Q UARTERLY F INANCIAL I NFORMATION

Transcription

1 Q UARTERLY F INANCIAL I NFORMATION Foresight Energy LLC and Subsidiaries Three and Six Months Ended 2013 and 2012 With Review Report of Independent Registered Public Accounting Firm

2 Quarterly Financial Information Three and Six Months Ended 2013 and 2012 Contents Condensed Consolidated Financial Statements Review Report of Independent Registered Public Accounting Firm... 1 Condensed Consolidated Balance Sheets as of 2013 (Unaudited) and December 31, Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended 2013 and Unaudited Condensed Consolidated Statement of Members Equity (Deficit) for the Six Months Ended Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended 2013 and Notes to Unaudited Condensed Consolidated Financial Statements... 6 Management s Discussion and Analysis of Financial Condition and Results of Operations... 16

3 EY The Plaza in Clayton 190 Carondelet Plaza Suite 1300 St. Louis, MO Tel: ey.com Review Report of Independent Registered Public Accounting Firm The Members Foresight Energy LLC We have reviewed the condensed consolidated balance sheet of Foresight Energy LLC and subsidiaries (the Company) as of 2013, and the related condensed consolidated statements of operations for the three-month and six-month periods ended 2013 and 2012, and the condensed consolidated statements of members equity (deficiency) and cash flows for the six-month periods ended 2013 and These financial statements are the responsibility of the Company's management. We conducted our review in accordance with auditing standards generally accepted in the United States and in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States and in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial information taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with US generally accepted accounting principles. We have previously audited, in accordance with auditing standards generally accepted in the United States and in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Foresight Energy LLC and subsidiaries as of December 31, 2012, and the related consolidated statements of operations, members equity (deficiency), and cash flows for the year then ended (not presented herein) and we expressed an unqualified opinion on those consolidated financial statements in our report dated March 20, In our opinion, the accompanying condensed consolidated balance sheet of Foresight Energy LLC and subsidiaries as of December 31, 2012, is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived. August 5, 2013 A member firm of Ernst & Young Global Limited 1

4 Condensed Consolidated Balance Sheets (Unaudited) December 31, Assets Current assets: Cash and cash equivalents $ 38,954 $ 27,888 Accounts receivable 51,142 68,540 Due from affiliates 366 1,357 Inventories 116,918 91,610 Prepaid expenses 5,578 1,940 Prepaid royalties 7,705 13,034 Other current assets 19,045 14,381 Total current assets 239, ,750 Property, plant, equipment and development, net 1,409,068 1,401,285 Prepaid royalties 53,833 47,509 Other assets 24,470 27,744 Total assets $ 1,727,079 $ 1,695,288 Liabilities and members equity Current liabilities: Current portion of long-term debt and capital lease obligations $ 33,563 $ 33,471 Accrued interest 31,930 30,340 Accounts payable 45,344 48,527 Accrued expenses and other current liabilities 40,798 20,927 Deferred revenue 17,278 3,907 Due to affiliates 10,507 11,751 Distribution payable - 25,000 Total current liabilities 179, ,923 Long-term debt and capital lease obligations 1,021,107 1,028,478 Sale-leaseback financing arrangements 193, ,434 Asset retirement obligations 19,825 19,350 Total liabilities 1,413,786 1,415,185 Members equity (deficit): Controlling interests 314, ,353 Noncontrolling interests (1,241) (1,250) Total members equity 313, ,103 Total liabilities and members equity $ 1,727,079 $ 1,695,288 See accompanying notes. 2

5 Unaudited Condensed Consolidated Statements of Operations Coal sales $ 215,930 $ 213,834 $ 448,523 $ 355,185 Costs and expenses: Cost of coal sales (excluding depreciation, depletion and amortization) 80,764 77, , ,891 Transportation 46,033 40,627 95,648 68,282 Depreciation, depletion and amortization 37,228 28,014 74,427 43,312 Accretion on asset retirement obligations Selling, general and administrative 9,211 7,520 18,217 13,315 Gain on commodity contracts (228) (680) Other operating loss (income), net 613 (10,087) 188 (10,149) Operating income 41,927 70,124 99, ,902 Other expense: Interest expense, net 27,760 18,879 55,961 34,489 Net income 14,167 51,245 43,387 76,413 Less: net income attributable to noncontrolling interests Net income attributable to controlling interests $ 14,036 $ 51,200 $ 43,181 $ 76,327 See accompanying notes. Three Months Ended Six Months Ended 3

6 Unaudited Condensed Consolidated Statement of Members Equity (Deficit) Controlling Noncontrolling Interests Interests Total Members equity (deficit) at January 1, 2013 $ 281,353 $ (1,250) $ 280,103 Net income 43, ,387 Distributions (10,000) (197) (10,197) Members equity (deficit) at 2013 $ 314,534 $ (1,241) $ 313,293 See accompanying notes. 4

