SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2006

OR

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 No. 1-32423

ALPHA NATURAL RESOURCES, INC.

Delaware		02-0733940
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)
One Alpha Place, P.O. Box 2345		24212
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:
(276) 619-4410

     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 þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

o Large accelerated filer      o Accelerated filer      þ Non-accelerated filer

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     Number of shares of the Registrant’s Common Stock, $0.01 par value, outstanding as of August 8, 2006 — 64,995,357.

 

 

TABLE OF CONTENTS

		Page
PART I
Item 1. Financial Statements		3
Condensed Consolidated Balance Sheets (Unaudited)		3
Condensed Consolidated Statements of Income (Unaudited)		4
Condensed Consolidated Statements of Cash Flows (Unaudited)		5
Notes to Condensed Consolidated Financial Statements (Unaudited)		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3. Quantitative and Qualitative Disclosures about Market Risk		35
Item 4. Controls and Procedures		36
PART II
Item 1A. Risk Factors		38
Item 4. Submission of Matters to a Vote of Security Holders		38
Item 6. Exhibits		38
EX-4.1: FIFTH SUPPLEMENTAL INDENTURE
EX-31.A: CERTIFICATION
EX-31.B: CERTIFICATION
EX-32.A: CERTIFICATION
EX-32.B: CERTIFICATION

Item 1. Financial Statements

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except share and per share amounts)

		June 30,				December 31,
		2006				2005
Assets
Current assets:
Cash and cash equivalents		$	4,800				39,622
Trade accounts receivable, net			160,117				147,961
Notes and other receivables			3,692				10,330
Inventories			84,859				84,885
Prepaid expenses and other current assets			38,788				36,117
Total current assets			292,256				318,915
Property, plant, and equipment, net			649,769				582,750
Goodwill			18,641				18,641
Other intangibles, net			9,193				11,014
Deferred income taxes			39,863				38,967
Other assets			43,770				43,371
Total assets		$	1,053,492				1,013,658
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt		$	3,224				3,242
Notes payable			8,783				59,014
Bank overdraft			14,416				17,065
Trade accounts payable			79,611				99,746
Deferred income taxes			12,575				11,243
Accrued expenses and other current liabilities			88,500				93,531
Total current liabilities			207,109				283,841
Long-term debt, net of current portion			452,369				423,547
Workers’ compensation benefits			6,516				5,901
Postretirement medical benefits			28,874				24,461
Asset retirement obligation			55,389				46,296
Deferred gains on sale of property interests			5,274				5,762
Other liabilities			24,484				11,085
Total liabilities			780,015				800,893
Stockholders’ equity:
Preferred stock — par value $0.01, 10,000,000 shares authorized, none issued			—				—
Common stock — par value $0.01, 100,000,000 shares authorized, 64,995,357 and 64,420,414 shares issued and outstanding			650				644
Additional paid-in capital			204,500				193,608
Accumulated other comprehensive (loss)			(525	)			—
Retained earnings			68,852				18,513
Total stockholders’ equity			273,477				212,765
Total liabilities and stockholders’ equity		$	1,053,492				1,013,658

See accompanying notes to condensed consolidated financial statements.

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income (Unaudited)

(In thousands, except share and per share amounts)

		Three months ended								Six months ended
		June 30,								June 30,
		2006				2005				2006				2005
Revenues:
Coal revenues		$	436,529			$	364,070			$	860,903			$	637,204
Freight and handling revenues			50,935				48,239				97,327				79,991
Other revenues			8,217				5,327				19,761				12,596
Total revenues			495,681				417,636				977,991				729,791
Costs and expenses:
Cost of coal sales (exclusive of items shown separately below)			345,505				293,493				676,391				519,777
Freight and handling costs			50,935				48,239				97,327				79,991
Cost of other revenues			5,445				4,319				13,396				10,384
Depreciation, depletion and amortization			34,207				15,075				67,841				29,245
Selling, general and administrative expenses (exclusive of depreciation and amortization shown separately above)			18,583				14,870				35,392				62,776
Total costs and expenses			454,675				375,996				890,347				702,173
Income from operations			41,006				41,640				87,644				27,618
Other income (expense):
Interest expense			(10,786	)			(6,647	)			(21,063	)			(12,764	)
Interest income			171				191				358				478
Miscellaneous income (expense), net			1,413				32				1,696				(9	)
Total other income (expense), net			(9,202	)			(6,424	)			(19,009	)			(12,295	)
Income from continuing operations before income taxes and minority interest			31,804				35,216				68,635				15,323
Income tax expense			8,676				9,089				18,296				11,599
Minority interest			—				—				—				2,918
Income from continuing operations			23,128				26,127				50,339				806
Discontinued operations:
Income (loss) from discontinued operations before income taxes and minority interest			—				359				—				(379	)
Income tax expense(benefit)			—				93				—				(93	)
Minority interest			—				—				—				(72	)
Income (loss) from discontinued operations			—				266				—				(214	)
Net income		$	23,128			$	26,393			$	50,339			$	592
Net income per basic share, as adjusted in 2005
Income from continuing operations		$	0.36				0.43			$	0.79				0.01
Loss from discontinued operations			—				—				—				—
Net income per basic share		$	0.36			$	0.43			$	0.79			$	0.01
Net income per diluted share, as adjusted in 2005
Income from continuing operations		$	0.36			$	0.43			$	0.79			$	0.01
Loss from discontinued operations			—				—				—				—
Net income per diluted share		$	0.36			$	0.43			$	0.79			$	0.01

See accompanying notes to condensed consolidated financial statements.

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

		Six months ended
		June 30,
		2006				2005
Operating activities:
Net income		$	50,339				592
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, depletion and amortization			67,841				29,528
Amortization of debt issuance costs			1,132				875
Accretion of asset retirement obligation			2,246				1,631
Virginia tax credit			—				(343	)
Stock-based compensation — non-cash			9,945				32,312
Amortization of deferred gains on sales of property interests			(488	)			(395	)
Amortization of deferred gain on railroad incentives			(154	)			(340	)
Gain on sale of fixed assets, net			(134	)			113
Gain on sale of discontinued operations			—				(704	)
Loss on settlement of asset retirement obligation			322				490
Provision for non-recoupable advance royalties			469				—
Minority interest			—				2,846
Deferred income taxes			5,274				1,588
Other			116				44
Changes in operating assets and liabilities:
Trade accounts receivable			(12,198	)			(55,382	)
Notes and other receivables			4,558				(477	)
Inventories			4,349				(37,953	)
Prepaid expenses and other current assets			(2,583	)			10,261
Other assets			(1,934	)			(4,065	)
Trade accounts payable			(20,891	)			16,275
Accrued expenses and other current liabilities			(12,655	)			(1,386	)
Workers’ compensation benefits			(928	)			(266	)
Postretirement medical benefits			4,413				4,503
Asset retirement obligation			615				(1,772	)
Other liabilities			773				605
Net cash provided by (used in) operating activities			100,427				(1,420	)

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited) — (Continued)

(In thousands)

		Six months ended
		June 30,
		2006				2005
Investing activities:
Capital expenditures		$	(84,000	)			(66,521	)
Proceeds from disposition of property, plant, and equipment			264				5,148
Purchase of equity investment			(107	)			(654	)
Purchase of acquired companies			(28,273	)			(389	)
Collections on note receivable from coal supplier			3,000				2,612
Payment of additional consideration on prior acquisition			—				(5,000	)
Net cash used in investing activities			(109,116	)			(64,804	)
Financing activities:
Repayments of notes payable			(50,232	)			(8,230	)
Proceeds from issuance of long-term debt			200,000				70,000
Repayments on long-term debt			(171,806	)			(944	)
Increase (decrease) in bank overdraft			(2,649	)			8,239
Proceeds from initial public offering, net of offering costs			—				598,066
Repayment of restructuring notes payable			—				(517,692	)
Distributions to prior members of ANR Holdings, LLC subsequent to Internal Restructuring			(2,400	)			(72,335	)
Distributions to prior members of ANR Holdings, LLC prior to Internal Restructuring			—				(7,732	)
Debt issuance costs			—				(422	)
Proceeds from exercise of stock options			954				—
Net cash provided by (used in) financing activities			(26,133	)			68,950
Net increase (decrease) in cash and cash equivalents			(34,822	)			2,726
Cash and cash equivalents at beginning of period			39,622				7,391
Cash and cash equivalents at end of period		$	4,800				10,117

See accompanying notes to condensed consolidated financial statements.

