain non-strategic Appalachia coal mineral rights to another coal producer for $1.3 million.

In June 2011, we entered into an agreement to exchange certain non-strategic Appalachia coal mineral rights for coal mineral rights contiguous to our Highland mining complex in the Illinois Basin. We recognized a gain of $7.3 million on this transaction.

Also in June 2011, we entered into an agreement allowing a right of way at our Kanawha Eagle mining complex to a third party for compensation of $2.1 million. We have no future obligation related to this agreement.

In the third quarter of 2010, we entered into agreements with two other coal producers to exchange certain of our non-strategic coal mineral rights for certain coal mineral rights located near our Highland mining complex. We recognized a gain of $3.4 million on these transactions.

In the second quarter of 2010, we entered into two separate agreements with other coal producers to exchange certain of our non-strategic coal mineral rights for certain coal mineral rights located near our Wells and Corridor G mining complexes. We recognized gains totaling $14.3 million on these transactions.

Effective April 2010, we entered into an agreement to surrender our rights to certain non-strategic leased coal reserves and the associated mining permits at our Rocklick mining complex in exchange for the release of the related reclamation obligations. We recognized a gain of $2.8 million on the April 2010 transaction as a result of transferring the reclamation liability.

In March 2010, we received approximately 13 million tons of coal mineral rights contiguous to our Highland mining complex in the Illinois Basin in exchange for non-strategic Illinois Basin coal reserves. We recognized a gain of $24.0 million on this transaction.

The exchange transactions above were recorded at fair value. The valuations primarily utilized Level 3 inputs, as defined by authoritative guidance, in a discounted cash flows model including assumptions for future coal sales prices and operating costs. Level 3 inputs were utilized due to the lack of an active, quoted market for coal reserves and due to the inability to use other transaction comparisons because of the unique nature and location of each coal seam.

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PATRIOT COAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

Other Transactions

On October 3, 2011, we purchased the preparation plant and the associated infrastructure at our Blue Creek mining complex which we had previously leased. As a result of this transaction, the long-term obligation of $17.6 million was reclassified to “Current portion of debt” from “Long-term debt, less current maturities” on our condensed consolidated balance sheet at September 30, 2011. The purchase price of the preparation plant was $28.1 million.

We were a defendant in litigation involving Peabody Energy Corporation (Peabody), in relation to their negotiation and June 2005 sale of two properties previously owned by two of our subsidiaries, which was filed prior to our 2007 spin-off from Peabody. In May 2011, this litigation was settled. As part of the settlement, we made a payment of $14.8 million and ownership of the related assets and liabilities reverted back to us. The assets include coal reserves in West Virginia and surface land in Illinois at closed mine sites. The liabilities include the reclamation obligations related to these assets. The assets were recorded at the value of the settlement consideration, which included $17.6 million of estimated reclamation liabilities assumed, resulting in no significant impact to our results of operations in the second quarter of 2011.

In February 2011, outstanding notes receivable related to the 2006 and 2007 sales of coal reserves and surface land were repaid for $115.7 million prior to the scheduled maturity date. The early repayment resulted in a loss of $5.9 million, which is reflected in “Interest expense and other” on the condensed consolidated statement of operations. At December 31, 2010, the outstanding notes receivable were included in “Accounts receivable and other” and “Notes receivable” on the condensed consolidated balance sheet.

In February 2010, we entered into an agreement to purchase certain coal mineral rights from another coal producer. The purchase price of $10 million is included in “Property, plant, equipment and mine development” on the condensed consolidated balance sheet.

Effective April 2010, we entered into an agreement to sell coal mineral rights at our Federal mining complex to a third party lessor and added them to an existing lease. We recorded this transaction as a financing arrangement. Therefore, we recorded the $17.7 million cash consideration as a liability. The liability is being accreted through interest expense over an expected lease term of approximately five years and is being relieved as we make future royalty payments. For the three and nine months ended September 30, 2011, $0.3 million and $0.9 million, respectively, is reflected in “Interest expense and other” on the condensed consolidated statement of operations. For the three and nine months ended September 30, 2010, $0.3 million and $0.7 million, respectively, is reflected in “Interest expense and other” on the condensed consolidated statement of operations.

During the three and nine months ended September 30, 2011, “Other revenues” includes the recognition of income as underlying tons were shipped from a coal purchase option sold in a prior year. Additionally, we monetized future coal reserve royalty payments for $2.2 million in the nine months ended September 30, 2011. Other revenues also include payments from customer settlements, royalties related to coal lease agreements and farm income.


(3)	Asset Retirement Obligation Expense

Asset retirement obligation expense includes accretion of asset retirement obligations and charges for selenium water treatment and related legal proceedings. On September 1, 2010, the U.S. District Court for the Southern District of West Virginia (U.S. District Court) issued an order to Apogee Coal Company (Apogee) and Hobet Mining, LLC (Hobet), our subsidiaries, in relation to the failure to meet the deadline to comply with selenium discharge limits in their permits by April 5, 2010.

The order required Hobet to submit by October 1, 2010 a proposed schedule to develop a treatment plan for a Hobet Surface Mine No. 22 outfall and to come into compliance with applicable discharge limits under the permit by May 1, 2013. We submitted the required schedule, which included conducting additional pilot projects related to certain technological alternatives. Based on the results of the pilot projects, a final treatment technology to be utilized at the Hobet Surface Mine No. 22 outfall was submitted to the U.S. District Court in June 2011 in accordance with the submitted schedule. We recorded expense of $24.0 million in the second quarter of 2011 for the estimated future ongoing operating costs of a Fluidized Bed Reactor (FBR) water treatment facility at this outfall. The charge was included in “Asset retirement obligation expense” on our condensed consolidated statements of operations. See Note 14 for the background on these proceedings and the additional impact of these orders on Apogee and Hobet.

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PATRIOT COAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011


(4)	Restructuring and Impairment Charge

In the second quarter of 2010, we recorded a $14.8 million restructuring and impairment charge related to the June 2010 closure of the Harris No. 1 mine as a result of adverse geologic conditions and further rationalization of our operations at the Rocklick mining complex based on this early closure. The Harris No. 1 mine was nearing the end of its projected mining life and was scheduled for closure in 2011. The charge included a $2.8 million non-cash, impairment component related to equipment and coal reserves that were abandoned due to the mine closure. Additionally, the charge included a restructuring component totaling $12.0 million for payment of remaining operational contracts to be made with no future economic benefit. These contracts provided for the use of a beltline and rights to coal reserves. Payments of these obligations will occur through the end of 2013. In the three and nine months ended September 30, 2011, the expense represents accretion related to the discounted future payment obligation. The current portion of the restructuring liability of $4.5 million is included in “Trade accounts payable and accrued expenses” and the long-term portion of $5.5 million is included in “Other noncurrent liabilities” on our condensed consolidated balance sheets.


(5)	Postretirement Benefit Costs

Net periodic postretirement benefit costs included the following components:



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
	(Dollars in thousands)
Service cost for benefits earned	$	1,402		$	1,421		$	4,207		$	4,271
Interest cost on accumulated postretirement benefit obligation	19,269			18,966			57,807			56,866
Amortization of actuarial loss	10,784			8,993			32,351			27,393
Amortization of prior service cost	(202		)	(200		)	(607		)	(600		)
Net periodic postretirement benefit costs	$	31,253		$	29,180		$	93,758		$	87,930


(6)	Income Tax Provision (Benefit)

For the three and nine months ended September 30, 2011, we recorded an income tax benefit of $0.2 million and an income tax provision of $0.4 million, respectively. For the three and nine months ended September 30, 2010, we recorded an income tax provision of $0.1 million and $0.5 million, respectively, primarily related to state taxes. We anticipate a tax net operating loss for the year ending December 31, 2011.


(7)	Earnings per Share

Basic earnings per share is computed by dividing net income by the number of weighted average common shares outstanding during the reporting period. Diluted earnings per share is calculated to give effect to all potentially dilutive common shares that were outstanding during the reporting period.

The effect of dilutive securities excludes certain stock options, restricted stock units and convertible debt-related shares because the inclusion of these securities was antidilutive to earnings per share. For the three and nine months ended September 30, 2011 and 2010, no common stock equivalents were included in the computation of the diluted loss per share because we reported a net loss for all periods.

Accordingly, 3.3 million shares for the three and nine months ended September 30, 2011 and 3.1 million shares for the three and nine months ended September 30, 2010 related to stock-based compensation awards were excluded from the diluted loss per share calculation. In addition, 3.0 million common shares related to the convertible notes, for all periods, were excluded from the diluted loss per share calculation.

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PATRIOT COAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011


(8)	Comprehensive Loss

The following table sets forth the after-tax components of comprehensive loss for the three and nine months ended September 30, 2011 and 2010:



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
	(Dollars in thousands)
Net loss	$	(49,517	)	$	(45,993	)	$	(77,168	)	$	(55,306	)
Accumulated actuarial loss and prior service cost realized in net loss	10,749			9,079			32,243			27,271
Unrealized loss on actuarially-determined liability^(a)	—			—			—			(11,500		)
Net change in fair value of diesel fuel hedge	(3,957		)	1,425			(3,608		)	349
Comprehensive loss	$	(42,725	)	$	(35,489	)	$	(48,533	)	$	(39,186	)

^(a)In March 2010, healthcare legislation was enacted and included provisions related to coal workers' pneumoconiosis, providing automatic extension of awarded lifetime benefits to surviving spouses and providing changes to the legal criteria used to assess and award claims. We adjusted our obligation by $11.5 million for the estimated impact of this legislation to our current population of beneficiaries and claimants.


(9)	Inventories

Inventories consisted of the following:



	September 30, 2011		December 31, 2010
	(Dollars in thousands)
Materials and supplies	$	53,332	$	42,056
Saleable coal	32,551		40,478
Raw coal	10,877		15,439
Total	$	96,760	$	97,973

Materials, supplies and coal inventory are valued at the lower of average cost or market. Saleable coal represents coal stockpiles that will be sold in current condition. Raw coal represents coal stockpiles that may be sold in current condition or may be further processed prior to shipment to a customer. Coal inventory costs include labor, supplies, equipment, operating overhead and other related costs.


(10)	Credit Facilities

Effective May 5, 2010, we entered into a $427.5 million amended and restated credit agreement with a maturity date of December 31, 2013. The credit facility provides for the issuance of letters of credit and direct borrowings. On January 6, 2011, we entered into an amendment to the credit agreement which, among other things, modified certain limits and minimum requirements of our financial covenants. At September 30, 2011, we were in compliance with the covenants of our amended credit facility.

In March 2010, we entered into a $125 million accounts receivable securitization program, which provides for the issuance of letters of credit and direct borrowings. Trade accounts receivable are sold, on a revolving basis, to a wholly-owned bankruptcy-remote entity (facilitating entity), which then sells an undivided interest in all of the trade accounts receivable to the creditors as collateral for any borrowings. Available liquidity under the program fluctuates with the balance of our trade accounts receivable. The outstanding trade accounts receivable balance was $191.3 million and $146.6 million as of September 30, 2011 and December 31, 2010, respectively.

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PATRIOT COAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

Based on our continuing involvement with the trade accounts receivable balances, including continued risk of loss, the sale of the trade accounts receivable to the creditors does not receive sale accounting treatment. As such, the trade accounts receivable balances remain on our financial statements until settled. Any direct borrowings under the program are recorded as secured debt.

Both the credit facility and the account receivable securitization program (the facilities) are available for our working capital requirements, capital expenditures and other corporate purposes. As of September 30, 2011 and December 31, 2010, the balance of outstanding letters of credit issued against the facilities totaled $335.1 million and $355.3 million, respectively. There were no outstanding short-term borrowings against either facility as of September 30, 2011 and December 31, 2010. Availability under these facilities was $217.4 million and $197.2 million as of September 30, 2011 and December 31, 2010, respectively.