7 Unaudited Condensed Consolidated Statements of Cash Flows Six Months Ended Cash flows from operating activities Net income $ 43,387 $ 76,413 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 74,427 43,312 Amortization of debt issuance costs and debt premium/discount 3,707 4,557 Deferred revenue recognized (10,089) Other 1, Changes in operating assets and liabilities: Accounts receivable 17,398 (29,521) Amount due from/to affiliates, net (253) (3,513) Inventories (22,987) (23,242) Prepaid expenses and other current assets (8,608) 3,442 Prepaid royalties (995) (13,017) Accounts payable (3,183) 12,670 Accrued interest 1,590 3,236 Accrued expenses and other current liabilities 11,097 9,895 Deferred revenue 23,460 Other (1,092) 309 Net cash provided by operating activities 129,213 85,200 Cash flows from investing activities Investment in property, plant, equipment and development (77,420) (137,238) Proceeds from sale of equipment 393 2,898 Settlement of derivative instruments 986 Net cash used in investing activities (76,041) (134,340) Cash flows from financing activities Net increase (decrease) in borrowings under revolving credit facility 10,000 (19,000) Proceeds from other long-term debt 33,135 Payments on other long-term debt and capital lease obligations (16,909) (5,603) Payments on short-term debt (4,966) Proceeds from sale-leaseback financing arrangement 49,950 Deferred IPO issuance costs paid (1,592) Distributions paid (35,197) (9,281) Net cash (used in) provided by financing activities (42,106) 42,643 Net increase (decrease) in cash and cash equivalents 11,066 (6,497) Cash and cash equivalents, beginning of period 27,888 51,761 Cash and cash equivalents, end of period $ 38,954 $ 45,264 Supplemental information: Interest paid, net of amounts capitalized $ 50,656 $ 25,507 Supplemental disclosures of non-cash financing activities: Financing of equipment, interest and debt issuance costs $ $ 11,717 See accompanying notes. 5

8 Notes to Unaudited Condensed Consolidated Financial Statements 1. Description of Business and Basis of Presentation Foresight Energy LLC ( Foresight Energy ), a perpetual-term Delaware limited liability company, was formed on September 5, 2006, for the purpose of holding an ownership interest in various affiliated entities under common control. Over 99% of Foresight Energy is owned by Foresight Reserves, LP ( Foresight Reserves ), and the remaining interest is held by current executive management of Foresight Energy. Foresight Energy s principal operation is the development, mining, transportation and sale of coal mined in the Illinois Basin. Foresight Energy operates four underground mining complexes: Williamson Energy, LLC ( Williamson Energy ); Sugar Camp Energy, LLC ( Sugar Camp Energy ); Hillsboro Energy, LLC ( Hillsboro Energy ); and Macoupin Energy, LLC ( Macoupin Energy ). The first Sugar Camp Energy and Hillsboro Energy mines emerged from development when longwall production began on March 1, 2012 and September 1, 2012, respectively. Mined coal is sold to a diverse customer base including electric utility and industrial companies in the eastern United States, as well as overseas markets. The unaudited condensed consolidated financial statements include the accounts of Foresight Energy, its subsidiaries and variable interest entities ( VIEs ) for which Foresight Energy or its subsidiaries are the primary beneficiary (collectively, the Company ). The Company operates in a single reportable segment. Intercompany transactions are eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements contain all significant adjustments (consisting of normal recurring accruals) that, in the opinion of management, are necessary to present fairly the Company s consolidated financial position, consolidated results of operations and consolidated cash flows for all periods presented. In preparing the unaudited condensed consolidated financial statements, management used estimates and assumptions that may affect reported amounts and disclosures. To the extent there are material differences between the estimates and actual results, the impact to the Company s financial condition or results of operations could be material. The unaudited condensed consolidated financial statements do not include footnotes and certain financial information as required annually under US generally accepted accounting principles ( US GAAP ) and, therefore, should be read in conjunction with the annual audited consolidated financial statements for the year ended December 31, The results of operations for the three and six months ended 2013 are not necessarily indicative of results that can be expected for the fiscal year ending December 31, Events and transactions were evaluated for potential recognition or disclosure through August 5, 2013, which is the date the unaudited condensed consolidated financial statements were issued (see Note 14). Certain prior period amounts in the unaudited condensed consolidated statements of cash flows have been reclassified to conform to the current period presentation. These reclassifications, which were not material, affected net cash (used in) provided by financing activities (deferred IPO issuance costs paid) and net cash provided by operating activities (other). 6

9 Notes to Unaudited Condensed Consolidated Financial Statements 2. Inventories Inventories consist of the following: 2013 December 31, 2012 Parts and supplies inventory $ 27,701 $ 25,486 Raw coal 2,465 2,305 Clean coal 86,752 63,819 Total inventories $ 116,918 $ 91, Property, Plant, Equipment and Development, Net Property, plant, equipment and development, net consist of the following: 2013 December 31, 2012 Land and land rights $ 70,832 $ 66,987 Mineral rights 42,728 42,728 Machinery and equipment 921, ,953 Machinery and equipment under capital leases 70,500 70,500 Buildings and structures 228, ,849 Development costs 589, ,244 Other 7,594 7,293 Property, plant, equipment and development 1,932,034 1,844,554 Less: accumulated depreciation, depletion and amortization (522,966) (443,269) Property, plant, equipment and development, net $ 1,409,068 $ 1,401,285 7