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2006
(In thousands, except percentages and share data)

(1) Business and Basis of Presentation

Organization and Business

     Alpha Natural Resources, Inc. and its operating subsidiaries are engaged in the business of extracting, processing and marketing coal from deep and surface mines, located in the Central and Northern Appalachian regions of the United States, for sale to utility and steel companies in the United States and in international markets.

     On February 11, 2005, Alpha Natural Resources, Inc., a Delaware corporation (Alpha) succeeded to the business of ANR Holdings, LLC, a Delaware limited liability company (ANR Holdings) in a series of internal restructuring transactions which are referred to collectively as the Internal Restructuring, and on February 18, 2005, Alpha completed the initial public offering of its common stock. Prior to the Internal Restructuring, ANR Fund IX Holdings, L.P. and Alpha NR Holding, Inc. (the FR Affiliates), entities under the common control of First Reserve GP IX, Inc., were the owners of 54.7% of the membership interests in ANR Holdings, and the remaining membership interests in ANR Holdings were held by affiliates of American Metals & Coal International, Inc. (AMCI), Alpha Coal Management, LLC (ACM) and Madison Capital Funding, LLC. The financial statements for the six months ended June 30, 2005 are presented on a combined basis including the combined financial results for the FR Affiliates and subsidiaries for the period from January 1, 2005 to February 11, 2005, and the consolidated results for Alpha and subsidiaries from February 12, 2005 to June 30, 2005. The financial statements for the three and six months ended June 30, 2006 are presented on a consolidated basis. The entities included in the accompanying financial statements are collectively referred to as “the Company.”

Basis of Presentation

     The accompanying interim condensed consolidated financial statements have been prepared in accordance with U.S generally accepted accounting principles for interim financial reporting. Accounting measurements at interim dates inherently rely on estimates more than year-end; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Results of operations for the six months ended June 30, 2006 are not necessarily indicative of the results to be expected for the year ending December 31, 2006. These financial statements should be read in conjunction with the audited financial statements and related notes as of and for the year ended December 31, 2005 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.

     In the course of preparing the second quarter financial statements, the Company and its independent auditors identified certain forward purchase and forward sale contracts that are considered derivative instruments under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”) that do not qualify under the “normal purchase and normal sales” exception. Transactions that do not qualify for this exception are required to be marked to market.

     Accordingly, the Company has reviewed these contracts to assess the impact, if any, that mark-to-market adjustments would have had on previously issued financial statements. Upon completion of that review, the Company concluded that previously issued financial statements were not materially misstated.

     At the beginning of the second quarter of 2006, the Company recorded adjustments to mark-to-market all its open contracts for coal sales and purchase in the over-the-counter market (OTC) and certain third party purchase and sales contracts. These adjustments resulted in an increase in coal sales revenue of $3,057 and a decrease in cost of coal sales of $564, resulting in a net after-tax increase to net income in the amount of $2,656 in the quarter. The Company has assessed the impact of these adjustments and does not believe these amounts are material to any previously issued financial statements or to its expected full year results for 2006.

     During the second quarter ended June 30, 2006, the Company recorded as coal sales revenue mark-to-market gains on open OTC coal sales contracts in the amount of $2,851 and mark-to-market losses on open OTC coal purchase contracts as cost of coal sales in the amount of $2,136, resulting in an after-tax net impact of $524 on earnings for the quarter.

     At June 30, 2006, the Company had unrealized gains (losses) on open sales and purchases contracts in the amount of $5,908 and ($1,572), respectively. These open sales and purchase contracts are recorded in prepaid expenses and other current assets and accrued expenses and other current liabilities, respectively.

(2) Earnings Per Share

     Due to the Internal Restructuring on February 11, 2005 and initial public offering of common stock completed on February 18, 2005, the calculation of earnings per share for the six months ended June 30, 2005 reflects certain adjustments, as described below.

     The numerator for purposes of computing basic and diluted net income (loss) per share, as adjusted for the six months ended June 30, 2005, includes the reported net income (loss) and a pro forma adjustment for income taxes to reflect the pro forma income taxes for ANR Fund IX Holdings, L.P.’s portion of reported pre-tax income (loss), which would have been recorded if the issuance of the shares of common stock received by the FR Affiliates in exchange for their ownership in ANR Holdings in connection with the Internal Restructuring had occurred as of January 1, 2005. For purposes of the computation of basic and diluted net income (loss) per share, as adjusted, the pro forma adjustment for income taxes only applies to the percentage interest owned by ANR Fund IX Holding, L.P., the non-taxable FR Affiliate. No pro forma adjustment for income taxes is required for the percentage interest owned by Alpha NR Holding, Inc., the taxable FR Affiliate, because income taxes have already been recorded in the historical results of operations. Furthermore, no pro forma adjustment to reported net income (loss) is necessary subsequent to February 11, 2005 because Alpha is subject to income taxes.

     The denominator for purposes of computing basic net income (loss) per share, as adjusted for the three months ended June 30, 2005 and the six months ended June 30, 2005, reflects the retroactive impact of the common shares received by the FR Affiliates in exchange for their ownership in ANR Holdings in connection with the Internal Restructuring on a weighted-average outstanding share basis as being outstanding as of January 1, 2005. The common shares issued to the minority interest owners of ANR Holdings in connection with the Internal Restructuring, including the immediately vested shares granted to management, have been reflected as being outstanding as of February 11, 2005 for purposes of computing the basic net income (loss) per share, as adjusted. The unvested shares granted to management on February 11, 2005 that vest monthly over the two-year period from January 1, 2005 to December 31, 2006 are included in the basic net income (loss) per share, as adjusted, computation as they vest on a weighted-average outstanding share basis starting on February 11, 2005. The 33,925,000 new shares issued in connection with the initial public offering have been reflected as being outstanding since February 14, 2005, the date of the initial public offering, for purposes of computing the basic net income (loss) per share, as adjusted.

     The unvested shares issued to management are considered options for purposes of computing diluted net income (loss) per share, as adjusted. Therefore, for diluted purposes, all remaining unvested shares granted to management are added to the denominator subsequent to February 11, 2005 using the treasury stock method, if the effect is dilutive. In addition, the treasury stock method is used for outstanding stock options, if dilutive, beginning with the November 10, 2004 grant of options to management to purchase units in ACM that were automatically converted into options to purchase up to 596,985 shares of Alpha Natural Resources, Inc. common stock at an exercise price of $12.73 per share.