(11)	Segment Information

We report our operations through two reportable operating segments, Appalachia and Illinois Basin. The Appalachia and Illinois Basin segments primarily consist of our mining operations in West Virginia and Kentucky, respectively. The principal business of the Appalachia segment is the mining and preparation of thermal coal, sold primarily to electricity generators and metallurgical coal, sold to steel and coke producers. The principal business of the Illinois Basin segment is the mining and preparation of thermal coal, sold primarily to electricity generators. For the nine months ended September 30, 2011 and 2010, our sales to electricity generators were 76% and 78% of our total volume, respectively. Our sales to steel and coke producers were 24% and 22% of our total volume for the nine months ended September 30, 2011 and 2010, respectively. For the nine months ended September 30, 2011 and 2010, our revenues attributable to foreign countries, based on where the product was shipped, were $657.3 million and $416.0 million, respectively. There are no material revenues attributed to any individual foreign country.

We utilize underground and surface mining methods and produce coal with high and medium Btu content. Our operations have relatively short shipping distances from the mine to most of our domestic utility customers and certain metallurgical coal customers. “Corporate and Other” in the tables below includes selling and administrative expenses, net gains on disposal or exchange of assets and costs associated with past mining obligations.

Our chief operating decision makers use Adjusted EBITDA as the primary measure of segment profit and loss. We believe that in our industry such information is a relevant measurement of a company's operating financial performance. Adjusted EBITDA is defined as net 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. Segment Adjusted EBITDA is calculated the same as Adjusted EBITDA but excludes “Corporate and Other” as defined above. 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.

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PATRIOT COAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

Operating segment results for the three and nine months ended September 30, 2011 and 2010 were as follows:



	Three Months Ended September 30, 2011										Nine Months Ended September 30, 2011
	Appalachia		Illinois Basin			Corporate and Other			Total		Appalachia		Illinois Basin			Corporate and Other			Total
	(Dollars in thousands)
Revenues	$	509,200	$	80,195		$	—		$	589,395	$	1,562,918	$	235,661		$	—		$	1,798,579
Adjusted EBITDA	68,820		(2,863		)	(51,161		)	14,796		291,919		(1,096		)	(157,220		)	133,603
Additions to property, plant, equipment and mine development	45,050		3,485			137			48,672		107,510		11,485			803			119,798
Income from equity affiliates	1,650		—			—			1,650		4,570		—			—			4,570



	Three Months Ended September 30, 2010										Nine Months Ended September 30, 2010
	Appalachia		Illinois Basin			Corporate and Other			Total		Appalachia		Illinois Basin		Corporate and Other			Total
	(Dollars in thousands)
Revenues	$	438,460	$	62,223		$	—		$	500,683	$	1,301,882	$	205,050	$	—		$	1,506,932
Adjusted EBITDA	66,654		(4,097		)	(49,343		)	13,214		219,558		1,187		(121,701		)	99,044
Additions to property, plant, equipment and mine development	26,282		4,435			191			30,908		75,275		18,960		365			94,600
Income from equity affiliates	3,491		—			—			3,491		5,183		—		—			5,183

A reconciliation of Adjusted EBITDA to net loss follows:



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
	(Dollars in thousands)
Total Adjusted EBITDA	$	14,796		$	13,214		$	133,603		$	99,044
Depreciation, depletion and amortization	(47,040		)	(44,782		)	(138,112		)	(144,744		)
Asset retirement obligation expense	(12,364		)	(31,291		)	(61,933		)	(53,141		)
Sales contract accretion	11,380			30,927			45,805			89,970
Restructuring and impairment charge	(139		)	(167		)	(423		)	(15,005		)
Interest expense and other	(16,453		)	(16,952		)	(55,896		)	(40,779		)
Interest income	73			3,128			171			9,819
Income tax benefit (provision)	230			(70		)	(383		)	(470		)
Net loss	$	(49,517	)	$	(45,993	)	$	(77,168	)	$	(55,306	)

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PATRIOT COAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(12) Derivatives

We utilize derivative financial instruments to manage exposure to certain commodity prices. We recognize derivative financial instruments at fair value on the condensed consolidated balance sheets. For derivatives that are not designated as hedges, the periodic change in fair value is recorded directly to earnings in “Operating costs and expenses” in the condensed consolidated statements of operations. For derivative instruments that are eligible and designated as cash flow hedges, the periodic change in fair value is recorded to “Accumulated other comprehensive loss” until the hedged transaction occurs or the relationship ceases to qualify for hedge accounting. In addition, if a portion of the change in fair value of a cash flow hedge is deemed ineffective during a reporting period, the ineffective portion of the change in fair value is recorded directly to earnings.

We have commodity price risk related to our diesel fuel purchases. To manage a portion of this risk, we entered into heating oil and ultra low sulfur diesel swap contracts with financial institutions. The changes in diesel fuel prices and the prices of these financial instruments are highly correlated, thus allowing the swap contracts to be designated as cash flow hedges of anticipated diesel fuel purchases. We expect to purchase approximately 22 million gallons of diesel fuel annually across all operations in 2011 and 2012. As of September 30, 2011, the notional amounts outstanding for the swaps included 2.3 million gallons and 13.1 million gallons of heating oil expiring throughout 2011 and 2012, respectively, as well as 3.0 million gallons of ultra low sulfur diesel expiring in 2013. For the three and nine months ended September 30, 2011, we recognized a net gain of $1.1 million and $3.6 million in earnings on settled contracts, respectively. For the three and nine months ended September 30, 2010, we recognized a net loss of less than $0.1 million in earnings on settled contracts for both periods. The portion of the fair value for the cash flow hedges deemed ineffective for the three and nine months ended September 30, 2011 and 2010, was immaterial.

The following table presents amounts related to our fuel derivative instruments and hedging activities included in the condensed consolidated balance sheets. See Note 8 for the impact of our fuel hedges on comprehensive loss.



	September 30, 2011			December 31, 2010
	(Dollars in thousands)

Fair value of current fuel contracts (Prepaid expenses and other current assets)	$	743		$	1,868
Fair value of current fuel contracts (Accounts payable and accrued expenses)	1,510			—
Fair value of noncurrent fuel contracts (Other noncurrent liabilities)	973			—
Net unrealized gains (losses) from fuel hedges, net of tax (Accumulated other comprehensive loss)	(1,740		)	1,868

We utilized New York Mercantile Exchange (NYMEX) quoted market prices for the fair value measurement of these contracts, which reflect a Level 2 fair value input.

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PATRIOT COAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011


(13)	Fair Value of Financial Instruments

Fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. Authoritative guidance establishes a three-level fair value hierarchy for fair value to be measured based on the observability of the inputs utilized in the valuation. The levels are: Level 1 - inputs from quoted prices in an active market, Level 2 - inputs other than quoted prices that are directly or indirectly observable through market corroborated inputs and Level 3 - inputs that are unobservable and require assumptions about pricing by market participants.

Cash and cash equivalents, accounts receivable, accounts payable and accrued expenses have carrying values which approximate fair value due to the short maturity or the financial nature of these instruments.

The following table summarizes the fair value of our remaining financial instruments:



	September 30, 2011		December 31, 2010
	(Dollars in thousands)
Assets:
Fuel contracts, cash flow hedges	$	743	$	1,868
Liabilities:
Fuel contracts, cash flow hedges	2,483		—
$200 million of 3.25% Convertible Senior Notes due 2013	181,500		190,211
$250 million of 8.25% Senior Notes due 2018	221,250		253,750

All of the instruments above were valued using Level 2 inputs. The fair value of the Convertible Senior Notes and the 8.25% Senior Notes was estimated using the last traded value on the last day of each period, as provided by a third party.


(14)	Commitments and Contingencies

Commitments

As of September 30, 2011, purchase commitments for equipment totaled $173.5 million. We typically finance a significant portion of equipment through leasing arrangements.

Other

On occasion, we become a party to claims, lawsuits, arbitration proceedings and administrative procedures in the ordinary course of business. Our significant legal proceedings are discussed below.

Clean Water Act Permit Issues

The federal Clean Water Act (CWA) and corresponding state and local laws and regulations affect coal mining operations by restricting the discharge of pollutants, including dredged or fill materials, into waters of the United States. In particular, the CWA requires effluent limitations and treatment standards for wastewater discharge through the National Pollutant Discharge Elimination System (NPDES) program. NPDES permits, which we must obtain for both active and historical mining operations, govern the discharge of pollutants into water, require regular monitoring and reporting and set forth performance standards. States are empowered to develop and enforce water quality standards, which are subject to change and must be approved by the Environmental Protection Agency (EPA). Water quality standards vary from state to state.

Environmental claims and litigation in connection with our various NPDES permits, and related CWA issues, include the following:

Hobet West Virginia Department of Environmental Protection (WVDEP) Action

In 2007, Hobet was sued for exceedances of effluent limits contained in four of its NPDES permits in state court in Boone County by the WVDEP. We refer to this case as the Hobet WVDEP Action. The Hobet WVDEP Action was resolved by a settlement and consent order entered in the Boone County Circuit Court on September 5, 2008. The settlement required us, among other things, to complete supplemental environmental projects, to gradually reduce selenium discharges from our Hobet Job 21 surface mine, to achieve full compliance with our NPDES permits by April 2010 and to study potential treatment alternatives for selenium.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

On October 8, 2009, a motion to enter a modified settlement and consent order in the Hobet WVDEP Action was submitted to the Boone County Circuit Court. This motion to modify the settlement and consent order was jointly filed by Patriot and the WVDEP. On December 3, 2009, the Boone County Circuit Court approved and entered a modified settlement and consent order to, among other things, extend coverage of the September 5, 2008 settlement and consent order to two additional permits and extend the date to achieve full compliance with our NPDES permits from April 2010 to July 2012. One of the two additional permits subject to such extension, Hobet Surface Mine No. 22, was subsequently addressed in the September 1, 2010 U.S. District Court Ruling, as further discussed below.

Selenium Matters

Federal Apogee Case and Federal Hobet Case

In 2007, Apogee was sued in the U.S. District Court by the Ohio Valley Environmental Coalition, Inc. (OVEC) and another environmental group (pursuant to the citizen suit provisions of the CWA). We refer to this lawsuit as the Federal Apogee Case. This lawsuit alleged that Apogee had violated water discharge limits for selenium set forth in one of its NPDES permits. The lawsuit sought compliance with the limits of the NPDES permit, fines and penalties as well as injunctive relief prohibiting Apogee from further violating laws and its permit.

In 2008, OVEC and another environmental group filed a lawsuit against Hobet and WVDEP in the U.S. District Court (pursuant to the citizen suit provisions of the CWA). We refer to this case as the Federal Hobet Case and it is very similar to the Federal Apogee Case. Additionally, the Federal Hobet Case involved the same four NPDES permits that were the subject of the original Hobet WVDEP Action in state court. However, the Federal Hobet Case focused exclusively on selenium exceedances in permitted water discharges, while the Hobet WVDEP Action addressed all effluent limits, including selenium, established by the permits.

On March 19, 2009, the U.S. District Court approved two separate consent decrees, one between Apogee and the plaintiffs and the other between Hobet and the plaintiffs. The consent decrees extended the deadline to comply with water discharge limits for selenium with respect to the permits covered by the Federal Apogee Case and the Federal Hobet Case to April 5, 2010 and added interim reporting requirements up to that date. We agreed to, among other things, undertake pilot projects at Apogee and Hobet involving reverse osmosis technology along with interim reporting obligations and to comply with our NPDES permits' water discharge limits for selenium by April 5, 2010. On February 26, 2010, we filed a motion requesting a hearing to discuss the modification of the March 19, 2009 consent decrees to, among other things, extend the compliance deadline to July 2012 in order to continue our efforts to identify viable treatment alternatives. On April 18, 2010, the plaintiffs in the Federal Apogee Case filed a motion asking the court to issue an order to show cause why Apogee should not be found in contempt for its failure to comply with the terms and conditions of the March 19, 2009 consent decree. The remedies sought by the plaintiffs included compliance with the terms of the consent decree, the imposition of fines and an obligation to pay plaintiffs' attorneys fees. A hearing to discuss these motions was held beginning on August 9, 2010. See September 1, 2010 U.S. District Court Ruling below for the outcome of this hearing.