10 Notes to Unaudited Condensed Consolidated Financial Statements 4. Long-Term Debt and Capital Lease Obligations Long-term debt and capital lease obligations consist of the following: 2013 December 31, % Senior Notes due 2017 $ 603,640 $ 604,010 Senior Secured Credit Facility 246, , % longwall financing arrangement 78,435 84, % longwall financing arrangement 77,344 82,500 Capital lease obligations 49,251 55,401 Total long-term debt and capital lease obligations 1,054,670 1,061,949 Less: current portion 33,563 33,471 Long-term debt and capital lease obligations $ 1,021,107 $ 1,028,478 Senior Secured Credit Facility The Senior Secured Credit Facility (the Credit Facility ), as amended, has a total borrowing capacity of $400.0 million and expires on August 12, At 2013, Foresight Energy had borrowings of $246.0 million outstanding under the Credit Facility and $2.0 million outstanding in letters of credit. There was $152.0 million of remaining capacity under the Credit Facility as of The weighted-average effective interest rate on borrowings under the Credit Facility as of 2013 and December 31, 2012, was approximately 3.9% and 3.7%, respectively. Foresight Energy is also required to pay a commitment fee based on its consolidated net leverage ratio to the lenders under the Credit Facility for unutilized commitments. The Credit Facility is subject to customary debt covenants, including a consolidated interest coverage ratio and a consolidated net leverage ratio, with which the Company was in compliance at Additionally, both the Senior Notes and the Credit Facility carry limitations on restricted payments, which impact the timing and amount of distributions available to members. On July 23, 2013, the Company issued a tender offer to purchase the outstanding 9.625% Senior Notes due 2017 (see Note 14). Fair Value The fair value of the Company s long-term debt as of 2013 and December 31, 2012, was $1,037.7 million and $1,043.8 million, respectively. The fair value of long-term debt was determined based on the amount of future cash flows associated with each debt instrument discounted at the Company s current estimated credit-adjusted borrowing rate for similar debt instruments with comparable terms. This is considered a Level 3 fair value measurement. 8

11 Notes to Unaudited Condensed Consolidated Financial Statements 5. Sale-Leaseback Financing Arrangements In the first quarter of 2009, Macoupin Energy sold certain of its coal reserves to WPP, LLC ( WPP ), a subsidiary of Natural Resource Partners, LP ( NRP ), and leased them back. The gross proceeds from this transaction were $143.5 million and were used for capital expenditures relating to the rehabilitation of the Macoupin Energy mine and for other capital items. In the first quarter of 2012, Sugar Camp Energy sold certain rail facilities to HOD, LLC ( HOD ), a subsidiary of NRP, and leased them back. The gross proceeds from this transaction were $50.0 million and were used for capital expenditures, to pay down the revolving credit facility and for general corporate purposes. In both transactions, because the Company had continuing involvement in the assets sold, the transactions were treated as sale-leaseback financing arrangements. As of 2013 and December 31, 2012, the outstanding balance on the Macoupin Energy and Sugar Camp Energy sale-leaseback financing arrangements was $143.5 million and $50.0 million, respectively. Interest is accrued on the outstanding principal amounts of the financing arrangements using an implied interest rate, which was initially determined at inception of the lease and is adjusted monthly for changes in future expected sales amounts and timing of payments based on the mine plans. The payments are applied against any unpaid accrued interest and any excess is applied against the outstanding principal. Revisions to the mine plans, which occur periodically as changes are made to estimates of the quantity and the timing of tons to be mined, will impact the effective interest rate. The Company accounts for such changes by adjusting, in the current period, the life-to-date interest previously recorded on the sale-leaseback to reflect the new effective interest rate as if it was applied from the inception of the transaction (i.e., retroactively applied). The implied effective interest rate was 14.2% as of June 30, 2013 and December 31, 2012 on the Macoupin Energy sale-leaseback financing arrangement and 13.9% and 13.8% for the Sugar Camp Energy sale-leaseback financing arrangement as of 2013 and December 31, 2012, respectively. If there is a material change to the mine plans, the impact of a change in the effective interest rate to the consolidated statements of operations could be significant. Interest expense recorded on the Macoupin Energy sale-leaseback was $4.8 million and $5.4 million for the three months ended 2013 and 2012, respectively, and $9.8 million and $10.1 million for the six months ended 2013 and 2012, respectively. Interest expense recorded on the Sugar Camp Energy sale-leaseback was $1.7 million for the three months ended 2013 and 2012 and $3.4 million and $2.2 million for the six months ended 2013 and 2012, respectively. As of 2013 and December 31, 2012, the Company had $8.6 million and $7.0 million, respectively, recorded as accrued interest in the condensed consolidated balance sheets under these arrangements. 6. Deferred Revenue The Company has two sales contracts under which the original contractual arrangements were modified and the customers paid cash consideration in advance to adjust the sales price in future contractual months. The amended contracts were accounted for prospectively, and the cash consideration received was deferred and will be recognized over future periods as tons are shipped under the contracts. The Company received $23.5 million in cash proceeds during the three months ended 2013 under one of these amendments. As of 2013 and December 31, 2012, the Company has recorded $17.3 million and $3.9 million, respectively, as deferred revenue in its condensed consolidated balance sheets. 9