The computations of basic and diluted net income per share, as adjusted, are set forth below:

		Three Months Ended June 30,								Six Months Ended June 30,
		2006				2005				2006				2005
Numerator:
Reported income from continuing operations		$	23,128			$	26,127			$	50,339			$	806
Deduct: Income tax effect of ANR Fund IX Holdings, L.P. income from continuing operations prior to Internal Restructuring			—				—								(91	)
Income from continuing operations, as adjusted			23,128				26,127				50,339				715
Reported income (loss) from discontinued operations			—				266				—				(214	)
Deduct: Income tax effect of ANR Fund IX Holdings, L.P. loss from discontinued operations prior to Internal Restructuring			—				—				—				2
Income (loss) from discontinued operations, as adjusted			—				266				—				(212	)
Net income, as adjusted		$	23,128			$	26,393			$	50,339			$	503
Denominator:
Weighted average shares — basic			64,012,586				61,091,806				63,907,353				50,220,404
Dilutive effect of stock options and restricted stock awards			182,153				471,167				151,109				218,607
Weighted average shares — diluted			64,194,739				61,562,973				64,058,463				50,439,011
Net income per basic share, as adjusted in 2005:
Income from continuing operations		$	0.36			$	0.43			$	0.79			$	0.01
Income (loss) from discontinued operations			—				—				—				—
Net income per basic share		$	0.36			$	0.43			$	0.79			$	0.01
Net income per diluted share, as adjusted in 2005:
Income from continuing operations		$	0.36			$	0.43			$	0.79			$	0.01
Income (loss) from discontinued operations			—				—				—				—
Net income per diluted share		$	0.36			$	0.43			$	0.79			$	0.01

(3) Inventories

     Inventories consisted of the following:

		June 30,				December 31,
		2006				2005
Raw coal		$	5,024			$	6,401
Saleable coal			64,063				65,318
Materials and supplies			15,772				13,166
Total inventories		$	84,859			$	84,885

(4) Long-Term Debt

     Long-term debt consisted of the following:

		June 30,				December 31,
		2006				2005
Term loan		$	248,750			$	250,000
10% Senior notes due 2012			175,000				175,000
Revolving credit facility			30,000				—
Variable rate term notes			—				293
Capital lease obligations			1,843				1,496
Total long-term debt			455,593				426,789
Less current portion			3,224				3,242
Long-term debt, net of current portion		$	452,369			$	423,547

     The Company manages its overall exposure to fluctuations in interest rates by entering into interest rate hedging transactions to achieve an appropriate mix of fixed and floating-rate instruments within its debt portfolio. The Company entered into a $233,125 (notional amount) interest rate swap, effective May 9, 2006 until October 21, 2012, which has been designated as a cash flow hedge. Under the terms of the interest rate swap, the Company receives variable interest rate payments based upon a 3-month LIBOR and makes fixed interest rate payments of 5.59% plus an applicable margin of 1.75% at June 30, 2006. When the hedged debt and swap are considered together, the combined cash flows are the equivalent of paying a fixed rate of interest of 5.59% on debt of $233,125 through October 21, 2012. Settlements paid on the swap agreement were $128,642 for the three months ended June 30, 2006. Net amounts to be paid or received under the interest rate swap agreement are accrued as an adjustment to interest expense. Any change in fair value of the interest rate swaps is recorded in accumulated other comprehensive Income. As of June 30, 2006 the fair value of the interest rate swap was a liability of $525.

(5) Asset Retirement Obligation

     At June 30, 2006 and December 31, 2005, the Company has recorded asset retirement obligation accruals for mine reclamation and closure costs totaling $62,602 and $53,487, respectively. The portion of the costs expected to be incurred within a year in the amounts of $7,213 and $7,190 at June 30, 2006 and December 31, 2005, respectively, are included in accrued expenses and other current liabilities. These regulatory obligations are secured by surety bonds in the amount of $130,641 at June 30, 2006 and $116,680 at December 31, 2005. Changes in the reclamation obligation were as follows:

Total asset retirement obligation at December 31, 2005		$	53,487
Accretion for the six months ended June 30, 2006			2,247
Sites added during the six months ended June 30, 2006			8,323
Expenditures for the six months ended June 30, 2006			(1,893	)
Change in estimates			116
Settlement of asset retirement obligation			322
Total asset retirement obligation at June 30, 2006		$	62,602

(6) Stock-Based Compensation Awards

     Adoption of New Accounting Method

     Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment” (SFAS 123R), which requires that the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors be based on estimated fair value over the requisite service or vesting period. Prior to January 1, 2006, the Company measured stock-based compensation expense using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,” and related interpretations (APB 25).

     In adopting SFAS 123R, the Company has elected to use the modified prospective transition method, and accordingly, has not restated results from prior periods. Under this transition method, stock-based compensation expense for the six months ended June 30, 2006 includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). Stock-based compensation expense for all awards granted after December 31, 2005 is also based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R.

     Stock-based compensation expense measured in accordance with SFAS 123R totaled $6,112 ($5,313 on a net-of-tax basis, or $.08 per basic and diluted share) for the three months ended June 30, 2006 and $9,945 ($8,978 on a net-of-tax basis, or $.14 per basic and diluted share) for the six months ended June 30, 2006. The adoption of SFAS 123R resulted in increased expense of approximately $467 ($340 on a net-of-tax basis, or $.01 per basic and diluted share) for the three months ended June 30, 2006 and $934 ($685 on a net-of-tax basis, or $.01 per basic and diluted share) for the six months ended June 30, 2006 as compared to the stock-based compensation expense that would have been recorded pursuant to APB 25.

     Approximately 92% of stock-based compensation expense is reported as selling, general and administrative expenses and is included in the Corporate and Eliminations category for segment reporting purposes (Note 9). Approximately 8% of the stock-based compensation expense was recorded as part of the Cost of Sales category on the condensed consolidated statement of operations. Under SFAR 123R the Company is required to report the benefits of income tax deductions that exceed recognized compensation as cash flow from financing activities. Such excess tax benefits were insignificant for the six months ended June 30, 2006.

     The following table illustrates the effect on the net income, as adjusted and the net income per basic and diluted share as if the Company had applied the fair value recognition provisions of SFAS 123R to stock-based compensation for the three months and six months ended June 30, 2005.

		Three months				Six months
		ended				ended
		June 30,				June 30,
		2005				2005
Net income, as adjusted (Note 2)		$	26,393			$	503
Add: shared-based employee compensation cost, included in net loss, as adjusted, net of income taxes and minority interest			2,508				38,029
Deduct: share-based employee compensation cost determined under the fair value based method, net of income taxes and minority interest			(2,709	)			(38,375	)
Pro forma net income, adjusted for effect of fair value of stock options		$	26,192			$	157
Net income per share — basic and diluted, adjusted for stock options		$	0.43			$	—

     The fair value of stock options granted during the three months ended June 30, 2005 was estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions:

Expected life (years)			4.0
Expected volatility			38.0	%
Risk-free interest rate			3.38	%
Expected annual dividend		$	0.10

     The Expected life for options represents an estimate of the period of time the stock options are expected to remain outstanding. The Company’s expected life is based upon a review of academic research on employee exercise behavior on comparable size companies with similar contractual lives and vesting periods because of the lack of history at Alpha.

     The Expected volatility assumption is based on stock price volatility of a group of publicly traded industry peers as a proxy because the Company was not publicly traded at the time the options were granted.

     The Risk-free interest rate assumption is based upon the yield on a U.S. Treasury strip (i.e., zero coupon bond) with a remaining life equal to the four-year expected life of the options.