Federal Hobet Surface Mine No. 22 Case

In March 2010, the U.S. District Court permitted a lawsuit to proceed that was filed in October 2009 by OVEC and other environmental groups against Hobet, alleging that Hobet has in the past violated, and continued to violate, effluent limitations for selenium in an NPDES permit and the requirements of a Surface Mining Control and Reclamation Act (SMCRA) permit for Hobet Surface Mine No. 22 and seeking injunctive relief. We refer to this as the Federal Hobet Surface Mine No. 22 Case. In addition to the Federal Apogee Case, the scope and terms of injunctive relief in the Federal Hobet Surface Mine No. 22 Case were discussed at the hearing that began on August 9, 2010. See September 1, 2010 U.S. District Court Ruling below for the outcome of this hearing.

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PATRIOT COAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

Other WVDEP Actions

On April 23, 2010, WVDEP filed a lawsuit against Catenary Coal Company, LLC (Catenary), one of our subsidiaries, in the Boone County Circuit Court. We refer to this case as the Catenary WVDEP Action. This lawsuit alleged that Catenary had discharged selenium from its surface mining operations in violation of certain of its NPDES and surface mining permits. On June 11, 2010, WVDEP filed a lawsuit against Apogee in the Logan County Circuit Court, alleging discharge of pollutants, including selenium, in violation of certain of its NPDES and SMCRA permits. We refer to this case as the Apogee WVDEP Action. WVDEP is seeking fines and penalties as well as injunctions prohibiting Catenary and Apogee from discharging pollutants, including selenium, in violation of laws and NPDES permits. A July 2012 trial date has been set for the Apogee WVDEP Action. We have filed a motion to consolidate the Catenary WVDEP Action with the Apogee WVDEP Action but have not yet received a ruling. We are unable to predict the likelihood of success of the plaintiffs' claims. Although we intend to defend ourselves vigorously against these allegations, we may consider alternative resolutions to these matters if they would be in the best interest of the Company.

Federal Catenary/Hobet Case

On June 18, 2010, OVEC and three other environmental groups filed a lawsuit against Hobet and Catenary in the U.S. District Court under the citizen suit provisions of the CWA and SMCRA. We refer to this case as the Federal Catenary/Hobet Case. The plaintiffs allege that Hobet and Catenary have discharged, and continue to discharge selenium in violation of their NPDES and SMCRA permits. The Federal Catenary/Hobet Case involves the same two NPDES permits that are the subject of the Catenary WVDEP Action and the same four NPDES permits that are the subject of the Hobet WVDEP Action and the Federal Hobet Case. The plaintiffs seek, among other remedies, immediate compliance with the limits of the NPDES permits, the imposition of fines and penalties, as well as injunctions prohibiting Hobet and Catenary from further violating laws and their permits. On October 22, 2010, we entered into an agreement with OVEC and the other environmental groups, pursuant to which the plaintiffs agreed, among other things, to dismiss without prejudice the Federal Catenary/Hobet Case. In November 2010, this case was dismissed.

September 1, 2010 U.S. District Court Ruling

On September 1, 2010, the U.S. District Court found Apogee in contempt for failing to comply with the March 19, 2009 consent decree entered in the Federal Apogee Case. Apogee was ordered to install a Fluidized Bed Reactor (FBR) water treatment facility for three outfalls and to come into compliance with applicable selenium discharge limits by March 1, 2013. In September 2010, we increased the portion of the selenium water treatment liability related to Apogee by $20.7 million for the fair value of the estimated future ongoing operating costs related to these three outfalls. We record the costs to install the Apogee FBR water treatment facility as capital expenditures when incurred. As of September 30, 2011, we have spent approximately $7.1 million on the Apogee FBR facility and the total expenditures are estimated to be approximately $55 million. We began construction on the Apogee FBR facility in the third quarter of 2011.

Additionally, the U.S. District Court ordered Hobet to submit a proposed schedule to develop a treatment plan for a Hobet Surface Mine No. 22 outfall by October 1, 2010 and to come into compliance with applicable discharge limits under the permit by May 1, 2013. We submitted the required schedule, which included conducting additional pilot projects related to certain technological alternatives. A final treatment technology to be utilized at this Hobet Surface Mine No. 22 outfall was filed with the U.S. District Court in June 2011 in accordance with the submitted schedule. In June 2011, we recorded an adjustment of $24.0 million to the selenium water treatment liability primarily related to the estimated future ongoing operating costs of an FBR water treatment facility at this outfall. This charge is reflected in “Asset retirement obligation expense” in the condensed consolidated statement of operations. As with the Apogee FBR facility, we will record the costs to install the Hobet FBR water treatment facility as capital expenditures when incurred. As of September 30, 2011, we have spent approximately $0.6 million on the Hobet FBR facility and the total expenditures are estimated to be approximately $40 million. We continue to design and seek permits for the Hobet FBR facility and anticipate beginning construction on the Hobet facility in the fourth quarter of 2011.

FBR technology had not been used to remove selenium or any other minerals discharged at coal mining operations prior to our pilot project performed in 2010. The FBR water treatment facilities required by the September 1, 2010 ruling will be the first two facilities constructed for selenium removal on a commercial scale. FBR technology has not been proven effective on a full-scale commercial basis and there can be no assurance that this technology will be successful under all variable conditions experienced at our mining operations.

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PATRIOT COAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

February 2011 Litigation

In February 2011, OVEC and two other environmental groups filed a lawsuit against us, Apogee, Catenary and Hobet, in the U.S. District Court alleging violations of ten NPDES permits and certain SMCRA permits. The ten NPDES permits include the six permits that were previously the subject of the Federal Catenary/Hobet Case. The plaintiffs are seeking fines, compliance with permit limits and other requirements, and injunctive relief. We are currently awaiting the court's ruling on our motion to dismiss this lawsuit.

Selenium Water Treatment Liability

In 2009, we estimated the costs to treat our selenium discharges in excess of allowable limits at a fair value of $85.2 million at the Magnum acquisition date. This liability was recorded in the purchase accounting for the Magnum acquisition and included the estimated costs of installing Zero Valent Iron (ZVI) water treatment technology, which was the most successful methodology at the time based on our testing results. At the time we recorded this liability, it reflected the estimated total costs of the planned ZVI water treatment installations we have been implementing and maintaining in consideration of the requirements of our mining permits, court orders, and consent decrees. This estimate was prepared considering the dynamics of legislation, capabilities of available technology and our planned water treatment strategy.

At the time of the Magnum Coal Company (Magnum) acquisition, various outfalls across the acquired operations had been tested for selenium discharges. Of the outfalls tested, 88 were identified as potential sites of selenium discharge limit exceedances, of which 78 were identified as having known exceedances. The estimated liability recorded at fair value in the purchase allocation took into consideration the 78 outfalls with known exceedances at the acquisition date.

As of September 30, 2011, we have a $143.0 million liability recorded for the treatment of selenium discharges. The current portion of the estimated liability is $13.7 million and is included in “Accounts payable and accrued expenses” and the long-term portion is recorded in “Asset retirement obligations” on our condensed consolidated balance sheets.

Our liability to treat selenium discharges at the other outfalls not addressed in the September 1, 2010 ruling is based on the use of ZVI technology. We are currently continuing to install ZVI systems according to our original water treatment strategy, while also performing a further review of other potential water treatment solutions. Our water treatment strategy reflects implementing scalable ZVI installations at each outfall due to its modular design that can be reconfigured as further knowledge and certainty is gained. Initial pilot testing of ZVI technology began in 2008 and has identified potential shortfalls requiring additional research to resolve certain detailed design considerations. To date, ZVI technology has not been demonstrated to perform consistently and sustainably in achieving effluent selenium limitations or in treating the expected water flows at these outfalls. However, based on the flexibility of the scalable system for configuration adjustments, we plan to continue to pursue the ZVI water treatment installations and determine whether modifications to the technology could result in its ability to treat selenium successfully.

At this time, there is no plan to install FBR or any technology other than ZVI at the other outfalls not included in the September 1, 2010 ruling as neither FBR nor other technologies have been proven effective on a full-scale basis. However, we are continuing to research and evaluate various treatment solutions in addition to ZVI for the other outfalls. Results of pilot testing in the first half of 2011 have indicated that ZVI, FBR and an additional technology may be viable selenium treatment options. We are continuing to test modifications to these treatment options and we are pilot testing alternative solutions.

We continue to implement treatment installations at various permitted outfalls, but we have been unable to comply with selenium discharge limits due to the ongoing inability to identify a water treatment solution that can remove selenium sustainably, consistently and uniformly under all variable conditions experienced at our mining operations. While we are actively continuing to explore new treatment options and modifying existing technologies, a definitive solution has not been identified and it is unknown when or if it will be identified. Even if a definitive solution would have existed as of September 30, 2011, it likely would not have been possible to install such technology at all of the outfalls included in the Hobet WVDEP Action by the July 2012 compliance deadline, and we are taking the requisite steps to seek an extension approved by the court.

If ZVI is not ultimately successful in treating the effluent selenium exceedances at these additional outfalls, we may be required to install alternative treatment solutions. The cost of other water treatment solutions could be materially higher than the costs reflected in our liability. Furthermore, costs associated with potential modifications to ZVI or the scale of our current ZVI systems could also cause the costs to be materially higher than the costs reflected in our liability. We cannot provide an estimate of the possible additional range of costs associated with alternate treatment solutions at this time as no solution has been proven to be effective on a full-scale commercial basis. Potential installations of selenium treatment alternatives are further complicated by the variable geological and topographical considerations of each individual outfall.

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PATRIOT COAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

While we are actively continuing to explore treatment options, there can be no assurance as to if or when a definitive solution will be identified and implemented. As a result, actual costs may differ from our current estimates. We will make additional adjustments to our liability when, and if, we have become subject to other obligations and/or it becomes probable that we will utilize a different technology or modify the current technology, whether due to developments in our ongoing research or a legal obligation to do so. Additionally, there are no assurances we will meet the timetable stipulated in the various court orders, consent decrees and permits.

General Selenium Matters

In general, we and other mining companies are currently operating pursuant to NPDES permits for which selenium limits went into effect on or around April 5, 2010. We filed a request to extend the deadline beyond April 2010. The WVDEP published a notice to extend the compliance deadlines, but the EPA subsequently objected to the extensions. We have filed administrative appeals and judicial actions which we believe effectively stayed enforcement of the effective dates for the selenium limits. In March 2011, however, a U.S. District Court determined that a similar proceeding involving certain of our competitors did not stay selenium limits applicable in that case. In West Virginia, all new NPDES permits and NPDES permit renewals are subject to selenium limits if a reasonable potential to discharge in violation of the standard has been determined to exist by the WVDEP.

With respect to all outfalls with known exceedances, including the specific sites discussed above, any failure to meet the deadlines set forth in our consent decrees or established by the federal government, the U.S. District Court or the State of West Virginia or to otherwise comply with selenium limits in our permits could result in further litigation against us, an inability to obtain new permits or to maintain existing permits, and the imposition of significant and material fines and penalties or other costs and could otherwise materially adversely affect our results of operations, cash flows and financial condition.

In addition to the uncertainties related to technology discussed above, future changes to legislation, compliance with judicial rulings, consent decrees and regulatory requirements, findings from current research initiatives and the pace of future technological progress could result in costs that differ from our current estimates, which could have a material adverse affect on our results of operations, cash flows and financial condition.

We may incur costs relating to the lawsuits discussed above and possible additional costs, including potential fines and penalties relating to selenium matters. Additionally, as a result of these ongoing litigation matters and federal regulatory initiatives related to water quality standards that affect valley fills, impoundments and other mining practices, including the selenium discharge matters described above, the process of applying for new permits has become more time-consuming and complex, the review and approval process is taking longer, and in certain cases, new permits may not be issued.

Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)

CERCLA and similar state laws create liability for investigation and remediation in response to releases of hazardous substances in the environment and for damages to natural resources. Under CERCLA and many similar state statutes, joint and several liability may be imposed on waste generators, site owners and operators and others regardless of fault. These regulations could require us to do some or all of the following: (i) remove or mitigate the effects on the environment at various sites from the disposal or release of certain substances; (ii) perform remediation work at such sites; and (iii) pay damages for loss of use and non-use values.