12 Notes to Unaudited Condensed Consolidated Financial Statements 7. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following: 2013 December 31, 2012 Employee compensation, benefits and payroll taxes $ 22,133 $ 5,078 Accrued taxes other than income 4,003 3,653 Royalties (non-affiliate) 3,047 1,228 Liquidated damages 6,799 5,863 Other 4,816 5,105 $ 40,798 $ 20,927 Employee compensation, benefits and payroll taxes includes a $10.4 million liability recognized during the three months ended 2013 for a phantom equity award (the Award ) to an executive of the Company. This Award fully vested in 2010 and was granted principally for services performed to develop the Company s longwall mines. The value of the Award is based on a percentage of the fair value of Foresight Reserves, as defined in the agreement, and is also adjusted for certain distributions made by Foresight Reserves subsequent to the grant date of the Award. When the executive s employment terminates, the Company has the election to pay the Award in quarterly installments over a term of ten years. Prior to 2013, the Company did not record the liability (or corresponding mine development asset), however, the Company determined the impact was immaterial to its consolidated financial statements during all periods impacted. Approximately $1.2 million was recognized under this award as selling, general and administrative expenses for the three months ended 2013 for nondevelopmental activities performed by the executive since the inception of the Award. The liability will be adjusted to fair value each reporting period with the offset primarily recorded to selling, general and administrative expenses. 8. Asset Retirement Obligations Changes in the carrying amount of the Company s asset retirement obligations were as follows: 2013 Balance at January 1, 2013 (including current portion) $ 19,449 Accretion expense 763 Expenditures for reclamation activities (288) Balance at ,924 Current portion of asset retirement obligations (99) Noncurrent portion of asset retirement obligations $ 19,825 10

13 Notes to Unaudited Condensed Consolidated Financial Statements 9. Related-Party Transactions The Company routinely engages in transactions in the normal course of business with affiliated entities under common control. These transactions include production royalties, transportation services, administrative and management service arrangements, coal material handling and storage services, sale-leaseback financing arrangements that are treated as interest and principal payments for financial reporting purposes (the sale-leaseback financing transactions are discussed in Note 5 and are excluded from the tables below), and other administrative services. From time to time, the Company also acquires certain mining equipment from Foresight Reserves and affiliated entities. As of 2013 and December 31, 2012, the Company had affiliate balances as follows: Affiliated Company Balance Sheet Location 2013 December 31, 2012 Foresight Reserves and affiliated entities Due from affiliates $ 366 $ 1,357 Foresight Reserves and affiliated entities Due to affiliates $ 5,111 $ 3,484 NRP Due to affiliates 5,396 8,267 $ 10,507 $ 11,751 Foresight Reserves Prepaid royalties $ 22,351 $ 22,575 NRP Prepaid royalties 39,187 34,390 $ 61,538 $ 56,965 A summary of expenses incurred with affiliated entities is as follows for the three and six months ended June 30: Three Months Ended Six Months Ended Royalty expense NRP $ 11,898 $ 10,912 $ 23,469 $ 18,516 Royalty expense Foresight Reserves 9 5, ,168 Transportation services NRP 1,988 3,156 4,774 5,924 Transportation services Raven Energy LLC 5,886 5,801 14,022 9,927 Management and transportation usage fees Foresight Reserves and affiliated entities , Royalty expenses to NRP and Foresight Reserves are included in cost of coal sales (excluding depreciation, depletion and amortization). Fees for transportation services to NRP represent net load-out royalties and are also included in cost of coal sales (excluding depreciation, depletion and amortization). Fees for throughput at Raven Energy, LLC s marine terminal are included in transportation expense in the unaudited condensed consolidated statements of operations. Allocated Foresight Reserve management fees and transportation usage fees incurred with other affiliated entities (affiliated through common majority ownership) are included in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations. 11