     The Expected annual dividend was based upon the Company’s expected dividend policy. The quarterly expected dividend range is between $.02 and $.03 per share, or $.08 and $.12 per share per year. A mid-range was selected for the assumptions above, however, the Company does not currently pay a dividend.

     No stock options have been granted during the first half of 2006.

     Disclosure of Share-Based Payment Arrangements

     In November 2004, ACM adopted the Alpha Coal Management LLC 2004 Long-Term Incentive Plan (the “Alpha Coal Management Long-Term Incentive Plan”) to provide equity-based incentive compensation to those key employees and others who make significant contributions to the strategic and long-term performance objectives and growth of the Company. On November 10, 2004, ACM granted options to

purchase 800,000 units of ACM to 22 members of the Company’s management team under the Alpha Coal Management Long-Term Incentive Plan. These options vest over a period of five years (with accelerated vesting upon a change of control) and have a term of ten years. In connection with this grant of options, ACM entered into a letter agreement with ANR Holdings pursuant to which ANR Holdings agreed to issue to ACM additional membership interests representing sharing ratios in the aggregate amount equal to 1% of the outstanding membership interests upon exercise of awards granted by ACM under the Alpha Coal Management Long-Term Incentive Plan. In connection with the Internal Restructuring on February 11, 2005, this plan was amended and restated, the outstanding options to purchase units of ACM were automatically converted into options to purchase shares of Alpha Natural Resources, Inc. common stock and Alpha Natural Resources, Inc. assumed the obligations of ACM pursuant to this plan. After the Internal Restructuring, there were outstanding under the plan options to purchase an aggregate of 596,985 shares of common stock at an exercise price of $12.73 per share. No additional options or awards will be granted under the plan.

     As part of the Internal Restructuring, the officers and employees who were members of ACM contributed all of their interest in ANR Holdings to Alpha in exchange for 2,772,157 shares of Alpha common stock. Pursuant to the stockholder agreements, an aggregate of 1,344,930 shares of common stock held by the Company’s executives were unvested on the grant date and subject to forfeiture. The stockholder agreement provides that an executive holding unvested shares whose employment is terminated by us for cause, as defined in the stockholder agreement, or who voluntarily terminates his employment will forfeit all of the unvested shares if the termination is prior to December 31,2005 and one half of the unvested shares if the termination is after December 31, 2005 and prior to December 31, 2006. The stockholder agreement also provides that an executive holding unvested shares whose employment is terminated by the Company without cause, or due to retirement, death or disability, will become vested upon termination in a percentage of the total shares initially subject to vesting equal to the number of full calendar months then elapsed since December 31, 2004 divided by 24. The stockholder agreement further provides that vesting of all unvested shares will accelerate upon a change of control of the Company, as defined in the stockholder agreement.

     In connection with the Internal Restructuring, Alpha Natural Resources, Inc. adopted, and its stockholders approved, the Alpha Natural Resources, Inc. Long-Term Incentive Plan (the “Long-Term Incentive Plan”). The principal purpose of the Long-Term Incentive Plan is to attract, motivate, reward and retain selected employees, consultants and directors through the granting of stock-based compensation awards. The Long-Term Incentive Plan provides for a variety of awards, including non-qualified stock options, incentive stock options (within the meaning of Section 422 of the Code), stock appreciation rights, unvested shares, dividend equivalents, performance-based awards and other stock-based awards. The total number of shares of Alpha Natural Resources, Inc. common stock initially available for issuance or delivery under the Long-Term Incentive Plan is 3,338,841 shares, and the maximum number of shares that may be subject to awards made to any one plan participant in any fiscal year will be 2,000,000 shares.

     On February 11, 2005 the Company granted certain of its executive officers, directors and key employees options to purchase an aggregate of 692,905 shares of Alpha Natural Resources, Inc. common stock at the initial public offering price of $19.00 per share. During the remainder of 2005, an additional 70,000 stock options were granted as well as 12,000 nonvested shares of stock. All options granted during 2005 pursuant to the Long-Term Incentive Plan vest over a period of five years and have a term of ten years. The nonvested shares of stock vest over a three-year period. In the six months ended June 30, 2006, all awards granted pursuant to the Long-Term Incentive Plan consisted of nonvested shares and performance shares. The nonvested shares generally vest in one-third increments on January 1, 2007, 2008 and 2009. The performance share awards entitle the grantee to receive a specified number of shares of Alpha common stock in the future, subject to the achievement of certain pre-established operating income and return on invested capital targets for the years 2006 through 2008. The performance share awards generally vest at the end of 2008.

     Stock option activity for the six months ended June 30, 2006 is summarized in the following table:

										Weighted-
						Weighted-				Average
						Average				Remaining
		Number of				Exercise				Contract
		Shares				Price				Life (Years)
Outstanding at December 31, 2005			1,253,593			$	16.71
Granted			—				—
Exercised			(60,195	)		$	15.86
Forfeited/Cancelled			(36,000	)		$	19.00
Outstanding at June 30, 2006			1,157,398			$	16.68				8.54
Exercisable at June 30, 2006			174,041			$	17.24				8.55

     The aggregate intrinsic value of options outstanding at June 30, 2006 was $3,403 and the aggregate intrinsic value of exercisable options was $414. The total intrinsic value of options exercised during the three months ended June 30, 2006 and 2005 was $243 and $0, respectively and for the six months ended June 30, 2006 $361 and $0, respectively. Cash received from the exercise of stock options during the three and six months ended June 30, 2006 was $544 and $954, respectively. As of June 30, 2006, $6,536 of unrecognized compensation cost related to stock options is expected to be recognized as expense over a weighted-average period of 3.51 years.

     Nonvested share award activity for the six months ended June 30, 2006 is summarized in the following table:

						Weighted-
						Average
		Number of				Grant Date
		Shares				Fair Value
Nonvested shares outstanding at December 31, 2005			684,465			$	19.15
Granted			519,242				21.26
Vested			(358,848	)			19.31
Forfeited			—
Nonvested shares outstanding at June 30, 2006			844,859			$	20.38

     The fair value of nonvested share awards is estimated based on the average of the high and low market stock price on the date of grant, and, for purposes of expense recognition, the total number of awards expected to vest is adjusted for estimated forfeitures. As of June 30, 2006, there was $9,600 of unamortized compensation cost related to nonvested shares which is expected to be recognized as expense over a weighted-average period of 2.63 years. This amount excludes $6,388 of unamortized costs remaining with respect to unvested shares issued in connection with the Internal Restructuring to certain officers and employees, which will be amortized over the remaining vesting period which ends December 31, 2006.

     In addition to the above, the Company granted 148,268 performance share awards in March 2006, all of which remain outstanding as of June 30, 2006. Recipients of these awards will receive shares of Alpha common stock at the end of a three-year performance period which ends on December 31, 2008, based on the Company’s actual performance against pre-established operating income and return on invested capital targets. In order to receive the shares, the recipient generally must also be employed by the Company on the

vesting date. The performance share awards represent the number of common shares to be awarded based on the achievement of targeted performance, however the actual number of shares to be awarded based on performance may range from 0 percent to 200 percent of the targeted amount. The grant date fair value of a performance share award is based on the closing market price of Alpha’s common stock on the date of award and is being amortized over the performance period. The Company reassesses at each reporting date whether achievement of the performance conditions is probable, as well as estimated forfeitures, and adjusts the accrual of compensation expense as appropriate. As of June 30, 2006, there was $2,686 of unamortized compensation cost related to performance share awards which is expected to be recognized as expense over the next 2.5 years.