Although waste substances generated by coal mining and processing are generally not regarded as hazardous substances for the purposes of CERCLA and similar legislation, and are generally covered by SMCRA, some products used by coal companies in operations, such as chemicals, and the disposal of these products are governed by CERCLA. Thus, coal mines currently or previously owned or operated by us, and sites to which we have sent waste materials, may be subject to liability under CERCLA and similar state laws. A predecessor of one of our subsidiaries has been named as a potentially responsible party at a third-party site, but given the large number of entities involved at the site and our anticipated share of expected cleanup costs, we believe that its ultimate liability, if any, will not be material to our financial condition and results of operations.

Flood Litigation

In 2006, Hobet and Catenary were named as defendants along with various other property owners, coal companies, timbering companies and oil and natural gas companies in lawsuits arising from flooding that occurred on May 30, 2004 in various watersheds, primarily located in southern West Virginia. This litigation is pending before two different judges in the Circuit Court of Logan County, West Virginia. In the first action, the plaintiffs have asserted that (i) Hobet failed to maintain an approved drainage control system for a pond on land near, on, and/or contiguous to the sites of flooding; and (ii) Hobet participated in the development of plans to grade, blast, and alter the land near, on, and/or contiguous to the sites of the flooding. Hobet has filed a motion to dismiss both claims based upon the assertion that insufficient facts have been stated to support the claims of the plaintiffs.

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PATRIOT COAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

In the second action, motions to dismiss have been filed, asserting that the allegations asserted by the plaintiffs are conclusory in nature and likely deficient as a matter of law. Most of the other defendants also filed motions to dismiss. Both actions were stayed during the pendency of the appeals to the West Virginia Supreme Court of Appeals in a similar case which was dismissed in April 2010.

The outcome of the flood litigation is subject to numerous uncertainties. Based on our evaluation of the issues and their potential impact, the amount of any future loss cannot be reasonably estimated. However, based on current information, we believe this matter is likely to be resolved without a material adverse effect on our financial condition, results of operations and cash flows.

Other Litigation and Investigations

Apogee has been sued, along with eight other defendants, including Monsanto Company (Monsanto), Pharmacia Corporation and Akzo Nobel Chemicals, Inc., by certain plaintiffs in state court in Putnam County, West Virginia. In total, 243 similar lawsuits have been served on Apogee, which are identical except for the named plaintiff. Of the 243 lawsuits, 75 were served in February 2008, 167 were served in December 2009, and one was served in January 2011. Each lawsuit alleges personal injury occasioned by exposure to dioxin generated by a plant owned and operated by certain of the other defendants during production of a chemical, 2,4,5-T, from 1949-1969. Apogee is alleged to be liable as the successor to the liabilities of a company that owned and/or controlled a dump site known as the Manila Creek landfill, which allegedly received and incinerated dioxin-contaminated waste from the plant. The lawsuits seek compensatory and punitive damages for personal injury. As of September 30, 2011, 47 of the lawsuits have been dismissed. Under the terms of the governing lease, Monsanto has assumed the defense of these lawsuits and has agreed to indemnify Apogee for any related damages. The failure of Monsanto to satisfy its indemnification obligations under the lease could have a material adverse effect on us.

We were a defendant in litigation involving Peabody in relation to their negotiation and June 2005 sale of two properties previously owned by two of our subsidiaries. Environmental Liability Transfer, Inc. (ELT) and its subsidiaries commenced litigation against these subsidiaries in the Circuit Court of the City of St. Louis in the State of Missouri alleging, among other claims, fraudulent misrepresentation, fraudulent omission, breach of duty and breach of contract. In May 2011, we entered into a litigation settlement agreement with ELT and its subsidiaries. See Note 2 for a detailed description of the settlement.

A predecessor of one of our subsidiaries operated the Eagle No. 2 mine located near Shawneetown, Illinois from 1969 until closure of the mine in July 1993. In March 1999, the State of Illinois brought a proceeding before the Illinois Pollution Control Board against the subsidiary alleging that groundwater contamination due to leaching from a coal waste pile at the mine site violated state standards. The subsidiary has developed a remediation plan with the State of Illinois and is in litigation before the Illinois Pollution Control Board with the Illinois Attorney General's office with respect to its claim for a civil penalty of $1.3 million.

One of our subsidiaries is a defendant in several related lawsuits filed in the Circuit Court of Boone County, West Virginia. As of September 30, 2011, there were approximately 140 related lawsuits. In addition to our subsidiary, the lawsuits name Peabody and other coal companies as defendants. The plaintiffs in each case allege contamination of their drinking water wells over a period in excess of 30 years from coal mining activities in Boone County, including underground coal slurry injection and coal slurry impoundments. The lawsuits seek property damages, personal injury damages and medical monitoring costs. The Boone County Public Service Commission installed public water lines and most of the plaintiffs now have access to public water. Pursuant to the terms of the Separation Agreement, Plan of Reorganization and Distribution from our 2007 spin-off, Patriot is indemnifying and defending Peabody in this litigation. The lawsuits have been settled subject to court approval and are fully reserved. In December 2009, we filed a third-party complaint against our current and former insurance carriers seeking coverage for this litigation under the applicable insurance policies.

In late January 2010, the U.S. Attorney's office and the State of West Virginia began investigations relating to one or more of our employees making inaccurate entries in official mine records at our Federal No. 2 mine. We terminated one employee and two other employees resigned after being placed on administrative leave. The terminated employee subsequently admitted to falsifying inspection records and has been cooperating with the U.S. Attorney's office. In April 2010, we received a federal subpoena requesting methane detection systems equipment used at our Federal No. 2 mine since July 2008 and the results of tests performed on the equipment since that date. We have provided the equipment and information as required by the subpoena. We have not received any additional requests for information in the twelve months ended September 30, 2011.

The outcome of other litigation and the investigations is subject to numerous uncertainties. Based on our evaluation of the issues and their potential impact, the amount of any future loss cannot be reasonably estimated. However, based on current information, we believe these matters are likely to be resolved without a material adverse effect on our financial condition, results of operations and cash flows.

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PATRIOT COAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011


(15)	Guarantees

As part of our 2007 spin-off, Peabody had guaranteed occupational disease (black lung) workers' compensation obligations related to certain of our subsidiaries with the U.S. Department of Labor (DOL). In the first quarter of 2011, we posted our own surety, resulting in a $15 million interest-bearing deposit that was recorded to “Investments and other assets” on the condensed consolidated balance sheet. Peabody no longer has any obligation to the DOL related to our subsidiaries included in the 2007 spin-off.

In 2010, we agreed to provide a limited guaranty of the payment and performance under three loans entered into by one of our joint ventures. The loans were obtained to purchase equipment, which is pledged as collateral for the loans. In the event of default on all three loans, we would be required to pay a maximum of $9.1 million. The maximum term of the three loans is through January 2016. The guaranteed portion of the loan balances at September 30, 2011 totaled $8.2 million. At September 30, 2011 and December 31, 2010, there was no carrying amount of the liability related to these guarantees on our consolidated balance sheets based on the amount of exposure and the likelihood of required performance.

In the normal course of business, we are party to guarantees and financial instruments with off-balance-sheet risk, such as bank letters of credit, performance or surety bonds and other guarantees and indemnities, which are not reflected in the accompanying condensed consolidated balance sheets. Such financial instruments are valued based on the amount of exposure under the instrument and the likelihood of required performance. We do not expect any material losses to result from these guarantees or off-balance-sheet instruments.

Other Guarantees

We are the lessee or sublessee under numerous equipment and property leases. It is common in such commercial lease transactions for Patriot, as the lessee, to agree to indemnify the lessor for the value of the property or equipment leased, should the property be damaged or lost during the course of our operations. We expect that losses with respect to leased property would be covered by insurance (subject to deductibles). Patriot and certain of our subsidiaries have guaranteed other subsidiaries' performance under their various lease obligations. Aside from indemnification of the lessor for the value of the property leased, our maximum potential obligations under their leases are equal to the respective future minimum lease payments and/or, in certain leases, liquidated damages, assuming no amounts could be recovered from third parties.


(16)	Pending Adoption of Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) issued authoritative guidance which requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. This guidance is effective for fiscal years beginning after December 15, 2011, and we will adopt it on January 1, 2012. While we are currently evaluating the impact on our disclosures and presentation of our financial statements, we do not believe this guidance will affect our results of operations or financial condition.

In September 2011, the FASB issued authoritative guidance which increases the quantitative and qualitative disclosures an employer is required to provide about its participation in multiemployer benefit plans. This guidance is effective for fiscal years ending after December 15, 2011 and it will have no effect on our results of operations or financial condition. We are currently evaluating the impact of this guidance on our disclosures.


(17)	Supplemental Guarantor/Non-Guarantor Financial Information

The following tables present condensed consolidating financial information for: (a) Patriot Coal Corporation (the "Parent") on a stand-alone basis; (b) the subsidiary guarantors of our 8.25% Senior Notes (“Guarantor Subsidiaries") on a combined basis and (c) the Non-Guarantor Subsidiary, Patriot Coal Receivables (SPV) Ltd. (the accounts receivable securitization program facilitating entity), on a stand-alone basis. Each Guarantor Subsidiary is wholly-owned by Patriot Coal Corporation. The guarantees from each of the Guarantor Subsidiaries are full, unconditional, joint and several. Accordingly, separate financial statements of the wholly-owned Guarantor Subsidiaries are not presented because the Guarantor Subsidiaries will be jointly, severally and unconditionally liable under the guarantees, and we believe that separate financial statements and other disclosures regarding the Guarantor Subsidiaries are not material to potential investors.

Effective January 1, 2011, Patriot Coal Corporation stand-alone balances and activity solely reflect cash, debt, insurance programs, a fuel hedge program, share-based compensation programs, and salaries and related costs of the named executive officers. All other corporate balances and activity were transferred to a new company that is a Guarantor Subsidiary.

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PATRIOT COAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011



UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2011

	Parent Company			Guarantor Subsidiaries			Non-Guarantor Entity			Eliminations			Consolidated
	(Dollars in thousands)
Revenues
Sales	$	—		$	584,145		$	—		$	—		$	584,145
Other revenues	—			5,250			—			—			5,250
Total revenues	—			589,395			—			—			589,395
Costs and expenses
Operating costs and expenses	—			570,850			—			—			570,850
Depreciation, depletion and amortization	—			47,040			—			—			47,040
Asset retirement obligation expense	—			12,364			—			—			12,364
Sales contract accretion	—			(11,380		)	—			—			(11,380		)
Restructuring and impairment charge	—			139			—			—			139
Selling and administrative expenses	4,059			8,729			—			—			12,788
Net gain on disposal or exchange of assets	—			(7,389		)	—			—			(7,389		)
Income from equity affiliates	34,221			(1,650		)	—			(34,221		)	(1,650		)
Operating loss	(38,280		)	(29,308		)	—			34,221			(33,367		)
Interest expense and other	11,620			4,833			357			(357		)	16,453
Interest income	(63		)	(10		)	(357		)	357			(73		)
Loss before income taxes	(49,837		)	(34,131		)	—			34,221			(49,747		)
Income tax provision (benefit)	(320		)	90			—			—			(230		)
Net loss	$	(49,517	)	$	(34,221	)	$	—		$	34,221		$	(49,517	)

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PATRIOT COAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011



UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 2011

	Parent Company			Guarantor Subsidiaries			Non-Guarantor Entity			Eliminations			Consolidated
	(Dollars in thousands)
Revenues
Sales	$	—		$	1,778,425		$	—		$	—		$	1,778,425
Other revenues	—			20,154			—			—			20,154
Total revenues	—			1,798,579			—			—			1,798,579
Costs and expenses
Operating costs and expenses	—			1,646,958			—			—			1,646,958
Depreciation, depletion and amortization	—			138,112			—			—			138,112
Asset retirement obligation expense	—			61,933			—			—			61,933
Sales contract accretion	—			(45,805		)	—			—			(45,805		)
Restructuring and impairment charge	—			423			—			—			423
Selling and administrative expenses	13,319			26,073			—			—			39,392
Net gain on disposal or exchange of assets	—			(16,804		)	—			—			(16,804		)
Income from equity affiliates	28,679			(4,570		)	—			(28,679		)	(4,570		)
Operating loss	(41,998		)	(7,741		)	—			28,679			(21,060		)
Interest expense and other	35,327			20,569			1,150			(1,150		)	55,896
Interest income	(157		)	(14		)	(1,150		)	1,150			(171		)
Loss before income taxes	(77,168		)	(28,296		)	—			28,679			(76,785		)
Income tax provision	—			383			—			—			383
Net loss	$	(77,168	)	$	(28,679	)	$	—		$	28,679		$	(77,168	)