14 Notes to Unaudited Condensed Consolidated Financial Statements 9. Related-Party Transactions (continued) From May 1, 2013 through 2013, the Company also purchased $2.6 million in mining supplies from a related-party joint venture (see Note 10). The Company had a de minimis outstanding payable balance to the joint venture as of Variable Interest Entities (VIEs) The Company s unaudited condensed consolidated financial statements include VIEs for which the Company is the primary beneficiary. These entities include Mach Mining, LLC; M-Class Mining, LLC; Coal Field Construction Company LLC; MaRyan Mining LLC; Patton Mining LLC; Viking Mining LLC; and LD Labor Company LLC. Each of the VIEs holds a contract to provide contract mining, processing and loading services or construction services to a Foresight Energy subsidiary. All of these entities were determined not to have sufficient equity at risk and are therefore VIEs. The Company was determined to be the primary beneficiary of each of these entities given the Company controls these entities under a contractual cost-plus arrangement. The liabilities recognized as a result of consolidating these VIEs do not necessarily represent additional claims on the general assets of the Company outside of the VIEs; rather, they represent claims against the specific assets of the consolidated VIEs. Conversely, assets recognized as a result of consolidating these VIEs do not necessarily represent additional assets that could be used to satisfy claims against the Company s general assets. There are no restrictions on the VIE assets that are reported in the Company s general assets. The total consolidated VIE assets and liabilities reflected in the Company s condensed consolidated balance sheets are as follows: 2013 December 31, 2012 Assets: Current assets $ 2,476 $ 3,472 Long-term assets Total assets $ 2,593 $ 3,612 Liabilities: Current liabilities $ 7,571 $ 5,017 Long-term liabilities Total liabilities $ 7,571 $ 5,017 On May 1, 2013, a related party to the Company through common majority ownership and an unrelated third-party supplier of mining equipment formed a joint venture whose purpose is the manufacture and sale of certain supplies primarily for use by the Company in the conduct of its mining operations. Upon the formation of the joint venture, the Company entered into an amendment to an existing supply agreement with this unaffiliated supplier to add the joint venture as a supplier party, extend the term of the agreement and update the pricing provisions of the agreement. The agreement, as amended, includes a requirement under which the Company s coal mines are obligated to purchase at least 90% of their aggregate annual requirements for certain mining supplies from the supplier parties, subject to certain exceptions as set forth in the agreement. 12

15 Notes to Unaudited Condensed Consolidated Financial Statements 10. Variable Interest Entities (VIEs) (continued) The initial term of the amended agreement is five years, ending in April The supplies covered under this arrangement are sold pursuant to a price schedule incorporated into the agreement that is reviewed and, if necessary, adjusted every six months during the term based on specified cost drivers for the supplies to result in an agreed-upon fixed profit percentage for the joint venture as set forth in the agreement. This joint venture was determined to be a VIE given that the equity holders of the joint venture do not have the obligation to absorb the expected losses or the right to receive the expected residual returns of the joint venture as a result of the Company guaranteeing a fixed profit percentage on the supplies it purchases from the joint venture. The Company is not the primary beneficiary of this joint venture and, therefore does not consolidate the joint venture, given that the power over the joint venture is conveyed through the board of directors of the joint venture, and no party controls the board of directors. 11. Derivative Contracts In June 2013, the Company entered into coal purchase and sale commodity derivative contracts totaling 240,000 tons as economic hedges to certain future unpriced sales commitments through The Company accounts for these coal commodity contracts as free-standing derivatives and records any gains or losses resulting from adjusting these contracts to fair value in earnings. During the three months and six months ended 2013, $0.2 million was recorded as a gain on commodity contracts in the condensed consolidated statement of operations and other current assets in the condensed consolidated balance sheet as of 2013, to record these contracts at fair market value. In October 2012, the Company entered into four coal purchase and sale commodity derivative contracts totaling 300,000 tons. The Company accounted for these coal commodity contracts as free-standing derivatives and recorded any gains or losses resulting from adjusting these contracts to fair value in earnings. These contracts were settled in January 2013 and $0.5 million was recorded to gain on commodity contracts in the unaudited condensed consolidated statement of operations. The $1.0 million in proceeds from the settlement of the commodity contracts was recorded as an investing activity in the condensed consolidated statement of cash flows because the commodity contracts were settled prior to the underlying economic hedge. 12. Contract Settlements In April 2012, the Company entered into a settlement agreement with a customer related to a dispute over a coal supply agreement dating back to Under the terms of the settlement agreement, the Company received $10.0 million in cash proceeds, which was recorded in other operating (income) loss, net in the condensed consolidated statements of operations during the three months ended 2012, and as an operating activity in the condensed consolidated statements of cash flows. The Company has no future performance obligations under the settlement agreement or the original coal supply agreement. 13

16 Notes to Unaudited Condensed Consolidated Financial Statements 13. Fair Value of Financial Instruments The table below sets forth, by level, the Company's financial assets and liabilities that are recorded at fair value in the accompanying condensed consolidated balance sheets: Fair Value at 2013 Total Level 1 Level 2 Level 3 Assets: Commodity contracts $ 228 $ $ 228 $ Total assets $ 228 $ $ 228 $ Liabilities: Liability award $ 10,372 $ $ $ 10,372 Total liabilities $ 10,372 $ $ $ 10,372 Fair Value at December 31, 2012 Total Level 1 Level 2 Level 3 Assets: Commodity contracts $ 534 $ $ 534 $ Total assets $ 534 $ $ 534 $ Liabilities: Total liabilities $ $ $ $ The commodity contracts were recorded on a gross basis to other current assets in the condensed consolidated balance sheets as of 2013 and December 31, The Company s commodity contracts are valued based on direct broker quotes and corroborated with market data. The liability award, recorded in accrued expenses and other current liabilities in the condensed consolidated balance sheet, represents a phantom equity award to an executive of the Company (see Note 7). The liability award s value is determined based on the fair value, as defined in the agreement, of Foresight Reserves and is adjusted for tax distributions made to Foresight Reserves members. The liability award is a Level 3 in the fair value hierarchy given Foresight Reserves is a private company and, therefore, there is no liquid market to determine the fair value of Foresight Reserves equity. The fair value of the liability award was determined based on current equity transactions at Foresight Reserves and corroborated with discounted cash flow models. During the three and six months ended 2013 and 2012, the Company had no assets or liabilities that were transferred between Level 1 and Level 2. 14