(7) Postretirement Benefits Other Than Pensions

     The following table details the components of the net periodic benefit cost for postretirement benefits other than pensions:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Service cost		$	859			$	1,000			$	1,920			$	1,944
Interest cost			766				717				1,413				1,255
Amortization of net (gain) or loss			85				15				93				9
Amortization of prior service cost			489				608				1,136				1,306
Net periodic benefit cost		$	2,199			$	2,340			$	4,562			$	4,514

     Employer contributions for benefits paid for the six months ended June 30, 2006 and 2005 were $0 and $10, respectively. Employee contributions are not expected to be made and the plan is unfunded.

     Two of the Company’s subsidiaries are required to make contributions to the 1993 UMWA Benefit Plan of fifty cents per signatory hour worked. The contributions that the Company made to this plan for the quarters ended June 30, 2006 and 2005 were $8 and $8 respectively and $15 and $15 for the six months ended June 30, 2006 and 2005, respectively.

(8) Related Party Transactions

     The Company had the following receivable balances from affiliated parties as of June 30, 2006 and December 31, 2005:

		June 30,				December 31,
		2006				2005
AMCI		$	63			$	10,390
Robindale Energy & Subsidiary			—				63
Total		$	63			$	10,453

     As of June 30, 2006, $63 of receivables from AMCI are included in notes and other receivables. As of December 31, 2005, $7,847 of receivables from AMCI were included in trade accounts receivable, net and $2,543 are included in notes and other receivables. The majority of the AMCI receivables at December 31, 2005 relate to coal sales transactions in the normal course of business.

The Company had the following balances payable to affiliated parties as of June 30, 2006 and December 31, 2005:

		June 30,				December 31,
		2006				2005
AMCI		$	7,535			$	13,735
First Reserve Fund IX, L.P.			—				4,500
Foundation Energy			—				2,605
Robindale Energy & Subsidiary			10				51
Total		$	7,545			$	20,891

     At December 31, 2005 and June 30, 2006, the amount payable to AMCI of $13,735 and $7,535, respectively, are included in accrued expenses and other current liabilities. First Reserve Fund IX, L.P. is no longer a related party since it sold all of its remaining shares on January 25, 2006 and its two designees on Alpha’s Board of Directors resigned effective January 19 and 25, 2006, respectively.

(9) Segment Information

     The Company extracts, processes and markets steam and metallurgical coal from surface and deep mines for sale to electric utilities, steel and coke producers, and industrial customers. The Company operates only in the United States with mines in the Central Appalachian and Northern Appalachian regions. The Company has one reportable segment: Coal Operations, which as of July 31, 2006, consisted of 39 underground mines and 28 surface mines located in Central Appalachia and Northern Appalachia. Coal Operations also includes the Company’s purchased coal sales function, which markets the Company’s Appalachian coal to domestic and international customers. The All Other category includes the Company’s equipment sales and repair operations, as well as other ancillary business activities, including terminal services, trucking services, coal and environmental analysis services, and leasing of mineral rights. In addition, the All Other category includes revenue from the operation of the Company’s highway construction businesses The Corporate and Eliminations category includes general corporate overhead and the elimination of intercompany transactions. The revenue elimination amount represents inter-segment revenues. The Company evaluates the performance of its segment based on EBITDA, as adjusted, which the Company defines as net income (loss) plus interest expense, income tax expense (benefit), depreciation, depletion and amortization, less interest income, and adjusted for minority interest. EBITDA, as adjusted, from continuing operations is defined as income from continuing operations plus interest expense, income tax expense (benefit), depreciation, depletion and amortization, less interest income, and adjusted for minority interest.

     Operating segment results for continuing operations for the three months ended June 30, 2006 and segment assets as of June 30, 2006 were as follows:

										Corporate
		Coal				All				and
		Operations				Other				Eliminations				Consolidated
Revenues		$	488,975			$	15,339			$	(8,633	)		$	495,681
Depreciation, depletion, and amortization			32,072				1,435				700				34,207
EBITDA			92,998				2,209				(18,581	)			76,626
Capital expenditures			32,430				60				71				32,561
Total assets			1,098,569				90,418				(135,495	)			1,053,492

     Operating segment results for continuing operations for the six months ended June 30, 2006 were as follows:

										Corporate
		Coal				All				and
		Operations				Other				Eliminations				Consolidated
Revenues		$	961,514			$	34,825			$	(18,348	)		$	977,991
Depreciation, depletion, and amortization			63,132				3,414				1,295				67,841
EBITDA			187,711				4,894				(35,424	)			157,181
Capital expenditures			76,872				6,025				1,103				84,000
Total assets			1,098,569				90,418				(135,495	)			1,053,492

     Operating segment results for continuing operations for the three months ended June 30, 2005 and segment assets as of June 30, 2005 were as follows:

										Corporate
		Coal				All				and
		Operations				Other				Eliminations				Consolidated
Revenues		$	414,660			$	10,517			$	(7,541	)		$	417,636
Depreciation, depletion, and amortization			14,344				369				362				15,075
EBITDA, as adjusted			70,502				1,112				(14,867	)			56,747
Capital expenditures			35,924				40				235				36,199
Total assets			505,097				72,329				30,806				608,232

     Operating segment results for continuing operations for the six months ended June 30, 2005 were as follows:

										Corporate
		Coal				All				and
		Operations				Other				Eliminations				Consolidated
Revenues		$	722,116			$	20,229			$	(12,554	)		$	729,791
Depreciation, depletion, and amortization			27,494				788				963				29,245
EBITDA, as adjusted			116,377				2,341				(61,864	)			56,854
Capital expenditures			65,458				322				431				66,211
Total assets			505,097				72,329				30,806				608,232

     Reconciliation of total segment EBITDA, as adjusted, to income from continuing operations follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Total segment EBITDA, as adjusted, for 2005 for continuing operations		$	76,626			$	56,747			$	157,181			$	56,854
Interest expense			(10,786	)			(6,647	)			(21,063	)			(12,764	)
Interest income			171				191				358				478
Income tax expense from continuing operations			(8,676	)			(9,089	)			(18,296	)			(11,599	)
Depreciation, depletion and amortization from continuing operations			(34,207	)			(15,075	)			(67,841	)			(29,245	)
Minority interest in income from continuing operations			—				—				—				(2,918	)
Income from continuing operations		$	23,128			$	26,127			$	50,339			$	806

     The Company markets produced, processed and purchased coal to customers in the United States and in international markets. Export revenues totaled $171,914 and $358,449 or approximately 35% and 37% of total revenues for the three and six months ended June 30, 2006, respectively. Export revenues were $204,638 and $344,771 or approximately 49% and 47%, respectively, of total revenues for the three and six months ended June 30, 2005.

(10) Commitment and Contingencies

     In the normal course of business, the Company is a party to certain guarantees and financial instruments with off-balance sheet risk, such as bank letters of credit and performance or surety bonds. No liabilities related to these arrangements are reflected in the Company’s combined balance sheets. Management does not expect any material losses to result from these guarantees or off-balance sheet financial instruments. The amount of bank letters of credit outstanding as of June 30, 2006 is $74,070. The amount of surety bonds currently outstanding related to the Company’s reclamation obligations is presented in note 5 to the condensed consolidated financial statements. The Company has provided guarantees for equipment financing obtained by certain of its contract mining operators totaling approximately $792. The estimated fair value of these guarantees is not significant.