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PATRIOT COAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011



UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2010

	Parent Company			Guarantor Subsidiaries			Non-Guarantor Entity			Eliminations			Consolidated
	(Dollars in thousands)
Revenues
Sales	$	—		$	496,271		$	—		$	—		$	496,271
Other revenues	—			4,412			—			—			4,412
Total revenues	—			500,683			—			—			500,683
Costs and expenses
Operating costs and expenses	(95		)	484,263			—			—			484,168
Depreciation, depletion and amortization	290			44,492			—			—			44,782
Reclamation and remediation obligation expense	—			31,291			—			—			31,291
Sales contract accretion	—			(30,927		)	—			—			(30,927		)
Restructuring and impairment charge	—			167			—			—			167
Selling and administrative expenses	10,321			2			—			—			10,323
Net gain on disposal or exchange of assets	—			(3,531		)	—			—			(3,531		)
Income from equity affiliates	20,663			(3,491		)	—			(20,663		)	(3,491		)
Operating loss	(31,179		)	(21,583		)	—			20,663			(32,099		)
Interest expense	14,844			2,108			337			(337		)	16,952
Interest income	(30		)	(3,098		)	(337		)	337			(3,128		)
Loss before income taxes	(45,993		)	(20,593		)	—			20,663			(45,923		)
Income tax provision	—			70			—			—			70
Net loss	$	(45,993	)	$	(20,663	)	$	—		$	20,663		$	(45,993	)

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PATRIOT COAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011



UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 2010

	Parent Company			Guarantor Subsidiaries			Non-Guarantor Entity			Eliminations			Consolidated
	(Dollars in thousands)
Revenues
Sales	$	—		$	1,494,279		$	—		$	—		$	1,494,279
Other revenues	—			12,653			—			—			12,653
Total revenues	—			1,506,932			—			—			1,506,932
Costs and expenses
Operating costs and expenses	91			1,421,771			—			—			1,421,862
Depreciation, depletion and amortization	1,365			143,379			—			—			144,744
Reclamation and remediation obligation expense	—			53,141			—			—			53,141
Sales contract accretion	—			(89,970		)	—			—			(89,970		)
Restructuring and impairment charge	—			15,005			—			—			15,005
Selling and administrative expenses	36,302			(7		)	—			—			36,295
Net gain on disposal or exchange of assets	—			(45,086		)	—			—			(45,086		)
Income from equity affiliates	(17,617		)	(5,183		)	—			17,617			(5,183		)
Operating profit (loss)	(20,141		)	13,882			—			(17,617		)	(23,876		)
Interest expense	35,198			5,581			607			(607		)	40,779
Interest income	(33		)	(9,786		)	(607		)	607			(9,819		)
Income (loss) before income taxes	(55,306		)	18,087			—			(17,617		)	(54,836		)
Income tax provision	—			470			—			—			470
Net income (loss)	$	(55,306	)	$	17,617		$	—		$	(17,617	)	$	(55,306	)

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PATRIOT COAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011



UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
As of September 30, 2011

	Parent Company		Guarantor Subsidiaries			Non-Guarantor Entity		Eliminations			Consolidated
	(Dollars in thousands)
ASSETS
Current assets
Cash and cash equivalents	$	238,802	$	282		$	—	$	—		$	239,084
Accounts receivable and other, net	332		197,968			191,388		(191,388		)	198,300
Inventories	—		96,760			—		—			96,760
Prepaid expenses and other current assets	1,179		24,077			—		—			25,256
Total current assets	240,313		319,087			191,388		(191,388		)	559,400
Property, plant, equipment and mine development
Land and coal interests	—		2,919,187			—		—			2,919,187
Buildings and improvements	—		455,709			—		—			455,709
Machinery and equipment	—		764,155			—		—			764,155
Less accumulated depreciation, depletion and amortization	—		(950,792		)	—		—			(950,792		)
Property, plant, equipment and mine development, net	—		3,188,259			—		—			3,188,259
Notes receivable	—		—			—		—			—
Investments, intercompany and other assets	1,293,719		(57,591		)	—		(1,168,608		)	67,520
Total assets	$	1,534,032	$	3,449,755		$	191,388	$	(1,359,996	)	$	3,815,179

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses	$	16,939	$	425,440		$	191,388	$	(191,388	)	$	442,379
Below market sales contracts acquired	—		48,515			—		—			48,515
Current portion of debt	—		20,444			—		—			20,444
Total current liabilities	16,939		494,399			191,388		(191,388		)	511,338
Long-term debt, less current maturities	431,490		7,113			—		—			438,603
Asset retirement obligations	—		409,736			—		—			409,736
Workers' compensation obligations	—		230,109			—		—			230,109
Accrued postretirement benefit costs	—		1,279,133			—		—			1,279,133
Obligation to industry fund	—		36,480			—		—			36,480
Below market sales contracts acquired, noncurrent	—		54,821			—		—			54,821
Other noncurrent liabilities	2,054		46,676			—		—			48,730
Total liabilities	450,483		2,558,467			191,388		(191,388		)	3,008,950
Stockholders' equity	1,083,549		891,288			—		(1,168,608		)	806,229
Total liabilities and stockholders' equity	$	1,534,032	$	3,449,755		$	191,388	$	(1,359,996	)	$	3,815,179

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PATRIOT COAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011



SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
As of December 31, 2010

	Parent Company			Guarantor Subsidiaries			Non-Guarantor Subsidiary		Eliminations			Consolidated
	(Dollars in thousands)
ASSETS
Current assets
Cash and cash equivalents	$	192,593		$	474		$	—	$	—		$	193,067
Accounts receivable and other, net	522			206,843			146,652		(146,652		)	207,365
Inventories	—			97,973			—		—			97,973
Prepaid expenses and other current assets	2,603			26,045			—		—			28,648
Total current assets	195,718			331,335			146,652		(146,652		)	527,053
Property, plant, equipment and mine development
Land and coal interests	—			2,870,182			—		—			2,870,182
Buildings and improvements	2,554			436,772			—		—			439,326
Machinery and equipment	16,147			663,282			—		—			679,429
Less accumulated depreciation, depletion and amortization	(13,806		)	(814,596		)	—		—			(828,402		)
Property, plant, equipment and mine development, net	4,895			3,155,640			—		—			3,160,535
Notes receivable	—			69,540			—		—			69,540
Investments, intercompany and other assets	1,409,341			(159,146		)	—		(1,197,287		)	52,908
Total assets	$	1,609,954		$	3,397,369		$	146,652	$	(1,343,939	)	$	3,810,036

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses	$	26,752		$	382,532		$	146,652	$	(146,652	)	$	409,284
Below market sales contracts acquired	—			70,917			—		—			70,917
Current portion of debt	—			3,329			—		—			3,329
Total current liabilities	26,752			456,778			146,652		(146,652		)	483,530
Long-term debt, less current maturities	424,408			27,121			—		—			451,529
Asset retirement obligations	—			349,791			—		—			349,791
Workers' compensation obligations	—			220,757			—		—			220,757
Accrued postretirement benefit costs	3,721			1,265,447			—		—			1,269,168
Obligation to industry fund	—			38,978			—		—			38,978
Below market sales contracts acquired, noncurrent	—			92,253			—		—			92,253
Other noncurrent liabilities	2,022			58,927			—		—			60,949
Total liabilities	456,903			2,510,052			146,652		(146,652		)	2,966,955
Stockholders' equity	1,153,051			887,317			—		(1,197,287		)	843,081
Total liabilities and stockholders' equity	$	1,609,954		$	3,397,369		$	146,652	$	(1,343,939	)	$	3,810,036

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PATRIOT COAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011



UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2011

	Parent Company			Guarantor Subsidiaries			Non-Guarantor Entity		Eliminations		Consolidated
	(Dollars in thousands)
Cash Flows From Operating Activities
Net cash provided by (used in) operating activities	$	(35,207	)	$	113,776		$	—	$	—	$	78,569
Cash Flows From Investing Activities
Additions to property, plant, equipment and mine development	—			(119,798		)	—		—		(119,798		)
Proceeds from notes receivable	—			115,679			—		—		115,679
Additions to advance mining royalties	—			(17,728		)	—		—		(17,728		)
Net cash paid in litigation settlement and asset acquisition	—			(14,787		)	—		—		(14,787		)
Proceeds from disposal or exchange of assets	—			6,691			—		—		6,691
Net cash used in investing activities	—			(29,943		)	—		—		(29,943		)
Cash Flows From Financing Activities
Long-term debt payments	—			(2,894		)	—		—		(2,894		)
Deferred financing costs	(1,830		)	—			—		—		(1,830		)
Proceeds from employee stock programs	2,115			—			—		—		2,115
Intercompany transactions	81,131			(81,131		)	—		—		—
Net cash provided by (used in) financing activities	81,416			(84,025		)	—		—		(2,609		)
Net increase (decrease) in cash and cash equivalents	46,209			(192		)	—		—		46,017
Cash and cash equivalents at beginning of period	192,593			474			—		—		193,067
Cash and cash equivalents at end of period	$	238,802		$	282		$	—	$	—	$	239,084

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PATRIOT COAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011



UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2010

	Parent Company			Guarantor Subsidiaries			Non-Guarantor Entity		Eliminations		Consolidated
	(Dollars in thousands)
Cash Flows From Operating Activities
Net cash provided by (used in) operating activities	$	(35,220	)	$	58,204		$	—	$	—	$	22,984
Cash Flows From Investing Activities
Additions to property, plant, equipment and mine development	(365		)	(94,235		)	—		—		(94,600		)
Additions to advance mining royalties	—			(14,768		)	—		—		(14,768		)
Proceeds from notes receivable	—			25,100			—		—		25,100
Proceeds from disposal or exchange of assets	—			1,526			—		—		1,526
Investment in joint ventures	—			(300		)	—		—		(300		)
Net cash used in investing activities	(365		)	(82,677		)	—		—		(83,042		)
Cash Flows From Financing Activities
Proceeds from debt offering, net of discount	248,198			—			—		—		248,198
Deferred financing costs	(20,972		)	—			—		—		(20,972		)
Proceeds from coal reserve financing transaction	—			17,700			—		—		17,700
Long-term debt payments	—			(6,237		)	—		—		(6,237		)
Proceeds from employee stock programs	2,474			—			—		—		2,474
Intercompany transactions	(12,963		)	12,963			—		—		—
Net cash provided by financing activities	216,737			24,426			—		—		241,163
Net increase (decrease) in cash and cash equivalents	181,152			(47		)	—		—		181,105
Cash and cash equivalents at beginning of period	26,574			524			—		—		27,098
Cash and cash equivalents at end of period	$	207,726		$	477		$	—	$	—	$	208,203

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Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.

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,” “could,” “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:


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


•	geologic, equipment and operational risks associated with mining;


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


•	new and existing coal mining laws and regulations and changes in the interpretation, enforcement or application thereof;


•	availability and costs of competing energy resources;


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


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


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


•	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;


•	negotiation of labor contracts, labor availability and relations;


•	the outcome of pending or future litigation;


•	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;


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


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


•	customer performance and credit risks;


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


•	worldwide economic and political conditions;


•	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;

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•	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;


•	sales of coal to Peabody Energy under existing agreements accounting for more than 10% of our revenues;


•	failure to comply with debt covenants;


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


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


•	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 Part I, Item 3 of our 2010 Annual Report on Form 10-K and Part II, Item 1 of this report.

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 2010 Annual Report on Form 10-K 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. These forward-looking statements are made as of the date of this report and 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 Appalachia and the Illinois Basin, our operating segments. 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, for sale primarily to electricity generators and metallurgical coal, for sale to steel and coke producers.