17 Notes to Unaudited Condensed Consolidated Financial Statements 13. Fair Value of Financial Instruments (continued) The following is a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended 2013: Liability Award Balance, January 1, 2013 $ Recorded fair value (gains) or losses: Included in earnings (651) Capitalized into development costs (217) Purchases, issuances, and settlements 11,240 Balance, 2013 $ 10,372 The Company had no Level 3 assets or liabilities measured at fair value during the six months ended Subsequent Events On July 23, 2013, the Company issued an Offer to Purchase and Consent Solicitation Statement ( Tender Offer ) to purchase its outstanding 9.625% Senior Notes due 2017 (the Senior Notes ) from the current holders of the Senior Notes. The Tender Offer is open through August 19, 2013 (the Expiration Date ), and requires consent from the majority of the Senior Note holders. The total cash consideration being offered in the Tender Offer is $1, per $1,000 principal amount of Senior Notes accepted for purchase, which includes a consent payment of $30.00 per $1,000 principal amount of Senior Notes, plus accrued and unpaid interest at the purchase date. Holders who validly tender their Senior Notes after August 5, 2013 (the Consent Date ), but on or prior to the Expiration Date will receive the tender offer consideration of $1, per $1,000 principal amount of Senior Notes accepted for purchase, plus accrued and unpaid interest, but will not receive the consent payment. The Company s obligation to purchase the Senior Notes under the Tender Offer is conditioned upon the consummation of a future financing at terms acceptable to the Company in its sole discretion, in addition to the satisfaction of other general conditions as described in the Tender Offer. 15

18 Management s Discussion and Analysis of Financial Condition and Results of Operations 2013

19 Management s Discussion and Analysis of Financial Condition and Results of Operations This discussion contains forward-looking statements about our business, operations and industry that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations and intentions. You can identify these forward-looking statements by the use of forward-looking words such as outlook, intends, plans, estimates, believes, expects, potential, continues, may, will, should, seeks, approximately, predicts, anticipates, foresees, or the negative version of these 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. Our future results and financial condition may differ materially from those we currently anticipate as a result of various factors. Among those factors that could cause actual results to differ materially are the following: A substantial or extended decline in coal prices or increase in the costs of mining or transporting coal could adversely affect our operating results and the economic recoverability of our coal reserves. Our future success depends on our ability to develop our existing coal reserves. Because we engage in longwall mining, subsidence issues are particularly important to our operations. Failure to timely secure subsidence or mitigation rights could materially affect our results by causing delays in our mining plan through stoppages or increased costs because of the necessity of obtaining such rights. Our mines may not consistently achieve full anticipated productive capacity, if at all. Delays in the receipt of, failure to receive, or revocation of necessary government permits may adversely affect our productivity and our financial condition. Severe accidents, such as fire or explosion, may adversely affect our productivity and financial condition. Adverse weather conditions, such as blizzards or floods, can impact our ability to mine and ship our coal and our customers ability to take delivery of coal. Adverse geology, such as poor roof or floor conditions, changes in coal thickness, faults and washouts in the coal seam, could negatively impact our ability to mine our coal seams. As our existing coal supply agreements expire, our revenues and operating profits could be negatively impacted if we are unable to negotiate equivalent or better contract pricing. Failure to meet certain provisions in our coal supply agreements could result in economic penalties. The loss of, or significant reduction in, purchases by our largest customers could adversely affect our revenues. Any change in consumption patterns by utilities away from the use of coal could affect our ability to sell the coal we produce. Further, excess production capacity in the industry could put downward pressure on coal prices. Our ability to recoup prepaid royalties could be negatively impacted by weak coal market conditions, unfavorable mine productivity or our failure to continue developing our existing reserves base, which may adversely impact our results of operations. Competition both within the coal industry and outside of it, such as competition from alternative fuel providers, such as natural gas, may adversely affect our ability to sell coal. Our business requires substantial capital expenditures for growth and to maintain our existing equipment and structures. If we are unable to generate sufficient cash flows from operations or obtain financing to fund capital expenditures, our operating results could be adversely impacted. 16