(b) Litigation

     The Company is involved in various legal proceedings from time to time in the normal course of business. In management’s opinion, the Company is not currently involved in any legal proceeding which individually or in the aggregate could have a material effect on the financial condition, results of operations and/or cash flows of the Company.

(11) Discontinued Operations

     On April 14, 2005, the Company sold the assets of its Colorado mining subsidiary, National King Coal LLC, and related trucking subsidiary, Gallup Transportation and Transloading Company, LLC (collectively, “NKC”), to an unrelated third party for cash in the amount of $4,400, plus an amount in cash equal to the fair market value of NKC’s coal inventory, and the assumption by the buyer of certain liabilities of NKC. The Company recorded a gain on the sale of NKC of $704 for the quarter and six months ended June 30, 2005. The results of operations of NKC for all periods have been reported in discontinued operations. National King Coal LLC was previously reported in the Coal Operations segment and Gallup Transportation and Transloading Company, LLC were previously reported in the All Other segment (note 9).

     The following statement of operations data reflects the activity for the discontinued operation for the three months and six months ended June 30, 2005:

		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2005				2005
Total revenues		$	906			$	4,523
Total costs and expenses			1,251				5,607
Gain on sale of discontinued operations			704				704
Income (loss) from operations			359				(380	)
Miscellaneous income			0				1
Income tax benefit (expense) from discontinued operations			93				(93	)
Minority interest in income (loss) from discontinued operations			0				(72	)
Income (loss) from discontinued operations		$	266			$	(214	)

(12) Income Taxes

     The condensed consolidated statements of operations for the six months ended June 30, 2005 include activity both prior to and after the Internal Restructuring and initial public offering. Accordingly, the total income tax provision for the three and six months ended June, 30 2005 is the sum of the provisions for the pre- and post-restructuring periods.

     Prior to February 12, 2005, the minority interest owners and ANR Fund IX Holdings, L.P. owned interests in ANR Holdings, a limited liability company and pass-through entity for income tax purposes. As a pass-through entity, ANR Holdings provides information returns reflecting the allocated income (loss) to the minority interest owners and ANR Fund IX Holdings, L.P based upon their respective ownership percentage and certain special allocations as provided by the limited liability company agreement and the Internal Revenue Code. The income tax consequences of the income (loss) allocated to these owners for the period from January 1, 2005 to February 11, 2005 is not reflected in the financial statements. For the 2005 period, only the income tax expense associated with Alpha NR Holding, Inc., a taxable entity, is included. The primary source of the income tax impact is derived from the allocated income (loss) from ANR Holdings, Alpha Natural Resources, LLC and its operating subsidiaries, all of which are pass-through entities for tax purposes. Subsequent to the Internal Restructuring and initial public offering, all of the income of ANR Holdings is taxed to Alpha Natural Resources, Inc.

     A tax provision of $8,676 was recorded for the three months ended June 30, 2006 on pre-tax income of $31,804, which equates to an effective tax rate of 27.3%. This rate is lower than the federal statutory rate of 35% due primarily to the tax benefits associated with percentage depletion and the extraterritorial income exclusion, partially offset by state income taxes, change in the valuation allowance, and the portion of the stock-based compensation charge associated with the issuance of common stock to management in connection with the Internal Restructuring and initial public offering which is not deductible for tax purposes.

     A tax provision of $11,599 was recorded for the six months ended June 30, 2005 on pre-tax income from continuing operations of $15,323, which equates to an effective tax rate of 75.7%. This rate is higher than the federal statutory rate of 35% due primarily to the majority of the stock-based compensation charge associated with the issuance of common stock to management in connection with the Internal Restructuring and IPO not being deductible for tax purposes. The increase in expected income tax expense related to the stock-based compensation charge is offset in part by the tax benefits associated with percentage depletion, the extraterritorial income exclusion, and taxes not being provided for on the minority interest and pass-through entity owners’ respective shares for the period prior to the restructuring. A tax provision of $18,296 was recorded for the six months ended June 30, 2006 on pre-tax income of $68,635 which equates to an effective tax rate of 26.7%. This rate is lower than the federal statutory rate of 35% due primarily to the tax benefits associated with percentage depletion and the extraterritorial income exclusion, partially offset by state income taxes, change in the valuation allowance, and the portion of the stock-based compensation charge associated with the issuance of common stock to management in connection with the Internal Restructuring and initial public offering which is not deductible for tax purposes.

     The income tax provision from continuing operations and discontinued operations for the three and six months ended June 30, 2005 was as follows:.

		Three months				Six months
		ended				ended
		2005				2005
Continuing operations		$	9,089			$	11,599
Discontinued operations			93				(93	)
		$	9,182			$	11,506

     A reconciliation of the statutory federal income tax expense at 35% to income from continuing operations before income taxes and minority interest, and the actual income tax expense is as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Federal statutory income tax expense		$	11,131			$	12,325			$	24,023			$	5,362
Increases (reductions) in taxes due to:
Percentage depletion allowance			(5,077	)			(4,895	)			(9,941	)			(6,563	)
Extraterritorial income exclusion			(469	)			(521	)			(882	)			(705	)
Deduction for domestic production activities			(101	)			(202	)			(266	)			(279	)
State taxes, net of federal tax impact			806				757				1,771				1,056
Stock-based compensation			1,199				1,300				2,229				13,354
Change in valuation allowance			986				268				989				397
Taxes not provided for minority interest			—				—				—				(1,001	)
Taxes not provided for pass-through entity			—				—				—				(133	)
Other, net			201				57				373				111
Actual income tax expense		$	8,676			$	9,089			$	18,296			$	11,599

     In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the future deductible temporary differences will reverse, management believes it is more likely than not that the Company will realize the benefits of the deferred tax assets, net of the valuation allowance of $104,971, at June 30, 2006.

     During the second quarter, a net deferred tax asset of $4,838 (gross asset of $15,295 less valuation allowance of $10,457) was recorded as a result of the Progress acquisition.

(13) Progress Acquisition

     On May 1, 2006, the Company completed the acquisition of certain coal mining operations in eastern Kentucky from Progress Fuels Corp, a subsidiary of Progress Energy for $28,273, including a preliminary adjustment for working capital. The purchase price is subject to a post-closing adjustment based on actual working capital levels. The Progress acquisition consisted of the purchase of the outstanding capital stock of White Diamond May Coal Co. and Progress Land Corp. and the assets of Kentucky May Coal Co., Inc. The operations acquired are adjacent to Alpha’s Enterprise business unit and has been integrated with Enterprise.

(14) Accumulated Other Comprehensive Income

     The component of accumulated other comprehensive income as of June 30, 2006 represents the unrealized loss on interest rate swaps, which are accounted for as cash flow hedges, in the amount of $525.

(15) New Accounting Pronouncements

     In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that the Company recognize in its financial statements the impact of a tax position if it is more likely than not the position will be sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of Alpha’s 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on its financial statements.

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

     You should read the following discussion and analysis in conjunction with our financial statements and related notes included elsewhere in this report. The combined historical financial information discussed below for all periods prior to the completion of our Internal Restructuring on February 11, 2005, is for ANR Fund IX Holdings, L.P. and Alpha NR Holding, Inc. and subsidiaries, which prior to the completion of our Internal Restructuring were the owners of a majority of the membership interests of ANR Holdings, and for all periods after our Internal Restructuring is for Alpha Natural Resources, Inc., the owner of 100% of the membership interests of ANR Holdings after our Internal Restructuring.

Cautionary Note Regarding Forward Looking Statements

     This report includes 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. These statements, which involve risks and uncertainties, relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable and may also relate to our future prospects, developments and business strategies. We have used the words “anticipate,” “believe,” “could,”, “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project”, “should” and similar terms and phrases, including references to assumptions, in this report to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements.