Our operations consist of fourteen active mining complexes, which 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 and coke producers. In the first nine months of 2011, we sold 23.5 million tons of coal, of which 76% was sold to domestic and global electricity generators and industrial customers and 24% was sold to domestic and global steel and coke producers. Our export sales accounted for 29% of our total tons sold during the nine months ended September 30, 2011. In 2010, we sold 30.9 million tons of coal, of which 78% was sold to domestic electricity generators and industrial customers and 22% was sold to domestic and global steel and coke producers. 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 ten mining complexes located in Boone, Lincoln, Logan and Kanawha counties, and in northern West Virginia, we have one complex located in Monongalia County. In Appalachia, we sold 18.0 million and 24.3 million tons of coal in the nine months ended September 30, 2011 and the year ended December 31, 2010, respectively. As of December 31, 2010, we controlled 1.2 billion tons of proven and probable coal reserves in Appalachia, of which 457 million tons were assigned to current operations.

•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 5.5 million and 6.6 million tons of coal in the nine months ended September 30, 2011 and the year ended December 31, 2010, respectively. As of December 31, 2010, we controlled 668 million tons of proven and probable coal reserves in the Illinois Basin, of which 178 million tons were assigned to current operations.

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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 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 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 11 to our unaudited condensed consolidated financial statements.

Three and Nine Months Ended September 30, 2011 Compared to September 30, 2010

Summary

Our Segment Adjusted EBITDA for the three and nine months ended September 30, 2011 increased compared to the prior year primarily due to higher average sales prices resulting from an increased mix of metallurgical coal and from higher sales pricing. This increase was partially offset by higher operating costs resulting from increased metallurgical coal production and sales, which generally have a higher average cost per ton due to lower yield.

In the third quarter of 2011, operating costs were higher at our Federal mine primarily due to longwall move delays and equipment issues, along with difficult geology. Also, production at our Panther longwall mine was lower due to equipment issues and difficult geology. In addition, mining operations were suspended at a contractor-operated mine in our Big Mountain mining complex after we experienced a significant roof fall and other structural damages, believed to be the result of the earthquake centered near Washington, D.C. in August 2011.

Also in the third quarter of 2011, certain of our subsidiaries signed new agreements with the United Mine Workers of America (UMWA), which are effective July 1, 2011 and generally extend through December 2016. The new agreements are substantially the same as the National Bituminous Coal Wage Agreement negotiated earlier this year between the Bituminous Coal Operators Association and the UMWA.

In June 2011, we recorded expense of $24.0 million related to the estimated future ongoing operating costs of a selenium water treatment facility at our Hobet mining complex, which is reflected in “Asset retirement obligation expense” on our condensed consolidated statements of operations. In addition, in February 2011, outstanding notes receivable were repaid in full for $115.7 million prior to the scheduled maturity date. The early repayment resulted in a loss of $5.9 million, which is reflected in “Interest expense and other” on our condensed consolidated statements of operations. Additional fluctuations between the three and nine months ended September 30, 2011 compared to the prior period are discussed in Net Loss below.

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Segment Results of Operations



	Three Months Ended											Nine Months Ended
	September 30,						Increase (Decrease)					September 30,					Increase (Decrease)
	2011			2010			Tons/$			%		2011			2010		Tons/$			%
	(Dollars and tons in thousands, except per ton amounts)
Tons Sold
Appalachia Mining Operations	5,549			5,985			(436		)	(7.3	)%	17,981			18,265		(284		)	(1.6	)%
Illinois Basin Mining Operations	1,875			1,498			377			25.2	%	5,502			4,879		623			12.8	%
Total Tons Sold	7,424			7,483			(59		)	(0.8	)%	23,483			23,144		339			1.5	%
Average sales price per ton sold
Appalachia Mining Operations	$	90.82		$	72.52		$	18.30		25.2	%	$	85.80		$	70.58	$	15.22		21.6	%
Illinois Basin Mining Operations	42.77			41.54			1.23			3.0	%	42.83			42.03		0.80			1.9	%
Revenue
Appalachia Mining Operations	$	503,950		$	434,048		$	69,902		16.1	%	$	1,542,764		$	1,289,229	$	253,535		19.7	%
Illinois Basin Mining Operations	80,195			62,223			17,972			28.9	%	235,661			205,050		30,611			14.9	%
Appalachia Other	5,250			4,412			838			19.0	%	20,154			12,653		7,501			59.3	%
Total Revenues	$	589,395		$	500,683		$	88,712		17.7	%	$	1,798,579		$	1,506,932	$	291,647		19.4	%
Segment Operating Costs and Expenses⁽¹⁾
Appalachia Mining Operations and Other	$	440,380		$	371,806		$	68,574		18.4	%	$	1,270,999		$	1,082,324	$	188,675		17.4	%
Illinois Basin Mining Operations	83,058			66,320			16,738			25.2	%	236,757			203,863		32,894			16.1	%
Total Segment Operating Costs and Expenses	$	523,438		$	438,126		$	85,312		19.5	%	$	1,507,756		$	1,286,187	$	221,569		17.2	%
Segment Adjusted EBITDA
Appalachia Mining Operations and Other	$	68,820		$	66,654		$	2,166		3.2	%	$	291,919		$	219,558	$	72,361		33.0	%
Illinois Basin Mining Operations	(2,863		)	(4,097		)	1,234			30.1	%	(1,096		)	1,187		(2,283		)	(192.3	)%
Total Segment Adjusted EBITDA	$	65,957		$	62,557		$	3,400		5.4	%	$	290,823		$	220,745	$	70,078		31.7	%

⁽¹⁾ Segment Operating Costs and Expenses represent consolidated operating costs and expenses of $570.9 million and $484.2 million less income from equity affiliates of $1.7 million and $3.5 million and past mining obligation expenses of $45.8 million and $42.6 million for the three months ended September 30, 2011 and 2010, respectively. Segment Operating Costs and Expenses represent consolidated operating costs and expenses of $1.6 billion and $1.4 billion less income from equity affiliates of $4.6 million and $5.2 million and past mining obligation expenses of $134.6 million and $130.5 million for the nine months ended September 30, 2011 and 2010, respectively.

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Tons Sold and Revenues

Revenues in the Appalachia segment were higher in the three and nine months ended September 30, 2011 compared to the prior year primarily due to higher average sales prices. Sales prices increased 25% and 22% in each period, respectively, due to the increased amount of metallurgical coal sold and increased sales prices compared to the same periods in 2010.

Total sales volumes in Appalachia decreased for the three and nine months ended September 30, 2011 compared to the same period in 2010 primarily due to difficulties experienced at our Federal mine in the third quarter of 2011. Development work on the new Federal longwall panel was not completed by the time of the planned move resulting in extended down time and lower production and sales volumes. Equipment issues and difficult geology also contributed to the lower volumes.

Total sales volumes in Appalachia also decreased for the nine months ended September 30, 2011 compared to the same period in 2010 primarily due to decreased dragline activity at the Hobet mining complex due to development delays in 2011 stemming from the prolonged approval timeframe for the Hobet 45 permit, dating back to late 2008. In addition, we have purchased and sold fewer tons of brokered coal in 2011 due to prior year purchases of thermal coal to cover certain sales commitments at our Panther mining complex.These decreases were partially offset by increases at the Rocklick and Wells mining complexes due to opening two new mines and adding continuous miner sections at two mines.

Revenues in the Illinois Basin segment were higher for the three and nine months ended September 30, 2011 as compared to the same period in 2010 due to higher sales volumes, as well as slightly higher average sales prices. Total sales volumes for the three and nine months ended September 30, 2011 were higher compared to the prior year primarily due to roof falls at our Highland mine in the second and third quarters of 2010.

Appalachia Other Revenue was higher for the three and nine months ended September 30, 2011 primarily due to the recognition of income as underlying tons were shipped from a coal purchase option sold in a prior year. Additionally, we monetized future coal reserve royalty payments for $2.2 million in the second quarter of 2011.

Segment Operating Costs and Expenses

Segment operating costs and expenses for Appalachia increased in the three and nine months ended September 30, 2011 as compared to the same period in 2010 in large part due to higher costs related to expanded metallurgical coal production and sales with the addition of several new mines and additional sections at existing mines. The higher costs included increased sales-related costs driven by higher sales prices. In the third quarter of 2011, operating costs were higher at our Federal and Panther mines, primarily due to equipment issues and difficult geology. During the three and nine months ended September 30, 2011, we incurred higher equipment and material costs, including rebuilds and general repairs and maintenance ($18.0 million and $70.3 million, respectively); increased labor costs ($11.7 million and $29.9 million, respectively); higher contract mining services ($7.0 million and $19.3 million, respectively); and higher royalties, sales-related taxes and leases ($14.4 million and $39.3 million, respectively). All these increases were partially due to expanded metallurgical coal production and sales. Additionally, the three and nine months ended September 30, 2011 also had higher fuel and explosives costs ($4.0 million and $12.4 million, respectively) related to higher commodity prices.

Certain of our subsidiaries entered into new UMWA agreements which include increased labor rates effective July 1, 2011. The higher UMWA hourly rates did not have a significant effect on the three and nine months ended September 30, 2011.

Segment operating costs and expenses for the Illinois Basin increased in the three and nine months ended September 30, 2011 as compared to the prior year due to continuous miner advancement into new areas and higher production, as well as increased labor costs and higher commodity prices. During the three and nine months ended September 30, 2011, we incurred higher equipment and material costs, including rebuilds and general repairs and maintenance ($3.7 million and $9.1 million, respectively); increased labor costs ($1.7 million and $7.1 million, respectively); and higher fuel and explosives costs ($1.2 million and $3.4 million, respectively). Additionally, the three and nine months ended September 30, 2011 had higher royalties and sales-related taxes ($1.9 million and $1.6 million, respectively).

Segment Adjusted EBITDA

Our Segment Adjusted EBITDA for Appalachia was higher in the three and nine months ended September 30, 2011 compared to the prior year primarily due to higher average sales prices resulting from an increased mix and higher selling prices of metallurgical coal, which was partially offset by higher operating costs.

Segment Adjusted EBITDA for the Illinois Basin increased in the three months ended September 30, 2011 from the prior year primarily due to higher revenues as a result of increased sales volumes, partially offset by a corresponding increase in operating costs.

Segment Adjusted EBITDA for the Illinois Basin decreased in the nine months ended September 30, 2011 from the prior year primarily due to increased operating costs and expenses as discussed above, partially offset by higher revenues as a result of increased production and sales volumes.

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Net Loss



	Three Months Ended September 30,						Favorable (Unfavorable)					Nine Months Ended September 30,						Favorable (Unfavorable)
	2011			2010			$			%		2011			2010			$			%
	(Dollars in thousands)
Segment Adjusted EBITDA	$	65,957		$	62,557		$	3,400		5.4	%	$	290,823		$	220,745		$	70,078		31.7	%
Corporate and Other:
Past mining obligation expense	(45,762		)	(42,551		)	(3,211		)	(7.5	)%	(134,632		)	(130,492		)	(4,140		)	(3.2	)%
Net gain on disposal or exchange of assets	7,389			3,531			3,858			109.3	%	16,804			45,086			(28,282		)	(62.7	)%
Selling and administrative expenses	(12,788		)	(10,323		)	(2,465		)	(23.9	)%	(39,392		)	(36,295		)	(3,097		)	(8.5	)%
Total Corporate and Other	(51,161		)	(49,343		)	(1,818		)	(3.7	)%	(157,220		)	(121,701		)	(35,519		)	(29.2	)%
Depreciation, depletion and amortization	(47,040		)	(44,782		)	(2,258		)	(5.0	)%	(138,112		)	(144,744		)	6,632			4.6	%
Asset retirement obligation expense	(12,364		)	(31,291		)	18,927			60.5	%	(61,933		)	(53,141		)	(8,792		)	(16.5	)%
Sales contract accretion	11,380			30,927			(19,547		)	(63.2	)%	45,805			89,970			(44,165		)	(49.1	)%
Restructuring and impairment charge	(139		)	(167		)	28			16.8	%	(423		)	(15,005		)	14,582			97.2	%
Interest expense and other	(16,453		)	(16,952		)	499			2.9	%	(55,896		)	(40,779		)	(15,117		)	(37.1	)%
Interest income	73			3,128			(3,055		)	(97.7	)%	171			9,819			(9,648		)	(98.3	)%
Loss before income taxes	(49,747		)	(45,923		)	(3,824		)	(8.3	)%	(76,785		)	(54,836		)	(21,949		)	(40.0	)%
Income tax benefit (provision)	230			(70		)	300			428.6	%	(383		)	(470		)	87			18.5	%
Net loss	$	(49,517	)	$	(45,993	)	$	(3,524	)	(7.7	)%	$	(77,168	)	$	(55,306	)	$	(21,862	)	(39.5	)%

Past mining obligation expense was higher in the three and nine months ended September 30, 2011 than the corresponding periods in the prior year primarily due to the change in the discount rate assumption for our actuarially-determined liability for retiree healthcare, partially offset by lower funding rates for the UMWA healthcare benefit plans. In the third quarter of 2011, we also incurred costs related to the suspension of operations at a contractor-operated mine discussed above.