20 We operate our mines with a limited and efficient workforce. Our ability to operate our mines efficiently could be impaired if we lose key personnel or fail to attract qualified personnel. We operate our mines with a workforce that is contracted through our operators. While none of our contractors employees are currently members of a union, there is no guarantee that the workforce will remain union-free in the future. A shortage of skilled mining labor in the United States could decrease our labor productivity and increase our labor costs, which would adversely affect our profitability. Failures of contractor-operated sources to fulfill the delivery terms of their contracts with us could adversely affect our operations and reduce our profitability. All of our coal reserves are leased and are subject to minimum royalty payments that are due regardless of whether coal is actually mined. The duration or severity of any current or future global economic downturn may have a material adverse impact on our business and financial condition. Certain of our customers may seek to defer contracted shipments of coal, which could affect our results of operations and liquidity. We may not be able to obtain equipment, parts and raw materials in sufficient quantities or at reasonable costs to support our coal mining and transportation operations. Defects in title or loss of any leasehold interests in our properties could limit our ability to conduct mining operations on these properties or result in significant unanticipated costs. The availability or reliability of current transportation facilities and our current dependence on a single rail carrier for transport from certain of our mining complexes could affect the demand for our coal or temporarily impair our ability to supply coal to our customers. Significant increases in transportation costs could make our coal less competitive when compared to alternative fuels or coal produced from other regions. We face numerous uncertainties in estimating the mineability of our economically recoverable coal reserves, and significant variances in such estimates could result in decreased profitability from lower than expected revenues or higher than expected costs. We have future reclamation obligations for which the timing and amount are uncertain. In addition, our failure to maintain required financial assurances could affect our ability to secure reclamation and coal lease obligations, which could adversely affect our ability to mine or lease the coal. Our operations are subject to risks, some of which are not insurable, and our existing insurance may be inadequate in the event of a catastrophic loss. Some of our customers blend our coal with coal from other sources, making our sales dependent upon our customers locating additional sources of coal. Our ability to collect payments from our customers could be impaired if their creditworthiness deteriorates. Terrorist attacks and threats, escalation of military activity in response to such attacks, or acts of war may negatively affect our business, financial condition and results of operations. Our mining operations, including our transportation infrastructure, are extensively regulated, which imposes significant costs on us. Future regulations or violations of regulations could increase those costs or limit our ability to produce coal. 17

21 Changes in the manner of enforcement of existing laws and regulations may adversely affect our productivity and financial condition. Changes in laws or regulations, including permitting requirements or the imposition of additional regulations, taxes or fees, could adversely affect our productivity and financial condition. Recent increased focus by regulatory authorities on the effects of mining on the environment and the disposal of mining refuse may materially affect our ability to dispose of mining refuse. New developments in the regulation of greenhouse gas emissions and coal ash could adversely affect our customers demand for coal and therefore our results of operations, cash flows and financial condition. Our operations may adversely impact the environment or cause exposure to hazardous substances, or our properties may have environmental contamination currently unknown to us, all of which could result in material liabilities to us. We could be involved in future legal proceedings that, if determined adversely to us, could significantly impact our profitability, financial position or liquidity. Because we have not been a public company/issuer as defined in the Sarbanes-Oxley Act of 2002 (the Act ), we are not subject to this Act. Should we become a public company/issuer then we would, over time, be required to comply with various aspects of the Act, which include, but are not limited to, increased documentation and internal control standards, an audit of our internal control system, etc. These requirements could increase our costs of operations. We have a substantial amount of indebtedness, which may adversely affect our cash flow and our ability to operate our business. Despite our substantial indebtedness level, we and our subsidiaries are able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness. Our ability to generate the significant amount of cash needed to pay interest and principal on the outstanding senior notes and service our other debt and financial obligations and our ability to refinance all or a portion of our indebtedness or obtain additional financing depend on many factors beyond our control. 18

22 Overview We believe we are the lowest cost underground coal producer in the United States, based on publicly available information. We currently operate four underground mining complexes, all in the Illinois Basin region of the United States. Our mining complexes consist of: Williamson Energy, LLC ( Williamson ), a longwall mining complex in southern Illinois, currently producing coal with one longwall mining system and two continuous miner units, with a productive capacity in excess of 8 million tons per year; Sugar Camp Energy, LLC ( Sugar Camp ), a longwall mining complex in southern Illinois, currently producing coal with one longwall mining system and three continuous miner units. The complex has a productive capacity of 32 million tons per year with all four of its longwall mining systems operational, the first of which began in March Development of a second longwall mine at the Sugar Camp complex is currently in progress, with longwall operations expected to commence in 2014; Hillsboro Energy, LLC ( Hillsboro ), a longwall mining complex in central Illinois, currently producing coal with one longwall mining system and two continuous miner units. The complex has a productive capacity of 28.5 million tons per year with all three of its longwall mining systems operational, the first of which began in September 2012; and Macoupin Energy, LLC ( Macoupin ), a continuous miner operation in central Illinois, currently producing with one continuous miner supported by a flexible conveyor train (FCT) unit. The complex has a productive capacity of 11 million tons per year with the operation of a second continuous miner unit and the development of a new mine with a longwall mining system accessing its additional reserves. With more than 3 billion tons of assigned proven and probable coal reserves, we believe our coal reserves are sufficient to support over 35 years of production at our full productive capacity of up to 79.5 million tons per year. All of our reserves are favorably located with transportation access to market via rail, barge, vessel and truck. We have direct and indirect access to all five Class I railroads and own a barge-loading river terminal on the Ohio River. We also have contractual arrangements with railroads, seaborne export terminals and additional river terminals giving us long-term market access with cost certainty. Since our inception, we have invested significantly in capital expenditures to develop what we believe are industry-leading, geologically similar, low-cost and highly productive mines and related infrastructure. We plan to add additional longwall mining systems in the upcoming years to continue growing our production. The timing of the additional development is dependent on several factors, including, but not limited to, equipment availability, permitting, the market for our coal and the committed sales position at our existing mining operations. During the twelve-month period ended 2013, our operating mines produced approximately 17.1 million tons of coal. Factors That Affect Our Results Coal Prices. We attempt to mitigate price fluctuations by executing long-term contracts. Domestic coal prices have weakened due to competition from natural gas and high inventory levels at utilities, which in combination reduced demand from coal-fired plants. We expect this low-price environment to continue throughout 2013 and possibly into the first part of Coal Demand. Demand for coal can increase due to unusually hot or cold weather as consumers use more air conditioning or heating. Conversely, mild weather can result in softer demand for our coal. Adverse weather conditions, such as blizzards or floods, can impact our ability to mine and ship our coal and our customers ability to take delivery of coal. We believe that long-term international demand for thermal coal will continue to increase due primarily to strong demand from China, India and other Asian countries, coupled with a shift of supply from the Atlantic market to the Pacific market and a limited supply from traditional coal exporting countries. As a result of growing international demand, coal prices for seaborne thermal coal have, from time to time, been higher relative to domestic prices and, based on forward price curves, are expected to continue to increase over time. Given our low cost of production and transportation optionality, we believe we will be able to competitively sell our coal into the seaborne market. 19