     The following factors are among those that may cause actual results to differ materially from our forward-looking statements:

	•		market demand for coal, electricity and steel;
	•		future economic or capital market conditions;
	•		weather conditions or catastrophic weather-related damage;
	•		our production capabilities;
	•		the consummation of financing, acquisition or disposition transactions and the effect thereof on our business;
	•		our ability to successfully integrate the operations we acquired in the Nicewonder and Progress acquisitions with our existing operations, and to successfully operate the highway construction business we acquired in the Nicewonder acquisition, as well as our ability to successfully integrate operations we may acquire in the future;
	•		our plans and objectives for future operations and expansion or consolidation;
	•		our relationships with, and other conditions affecting, our customers;
	•		timing of changes in customer coal inventories;
	•		long-term coal supply arrangements;
	•		inherent risks of coal mining beyond our control;
	•		environmental laws, including those directly affecting our coal mining and production, and those affecting our customers’ coal usage;
	•		competition in coal markets;
	•		railroad, barge, truck and other transportation performance and costs;
	•		availability of mining and processing equipment and parts;
	•		our assumptions concerning economically recoverable coal reserve estimates;
	•		availability of skilled employees and other employee workforce factors;
	•		regulatory and court decisions;
	•		future legislation and changes in regulations, governmental policies or taxes;
	•		changes in postretirement benefit obligations;

	•		our liquidity, results of operations and financial condition; and
	•		other factors, including the other factors discussed in “Overview – Coal Pricing Trends and Uncertainties” and “Outlook” below, and the factors discussed in Part I, Item 1A “Risk Factors” section of our annual report on Form 10-K for the year ended December 31, 2005.

     When considering these forward-looking statements, you should keep in mind the cautionary statements in this report and the documents incorporated by reference. We do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by the forward-looking statements contained in this report.

Overview

     We produce, process and sell steam and metallurgical coal from eight regional business units, which, as of July 31, 2006, are supported by 39 active underground mines, 28 active surface mines and 12 preparation plants located throughout Virginia, West Virginia, Kentucky, and Pennsylvania. We also sell coal produced by others through third party purchase contracts or in the over-the-counter market, the majority of which we process and/or blend with coal produced from our mines prior to resale, providing us with a higher overall margin for the blended product than if we had sold the coals separately. For the three months ended June 30, 2006 and six months ended June 30, 2006, sales of steam coal were 4.9 and 9.2 million tons, respectively, which accounted for approximately 66% and 63%, respectively, of our coal sales volume during each of these periods. For the three months ended June 30, 2006 and six months ended June 30, 2006, sales of metallurgical coal, which generally sells at a premium over steam coal, were 2.6 and 5.3 million tons, respectively, which accounted for approximately 34% and 37%, respectively, of our coal sales volume during each of these periods. Our sales of steam coal during the first half of 2006 were made primarily to large utilities and industrial customers in the Eastern region of the United States, and our sales of metallurgical coal during the period were made primarily to steel companies in the Northeastern and Midwestern regions of the United States and in several countries in Europe, Asia and South America. Approximately 37% of our coal sales revenue including freight and handling in the first six months of 2006 was derived from sales made outside the United States, primarily in Canada, Italy, Romania, India, Brazil and Turkey.

     In addition, we generate other revenues from highway construction, equipment and parts sales, equipment repair income, rentals, royalties, commissions, coal handling, terminal and processing fees, and coal and environmental analysis fees. We also record revenue for freight and handling charges incurred in delivering coal to our customers, which we treat as being reimbursed by our customers. However, these freight and handling revenues are offset by equivalent freight and handling costs and do not contribute to our profitability.

     Our business is seasonal, with operating results varying from quarter to quarter. We generally experience lower sales and hence build coal inventory during the winter months primarily due to the freezing of lakes that we use to transport coal to some of our customers. In the first quarter of this year, the lakes opened for shipments earlier than normal due to milder weather, which lessened the impact of this lake effect on our operations in the first quarter of this year.

     Our primary expenses are wages and benefits, supply costs, repair and maintenance expenditures, cost of purchased coal, royalties, freight and handling costs, and taxes incurred in selling our coal. Historically, our cost of coal sales per ton is lower for sales of our produced and processed coal than for sales of purchased coal that we do not process prior to resale.

     We have one reportable segment, Coal Operations, which includes all of our revenues and costs from coal production and sales, freight and handling, rentals, commissions and coal handling and processing operations and coal recovery incidental to our highway construction operations. These revenues and costs included in our Coal Operations segment are reported by us in our coal revenues and cost of coal sales, except for the revenues and costs from rentals, commissions, and coal handling, processing operations and highway construction, which we report in our other revenues and cost of other revenues, respectively.

     In the course of preparing the second quarter financial statements, the Company and its independent auditors identified certain forward purchase and forward sale contracts that are considered derivative instruments under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”) that do not qualify under the “normal purchase and normal sales” exception. Transactions that do not qualify for this exception are required to be marked to market.

     Accordingly, the Company has reviewed these contracts to assess the impact, if any, that mark-to-market adjustments would have had on previously issued financial statements. Upon completion of that review, the Company concluded that previously issued financial statements were not materially misstated.

     At the beginning of the second quarter of 2006, the Company recorded adjustments to mark-to-market all its open contracts for coal sales and purchase in the over-the-counter market (OTC) and certain third party purchase and sales contracts. These adjustments resulted in an increase in coal sales revenue of $3.1 million and a decrease in cost of coal sales of $0.6 million, resulting in a net after-tax increase to net income in the amount of $2.7 million in the quarter. The Company has assessed the impact of these adjustments and does not believe these amounts are material to any previously issued financial statements or to its expected full year results for 2006.

     During the second quarter ended June 30, 2006, the Company recorded as coal sales revenue mark-to-market gains on open OTC coal sales contracts in the amount of $2.9 million and mark-to-market losses on open OTC coal purchase contracts as cost of coal sales in the amount of $2.1 million, resulting in an after-tax net impact of $0.5 million on earnings for the quarter.

     At June 30, 2006, the Company had unrealized gains (losses) on open sales and purchases contracts in the amount of $5.9 million and ($1.6 million), respectively. These open sales and purchases are recorded in prepaid expenses and other current assets and accrued expenses and other current liabilities, respectively.

     Coal Pricing Trends and Uncertainties. During the three months and six months ended June 30, 2006 when compared to the corresponding periods in 2005, prices for our coal increased 8% and 13%, respectively, due to a combination of conditions in the United States and internationally, including an improving U.S. economy, strong growth in the steel sector, limited availability of high-quality coal from competing producers in Central Appalachia, capacity constraints of U.S. nuclear-powered electricity generators, and increased international demand for U.S. coal. This strong coal pricing environment has contributed to our growth in revenues during the three months and six months ended June 30, 2006. However, there has been a slight softening of the spot coal market caused by a mild winter, increased production and some railroad improvements. While our outlook on coal pricing remains positive as noted below under “—Outlook,” future coal prices are subject to factors beyond our control and we cannot predict whether and for how long this strong coal pricing environment will continue. As of July 14, 2006, approximately 3%, 40% and 67% of our planned production for 2006, 2007 and 2008 respectively, including the operations we acquired in the Progress acquisition, was uncommitted and was not yet priced.