Net gain on disposal or exchange of assets increased for the three months ended and decreased for the nine months ended September 30, 2011 compared to the corresponding period in the prior year due to timing of transactions. In 2011, net gain on disposal or exchange of assets included gains of $6.2 million on exchange and sale transactions for mineral interests in the third quarter, a gain of $7.3 million on a mineral rights exchange transaction and a gain of $2.1 million on a right of way purchase transaction in the second quarter. In 2010, net gain on disposal or exchange of assets included a gain of $3.4 million on exchange transactions for mineral interests in the third quarter, gains of $14.3 million on two mineral rights exchange transactions in the second quarter and a gain of $24.0 million on an exchange transaction for mineral rights in the first quarter.

Selling and administrative expenses increased in the three and nine months ended September 30, 2011 compared to the same periods in 2010 due to a net increase in stock-based compensation expense resulting from a significant third quarter 2010 forfeiture.

Depreciation, depletion and amortization increased in the three months ended September 30, 2011 compared to the same period in the prior year primarily due to the equipment placed in service during 2011 as a result of our metallurgical coal expansion program. Depreciation, depletion and amortization decreased in the nine months ended September 30, 2011 compared to the prior year, primarily due to the full depreciation in the third quarter of 2010 of a majority of the machinery and equipment associated with the 2008 Magnum acquisition.

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Asset retirement obligation expense decreased in the three months ended September 30, 2011 as compared to the same period in 2010, primarily due to additional expense of $20.7 million that was recorded in the third quarter of 2010 as a result of adjusting our estimated future costs of selenium water treatment at certain outfalls resulting from requirements of the September 1, 2010 court ruling. Asset retirement obligation expense increased in the nine months ended September 30, 2011 due to additional selenium water treatment expense of $24.0 million recorded in the second quarter of 2011 and increased monthly accretion as a result of adjusting our estimated future costs of selenium water treatment per the September 1, 2010 court ruling, as well as additional expense, primarily in the first quarter of 2011, due to certain mines closing earlier than expected. See Liquidity and Capital Resources for a more detailed description of the adjustments made in relation to selenium water treatment.

Sales contract accretion decreased in the three and nine months ended September 30, 2011 primarily due to the expiration of several contracts assumed in the Magnum acquisition in the second half of 2010. We expect sales contract accretion to continue to decrease as the acquired below market sales contracts reach the end of their contract lives.

Restructuring and impairment charge decreased in the nine months ended September 30, 2011 compared to the corresponding period in the prior year due to the charge related to the closure of the Harris No. 1 mine in June 2010. The 2010 charge included a $2.8 million impairment charge related to equipment and coal reserves that were abandoned due to the mine closure and a restructuring component of $12.0 million for payment of remaining operational contracts to be made with no future economic benefit. In the three and nine months ended September 30, 2011, the expense represents accretion related to the discounted future payment obligation.

Interest expense and other increased in the nine months ended September 30, 2011 primarily due to interest expense related to the $250 million of Senior Notes issued on May 5, 2010 as well as the increased amortization of deferred financing costs related to the new senior notes and the amended and restated credit agreement entered into in May 2010. Interest expense and other also increased due to the accounts receivable securitization entered into in March 2010. In addition, in February 2011, 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. At December 31, 2010, the outstanding notes receivable were included in “Accounts receivable and other” and “Notes receivable” on the condensed consolidated balance sheet. The early repayment resulted in a loss of $5.9 million, which is reflected in "Interest expense and other."

Interest income decreased in the three and nine months ended September 30, 2011 primarily related to the early repayment of outstanding notes receivable in February 2011.

Outlook

Market

We believe that the globalization of coal markets will create opportunities, with demand from developing countries continuing to grow for both thermal and metallurgical coal. Key indicators point to the sustainability of coal market globalization. Global seaborne demand for metallurgical coal could nearly double from about 250 million metric tonnes in 2010 to approximately 500 million metric tonnes by 2020. On the thermal side, global seaborne demand could increase more than 25% from 2010 to 2020, to almost 1 billion metric tonnes. With supply constraints worldwide, we believe U.S. metallurgical and thermal coal could increasingly be shipped overseas to satisfy the robust and growing global demand. From our perspective, the U.S. metallurgical and eastern thermal coals are well-positioned to participate in these export opportunities.

We believe that total coal exports from the U.S. could approximate 100 million tons in 2011. This represents a doubling of exports since 2006 and a 25% increase over the strong export market in 2010.

We believe that metallurgical coal market demand will continue to grow. While China has long been considered the leader in this trend, India's population is expected to surpass that of China over the next 20 years with their total combined populations approaching three billion. Within this time frame, an additional 10% of both Chinese and Indian populations is expected to be urbanized. The simultaneous population growth and urban development of China and India should magnify the need for substantially higher levels of commodities, including metallurgical and thermal coal.

While the projected gross domestic product growth rates for major economies remain positive through 2015, near-term concerns about slowing global growth have caused speculation of a weakening metallurgical coal market. However, a number of countries are showing signs of strength, particularly in steel production and demand. Steel mills in Brazil, a natural destination for U.S. metallurgical coal, are operating at 80% of capacity, with coke plants running near full capacity. In India, steel producers are increasing capacity substantially, with the largest Indian steel producer targeting an increase from 13.5 million tonnes in 2010 to 23.6 million tonnes in 2013. South Korean steel production is up more than 20% year-over-year, and U.S. coke plants continue to run near full capacity.

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Low-volatile and premium high-volatile metallurgical coal supply remains tight, while lower quality high-volatile metallurgical coals are believed to be in greater supply. Given the relatively tight worldwide supply/demand balance, any significant supply disruptions, such as those experienced in recent years, would result in stronger pricing for metallurgical-grade products.

For thermal coal, total U.S. inventories and eastern U.S. inventories both declined more from June 2011 through August 2011 than during the same period in any of the last ten years. However, domestic electricity generators have taken a cautious stance in their coal purchases, which we believe may be related to uncertainty caused by the Cross-State Air Pollution Rule promulgated by the Environmental Protection Agency (EPA) as further described below, as well as concerns about the pace of recovery in the U.S. economy. Soft natural gas prices continue to dampen demand for domestic utility coal.

Thermal coal exports continue at an increasing rate, with eastern U.S. thermal coals well-positioned to participate in the growing international seaborne market. Year-to-date through August, U.S. thermal coal exports increased more than 75% compared with a year ago, and export opportunities are expected to continue at an elevated level.

Patriot Operations

We anticipate fourth quarter 2011 sales volume in the range of 8.0 to 8.3 million tons, including metallurgical coal sales of approximately 2.0 million tons.

We are committed to the continued expansion of our metallurgical production. We are on a path to add a number of new metallurgical mines over the 2011 to 2012 time frame, thereby increasing our met coal production substantially. Production continues to ramp up at our Black Oak mine, as well as the Gateway Eagle and Workman Branch mines we opened in the second quarter of 2011. We continue to develop our new Peerless mine at our Kanawha Eagle mining complex, and expect it to open late this year. We have also begun the construction phase on the new North Eagle mine at our Kanawha Eagle mining complex.

As we complete our planning process for 2012 and beyond, we will further refine our operating and marketing assumptions relative to both our near- and medium-term metallurgical coal build-out plans. Our metallurgical coal expansion plan is modular in nature which allows us to adjust our build-out in line with market circumstances, including demand volume, coal quality requirements and pricing.

We are also targeting export thermal business. Over the past two quarters, we have sold more than 7 million tons of thermal coal for export delivery in 2012, sourced from both Appalachia and the Illinois Basin. Additionally, we expect to see the initial benefits of our expiring below market legacy thermal contracts as we enter 2012.

As of September 30, 2011, approximately 50% of our employees were represented by the UMWA. In late September 2011, certain of our subsidiaries signed new agreements with the UMWA, which generally extend through December 2016. The contracts are substantially the same as the National Bituminous Coal Wage Agreement negotiated earlier this year between the Bituminous Coal Operators Association and the UMWA. We expect the new labor agreements will cause our per-ton costs on our total production base to increase approximately 4% on average over the term of the agreements. Key elements of the new agreements include an increase to wages of $1 per hour effective July 1, 2011, an additional $1 per hour wage increase each January 1^st throughout the contract term, and an increase in contributions to certain savings and postretirement benefit plans.

In July 2011, the EPA published final guidelines for Appalachian surface coal mining operations. This final guidance was an update to the interim guidance issued in April 2010, which was discussed more fully under Part 1, Item 1. Environmental Laws in our 2010 Annual Report on Form 10-K. The final guidance was not significantly different from the interim guidance, although additional data collection requirements were added.

In August 2011, the EPA released its final version of the Cross-State Air Pollution Rule (CSAPR), which was proposed in 2010 as the Clean Air Transport Rule. CSAPR limits sulphur dioxide and nitrogen oxide emissions from power plants in 27 Eastern states. Many of our customers are affected by CSAPR, which requires sulphur dioxide emission reductions beginning in 2012 and significant additional sulphur dioxide emission reductions in 2014. CSAPR may affect coal quality price adjustments in certain of our contracts. Additionally, the EPA is expected to issue final emission standards for mercury and other hazardous air pollutants from power plants in December 2011. See additional discussion of Clean Air Regulations under Part 1, Item 1. Environmental Laws in our 2010 Annual Report on Form 10-K.

As discussed more fully under Part 1, Item 1A. Risk Factors in our 2010 Annual Report on Form 10-K, our results of operations in the near-term could be negatively impacted by factors such as price volatility and demand; unforeseen adverse geologic conditions or equipment problems at mining locations; changes in general global economic conditions; new and existing coal mining laws and regulations and changes in the interpretation, enforcement or application thereof; availability and the costs of competing energy resources; the passage of new or expanded regulations that could limit our ability to mine, increase our mining costs, or limit our customers' ability to utilize coal as fuel for electricity generation; existing or new environmental laws and regulations, including those related to selenium, and changes in the interpretation, enforcement or application thereof; negotiation of labor contracts, labor availability and relations; the outcome of pending or future litigation; changes in the costs to provide healthcare to eligible active employees and certain retirees under postretirement benefit obligations and contribution requirements

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to multi-employer retiree healthcare and pension plans; reductions of purchases or deferral of deliveries by major customers; the availability and costs of credit, surety bonds and letters of credit; customer performance and credit risks; fluctuating prices of key supplies, mining equipment and commodities; supplier and contract miner performance and the unavailability of transportation for coal shipments.

On a long-term basis, our results of operations could also be impacted by our ability to secure or acquire high-quality coal reserves; our ability to attract and retain skilled employees and contract miners; and our ability to find replacement buyers for coal under contracts with comparable or favorable terms to existing contracts.

Potential legislation, regulation, treaties and accords at the local, state, federal and international level, and changes in the interpretation, enforcement or application of existing laws and regulations, have created some uncertainty and could have a significant impact on demand for coal and our future operational and financial results. For example, increased scrutiny of mining could make it difficult to receive permits or could otherwise cause production delays in the future. The lack of proven technology to meet selenium discharge standards creates uncertainty as to the future costs of water treatment to comply with mining permits, which may be materially different from our current estimates. Additionally, future regulation of carbon dioxide and other greenhouse gas emissions and coal combustion by-products could have an adverse effect on the financial condition of our customers and significantly impact the demand for coal.