23 Coal Production Rates. For US generally accepted accounting principles ( US GAAP ) reporting purposes, our Williamson and Macoupin mining complexes were our only operating mines prior to Sugar Camp s and Hillsboro s first longwalls began production on March 1, 2012, and September 1, 2012, respectively. Our coal production and revenues for US GAAP reporting purposes have grown as Sugar Camp and Hillsboro transitioned from development to longwall production. Unless otherwise noted herein, all references to tons produced, tons sold or cash cost per ton sold refer to clean tons of coal produced from our operating mines. The below table represents total tons produced from our operating and development mines: Three Months Ended Six Months Ended (In Millions) Tons produced operating mines Tons produced development mines (1) Total (1) Amounts may not foot due to rounding. Longwall Moves. Longwall mines have periods of interrupted production as mining is completed in a particular panel and the longwall mining equipment is disassembled, moved and reassembled at the next panel. During these periods, the mine continues to ship coal to customers from inventory. We attempt to minimize this production interruption by designing long and wide panels that limit moves to approximately once per year. Using this design, combined with advance planning and spare longwall mining equipment, the last three longwall moves at Williamson have had production interruptions of two days or less, including the longwall move in March There are no guarantees that future longwall moves at our longwall mines will have similar results. Contract Position. We sell a significant portion of our coal under agreements with terms that range from twelve months to nine years. As of 2013, we had 9.9 million tons committed and priced and 0.4 million tons committed and unpriced for the remainder of We have 14.5 million tons committed and priced and 1.1 million tons committed and unpriced for the year ending December 31, We have sold coal to over 100 domestic power plants, industrial users and international customers. During the six months ended 2013, and the years ended December 31, 2012, 2011 and 2010, export tons represented 35%, 44%, 29% and 24% of tons sold, respectively (inclusive of both our operating mine sales and nominal sales from our development mines). Our sales strategy is generally to enter into long-term contracts for the majority of our production, with the initial two to three years at fixed prices, and the subsequent years subject to reset at a negotiated price or the prevailing market price at regular intervals. We believe that our low-cost structure positions us to successfully reprice our coal at a profitable margin in any price environment in which our competitors can operate. Our average coal sales realization in the near term may decrease as we replace expiring favorably priced supply contracts with new supply contracts at market prices. Operations in Development. For US GAAP reporting purposes, our mining operations are considered to be in development until longwall mining operations commence. While in development, coal sales, if any, and their costs are capitalized, and therefore, the results of operations in development do not have an effect on our consolidated statements of operations. Longwall operations at Sugar Camp and Hillsboro came out of development on March 1, 2012 and September 1, 2012, respectively. Therefore, their results of operations are included in our consolidated statements of operations subsequent to the end of development of their longwall operations. Development of a second longwall mine at the Sugar Camp complex is currently in progress, with longwall operations expected to commence in Cost of Coal Sales (Excluding Depreciation, Depletion and Amortization). Our cost of coal sales includes, but is not limited to, labor and benefits, supplies, repairs, utilities, insurance, equipment rental, mine lease costs, property and land subsidence costs, sales-related costs, belting, coal preparation and direct mine overhead. Each of these cost components has its own drivers, which can include the cost and availability of labor, changes in health care and insurance regulation, the cost of consumable items or inputs in our supplies, changes in regulation of our industry, and/or our staffing levels. In particular, our royalties generally depend directly upon the price at which we sell our coal and the underlying terms of our coal leases. 20