     During the first half of 2006, we continued to experience increased costs for purchased coal which have risen with coal prices generally, and increased operating costs for employee wages, and salaries and benefits, diesel fuel, and trucking. We also experienced some disruptions in railroad service during the first six months of 2006, which caused delays in delivering products to customers, lowered sales volume, and increased our internal coal handling costs.

     We continued to experience a tight market for supplies of mining and processing equipment and parts during this quarter, due to increased demand by coal producers attempting to increase production in response to the strong market demand for coal. Although we are attempting to obtain adequate supplies of mining and processing equipment and parts to meet our production forecasts, continued limited availability of equipment and parts could prevent us from meeting those forecasts. The supply of mining and processing equipment and parts is subject to factors beyond our control and we cannot predict whether and for how long this supply market will remain limited.

     We are also experiencing a tight market for skilled mining employees, due to increased demand by coal producers attempting to increase production in response to the strong market demand for coal, and demographic changes as existing miners in Appalachia retire at a faster rate than new miners are added to the Appalachian mining workforce. Coal mining is an experience-oriented industry as to labor skill sets. It takes considerable time for new miners to achieve the productivity rate historically exhibited by the experienced miners. Although we have initiated training programs to create new skilled miners and raise the skill levels of existing miners, continued limited availability of skilled miners could prevent us from being able to meet our production and sales forecasts. The supply of skilled mining employees is subject to factors beyond our control and we cannot predict whether and for how long this employee market will remain limited.

Reconciliation of Non-GAAP Measures

     The following unaudited table reconciles EBITDA and EBITDA, as adjusted, to net income, the mostly directly comparable GAAP measure.

		Three months ended								Six months ended
		June 30,								June 30,
		2006				2005				2006				2005
						(in thousands)
Net income		$	23,128			$	26,393			$	50,339			$	592
Interest expense			10,786				6,647				21,063				12,764
Interest income			(171	)			(191	)			(358	)			(478	)
Income tax expense			8,676				9,182				18,296				11,506
Depreciation, depletion and amortization			34,207				15,048				67,841				29,528
EBITDA (1)			76,626				57,079				157,181				53,912
Minority interest			—				—				—				2,846
EBITDA, as adjusted (1)		$	76,626			$	57,079			$	157,181			$	56,758

Results of Operations

     Summary

     For the quarter ended June 30, 2006, we recorded revenues of $ 495.7 million compared to $417.6 million for the quarter ended June 30, 2005, an increase of $78.0 million. Net income decreased from $26.4 million ($0.43 per diluted share) in the second quarter of 2005 to $23.1 million ($0.36 per diluted share) for the second quarter of 2006. EBITDA, as adjusted, in 2005 and as reconciled to our net income in the table above, was $76.6 million and $57.1 in the second quarter 2006 and 2005 respectively, including the non-cash portion of our stock-based compensation charges of $6.1 million and $3.4 million in the second quarter of 2006 and 2005, respectively.

     We sold 7.5 million tons of coal during the second quarter of 2006, 0.8 million more than the comparable period in 2005. Our Callaway business unit contributed 1.0 million tons for the quarter. Coal margin, which we define as coal revenues less cost of coal sales, divided by coal revenues, increased from 19.4% in 2005 to 20.9% in 2006. Coal margin per ton was $12.20 in the second quarter 2006, a 15.6% increase from the second quarter 2005. Coal margin per ton is calculated as coal sales realization (sales price) per ton less cost of coal sales per ton.

     Revenues

		Three months Ended								Increase
		June 30,								(Decrease)
		2006				2005				$ or Tons				%
		(in thousands, except per ton data)
Coal revenues		$	436,529			$	364,070			$	72,459				20	%
Freight and handling revenues			50,935				48,239				2,696				6	%
Other revenues			8,217				5,327				2,890				54	%
Total revenues		$	495,681			$	417,636			$	78,045				19	%
Tons Sold:
Steam			4,893				3,906				987				25	%
Metallurgical			2,567				2,784				(217	)			(8	)%
Total			7,460				6,690				770				12	%
Coal sales realization per ton:
Steam		$	50.16			$	40.97			$	9.19				22	%
Metallurgical			74.44				73.29				1.15				2	%
Total		$	58.52			$	54.42			$	4.10				8	%

     Coal Revenues. Coal revenues increased by $72.5 million (20%) for the quarter ended June 30, 2006 over the comparable period of 2005 mainly driven by an 8% increase in coal sales realization per ton from $54.42 per ton in the second quarter of 2005 to $58.52 per ton in the second quarter of 2006. The mark-to-market adjustment for forward sales contracts on the OTC market increased revenue by $5.9 million or $0.79 per ton. Our metallurgical coal (met coal) realization per ton increased from $73.29 per ton in the second quarter of 2005 to $74.44 per ton in the second quarter of 2006, or 2%, and steam coal realization per ton increased from $40.97 to $50.16 or 22%, for the reasons discussed in the section titled “Coal Pricing Trends and Uncertainties” above. The mark-to-market adjustment for forward sales contracts on the OTC market increased revenue by $5.9 million or $1.20 per ton for steam coal. Met coal sales accounted for 34% of our coal sales volume in the second quarter of 2006 compared with 42% in the second quarter of 2005. Total tons sold during the second quarter of 2006 were 7.5 million, including 2.6 million tons of met coal and 4.9 million of steam coal. Sales volume for the second quarter of 2005 was 6.7 million tons of which 2.8 million tons were met coal and 3.9 million were steam coal.

     Freight and Handling Revenues. Freight and handling revenues increased to $50.9 million for the three months ended June 30, 2006, an increase of $2.7 million compared with the three months ended June 30, 2005 due to an increase of 0.9 million tons of domestic steam coal shipments, which accounts for approximately $2 million of the increase. The balance is attributable to higher freight rates partially offset by a decrease in export shipments. However, these revenues are offset by equivalent costs and do not contribute to our profitability.

     Other Revenues. Other revenues increased by $2.9 million mainly due to $6.2 million of road construction revenues in the current period, partially offset by a decrease in revenues from our Maxxim Rebuild operation ($1.9 million) and revenues from coal processing fees ($1.9 million). We expect that other revenues generated by Maxxim Rebuild and coal processing fees during the rest of 2006 will also be below last year’s levels. Maxxim Rebuild has concentrated its efforts on Company operations in 2006. In addition, a contract for coal processing terminated at the end of 2005.

     Costs and Expenses

		Three months ended								Increase
		June 30,								(Decrease)
		2006				2005				$				%
		(in thousands, except per ton data)
Cost of coal sales (exclusive of items shown separately below)		$	345,505			$	293,493			$	52,012				18	%
Freight and handling costs			50,935				48,239				2,696				6	%
Cost of other revenues			5,445				4,319				1,126				26	%
Depreciation, depletion and amortization			34,207				15,075				19,132				127	%
Selling, general and administrative expenses (exclusive of depreciation and amortization shown separately above and including stock-based compensation expense in the amount of $5,311 in 2006 and $3,381 in 2005)			18,583				14,870				3,713				25	%

		Three months ended								Increase
		June 30,								(Decrease)
		2006				2005				$				%
		(in thousands, except per ton data)
Total costs and expenses		$	454,675			$	375,996			$	78,679				21	%
Cost of coal sales per ton:
Company mines		$	42.63			$	36.65			$	5.98				16	%
Contract mines (including purchased and processed)			53.40				53.12				0.28				1	%
Total produced and processed			44.39				40.40				3.99				10	%
Purchased and sold without processing			57.82				56.46				1.36				2	%
Cost of coal sales per ton		$	46.32			$	43.87			$	2.45				6	%