Actual events and results may vary significantly from those included in, contemplated or implied by the forward-looking statements under Outlook. The guidance provided under the caption Outlook should be read in conjunction with the section entitled Cautionary Notice Regarding Forward-Looking Statements included in this report. For additional information regarding the risks and uncertainties that affect our business, see Part 1, Item 1A. Risk Factors in our 2010 Annual Report on Form 10-K.

Liquidity and Capital Resources

Our primary sources of cash include sales of our coal production to customers, sales of non-core assets and financing transactions. Our primary uses of cash include our cash costs of coal production, capital expenditures, interest costs and costs related to past mining obligations, as well as acquisitions. Our ability to service our debt (interest and principal) and acquire new productive assets or businesses is dependent upon our ability to continue to generate cash from the primary sources noted above in excess of the primary uses. We expect to fund all of our capital expenditure requirements with cash generated from operations or borrowed funds as necessary.

Net cash provided by operating activities was $78.6 million for the nine months ended September 30, 2011, compared to $23.0 million in the same period of 2010. The increase in cash provided by operating activities primarily related to higher cash flows from operations of $73.5 million, partially offset by a one-time surety deposit of $15.0 million. The $15.0 million surety deposit was posted with the U.S. Department of Labor (DOL) in 2011 in relation to certain of our occupational disease (Federal black lung) workers' compensation obligations. As part of our 2007 spin-off, Peabody Energy Corporation (Peabody) had previously guaranteed with the DOL certain obligations related to our subsidiaries until they were fully transferred in 2011.

Net cash used in investing activities was $29.9 million for the nine months ended September 30, 2011, compared to $83.0 million in the same period of 2010. The decrease in cash used in investing activities in 2011 reflected the early repayment of $115.7 million of our outstanding notes receivable in February 2011 as compared to the collection of $25.1 million in scheduled payments on the same notes receivable in the first nine months of 2010. The decrease in cash used was partially offset by cash paid in a litigation settlement of $14.8 million and an increase in capital expenditures of $25.2 million in 2011. As part of a litigation settlement, we made a payment of $14.8 million, and ownership of the assets and liabilities from a 2005 sale reverted back to us. The assets include coal reserves in West Virginia and surface land in Illinois at closed mine sites. The liabilities include the reclamation obligations related to these assets.

Net cash used by financing activities was $2.6 million for the nine month period ended September 30, 2011, compared to net cash provided by financing activities of $241.2 million for the nine months ended September 30, 2010. The decrease in cash provided by financing activities reflects a decrease in proceeds from debt offering of $248.2 million and a decrease in proceeds from coal reserve financing transaction of $17.7 million, partially offset by a decrease in deferred financing costs of $19.1 million.

As a result of our multi-year expansion plan for metallurgical coal and routine replacement of equipment, purchase commitments for equipment totaled $173.5 million as of September 30, 2011. On October 3, 2011, we purchased the preparation plant and associated infrastructure at our Blue Creek mining complex which we had previously leased. As a result of this transaction, the long-term obligation of $17.6 million was reclassified to “Current portion of debt” from “Long-term debt, less current maturities” on our condensed consolidated balance sheet at September 30, 2011. The purchase price of the preparation plant was $28.1 million.

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September 1, 2010 U.S. District Court Ruling

On September 1, 2010, the U.S. District Court for the Southern District of West Virginia (U.S. District Court) found Apogee Coal Company (Apogee) in contempt for failing to comply with a March 19, 2009 consent decree. Apogee was ordered to install a Fluidized Bed Reactor (FBR) water treatment facility for three outfalls and to come into compliance with applicable selenium discharge limits by March 1, 2013. In September 2010, we increased the portion of the selenium water treatment liability related to Apogee by $20.7 million for the fair value of the estimated future ongoing operating costs related to these three outfalls. This charge is reflected in “Asset retirement obligation expense” in the condensed consolidated statement of operations. We record the costs to install the Apogee FBR water treatment facility as capital expenditures when incurred. As of September 30, 2011, we have spent approximately $7.1 million on the Apogee FBR facility and the total expenditures are estimated to be approximately $55 million. We began construction on the Apogee FBR facility in the third quarter of 2011.

Additionally, the U.S. District Court ordered Hobet to submit a proposed schedule to develop a treatment plan for a Hobet Surface Mine No. 22 outfall by October 1, 2010 and to come into compliance with applicable discharge limits under the permit by May 1, 2013. We submitted the required schedule, which included conducting additional pilot projects related to certain technological alternatives. A final treatment technology to be utilized at this Hobet Surface Mine No. 22 outfall was filed with the U.S. District Court in June 2011 in accordance with the submitted schedule. In June 2011, we recorded an adjustment of $24 million to the selenium water treatment liability primarily related to the estimated future ongoing operating costs of an FBR water treatment facility at this outfall. This charge is reflected in “Asset retirement obligation expense” in the condensed consolidated statement of operations. As with the Apogee FBR facility, we will record the costs to install the Hobet FBR water treatment facility as capital expenditures when incurred. As of September 30, 2011, we have spent approximately $0.6 million on the Hobet FBR facility and the total expenditures are estimated to be approximately $40 million. We anticipate beginning construction on the Hobet facility in the fourth quarter of 2011.

When we began researching selenium water treatment in 2008, we were one of the first coal producers focused on the resolution of this issue. To date, our efforts to address this industry-wide issue at our mining complexes have included researching potential solutions, engaging experts and working with government agencies to clarify the requirements. In the past year, certain of our competitors have also been sued by environmental groups for failure to comply with the selenium standards.

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Credit Facilities

Both facilities are available for our working capital requirements, capital expenditures and other corporate purposes. As of September 30, 2011 and December 31, 2010, the balance of outstanding letters of credit issued against the facilities totaled $335.1 million and $355.3 million, respectively. There were no outstanding short-term borrowings against either facility as of September 30, 2011 and December 31, 2010. Availability under these facilities was $217.4 million and $197.2 million as of September 30, 2011 and December 31, 2010, respectively.

Pending Adoption of Recent Accounting Pronouncements


Item 3.	Quantitative and Qualitative Disclosures About Market Risk.

Commodity Price Risk

The potential for changes in the market value of our coal portfolio is referred to as “market risk.” Due to lack of quoted market prices and the long term, illiquid nature of the positions, we have not quantified market risk related to our portfolio of coal supply agreements. We manage our commodity price risk for our coal contracts through the use of long-term coal supply agreements, rather than through the use of derivative instruments. We sold 77% of our sales volume under coal supply agreements with terms of greater than one year during 2010. As of September 30, 2011, we had virtually no unpriced production for 2011. Unpriced volumes for 2012 will depend on finalization of production plans, taking into account demand and pricing.

In connection with our 2007 spin-off, we entered into long-term coal contracts with marketing affiliates of Peabody. The arrangements have substantially similar terms and conditions as the pre-existing contractual obligations of Peabody's marketing affiliate. These arrangements may be amended or terminated only with the mutual agreement of Peabody and Patriot.

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We have commodity risk related to our diesel fuel purchases. To manage this risk, we have entered into heating oil and ultra low sulfur diesel swap contracts with financial institutions. The changes in diesel fuel prices and the prices of these financial instruments are highly correlated, thus allowing the swap contracts to be designated as cash flow hedges of anticipated diesel fuel purchases. As of September 30, 2011, the notional amounts outstanding for the swaps included 2.3 million gallons and 13.1 million gallons of heating oil expiring throughout 2011 and 2012, respectively, as well as 3.0 million gallons of ultra low sulfur diesel expiring in 2013.

We expect to purchase approximately 22 million gallons of diesel fuel annually across all operations in 2011 and 2012. Excluding the impact of our hedging activities, a $0.10 per gallon change in the price of diesel fuel would impact our operating costs by approximately $2.2 million annually.

Credit Risk

Approximately 12% of our accounts receivable balance at September 30, 2011 was with a marketing affiliate of Peabody. Included in this balance are receivables related to contracts to supply coal in order for Peabody to meet its commitments under customer agreements existing prior to our 2007 spin-off which are sourced from our operations. The pre-existing customer arrangements between Patriot and Peabody are scheduled to expire on December 31, 2012. The majority of our sales are made directly to electricity generators, industrial companies and steelmakers. Therefore, our concentration of credit risk is with Peabody, electricity generators and steelmakers.

Our policy is to independently evaluate each customer's creditworthiness prior to entering into transactions and to constantly monitor the credit extended. In the event that we engage in a transaction with a counterparty that does not meet our credit standards, we will protect our position by requiring the counterparty to provide appropriate credit enhancement. When appropriate (as determined by our credit management function), we have taken steps to mitigate our credit exposure to customers or counterparties whose credit has deteriorated and who may pose a higher risk of failure to perform under their contractual obligations. These steps may include, but are not limited to, obtaining letters of credit or cash collateral, requiring prepayments for shipments or the creation of customer trust accounts held for our benefit to serve as collateral in the event of a failure to pay.


Item 4.	Controls and Procedures.

As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have each concluded that our disclosure controls and procedures were designed, and were effective, to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms and were also effective to ensure that the information required to be disclosed by us in this Quarterly Report was accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure.

There have not been any significant changes in our internal control over financial reporting during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION


Item 1.	Legal Proceedings.

See Note 14 to the unaudited condensed consolidated financial statements included in Part I, Item 1. of this report relating to certain legal proceedings, which information is incorporated by reference herein.


Item 4.	Mine Safety Disclosure.

The information concerning mine safety violations or other regulatory matters required by Section 1503 of the Dodd-Frank Wall Street Reform and Consumer Protection Act is included in Exhibit 99.1 of this report.


Item 6.	Exhibits.

See Exhibit Index on the last page of this report.

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SIGNATURE

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.



		PATRIOT COAL CORPORATION

Date:	November 2, 2011	By:	/s/ CHRISTOPHER K. KNIBB
			Christopher K. Knibb Vice President - Controller & Chief Accounting Officer (On behalf of the registrant and as Principal Accounting Officer)

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EXHIBIT INDEX

The exhibits below are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K.



Exhibit No.		Description of Exhibit

3.1		Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K, filed on May 17, 2010).

3.2		Amended and Restated By-Laws (Incorporated by reference to Exhibit 3.2 of the Registrant's Current Report on Form 8-K, filed on October 25, 2007).

10.1		Amendment to Employment Agreement between Patriot Coal Corporation and Paul H. Vining, dated November 9, 2010. (Incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 10-Q, filed on May 3, 2011).

10.2		Amendment No. 1, dated as of January 6, 2011, to the Amended and Restated Credit Agreement dated as of May 5, 2010, among Patriot Coal Corporation, Bank of America, N.A., as administrative agent, L/C Issuer and Swing Line Lender, and the lenders party thereto (Incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K, filed on January 6, 2011).

10.3		Indemnification Agreement, dated January 27, 2011, between Patriot Coal Corporation and Janiece M. Longoria (Incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K, filed on January 28, 2011).

10.4		Amendment to Employment Agreement between Patriot Coal Corporation and Paul H. Vining, dated April 1, 2011. (Incorporated by reference to Exhibit 10.4 of the Registrant's Current Report on Form 10-Q, filed on May 3, 2011).

10.5*		Employment Agreement between Patriot Coal Corporation and Bennett K. Hatfield, dated September 19, 2011.

31.1*		Certification of periodic financial report by Patriot Coal Corporation's Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of periodic financial report by Patriot Coal Corporation's Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of periodic financial report pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Patriot Coal Corporation's Chief Executive Officer.

32.2*		Certification of periodic financial report pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Patriot Coal Corporation's Chief Financial Officer.

99.1*		Mine Safety Disclosure Exhibit

101**		Interactive Data Files pursuant to Rule 405 of Regulation S-T: (i) the Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010, (ii) the Condensed Consolidated Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010, (iii) the Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010 and (iv) the Notes to Unaudited Condensed Financial Statements.



*	Filed herewith.
**	Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.