**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington, D.C.
      20549**


**Form 10-K**





(Mark
      One)


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




**For
                the fiscal year ended December 31,
                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. 333-124319-17**


**ALPHA
      NR HOLDING, INC.**


*(Exact
      name of registrant as specified in its charter)*





**Delaware**
            
            **02-0590704***(State
                or other jurisdiction of incorporation or
                organization)*
            
            *(I.R.S.
                Employer Identification Number)***One
                Alpha Place, P.O. Box 2345, Abingdon,
                Virginia**
            
            **24212***(Address
                of principal executive offices)*
            
            *(Zip
                Code)*





**Registrant’s
      telephone number, including area code:**


**(276) 619-4410**


**Securities
      registered pursuant to Section 12(b) of the Act:**


**None**


**Securities
      registered pursuant to Section 12(g) of the Act:**


**None**


Indicate
      by check mark whether the registrant is a well-known seasoned issuer, as defined
      in Rule 405 of the Securities
      Act.     Yes  ̈ No þ


Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the
      Act.     Yes þ No  ̈


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, and (2) has been subject to such
      filing requirements for the past
      90 days.     Yes þ No o


Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the
      best of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any
      amendment to this Form 10-K. þ


Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer (as defined in Exchange Act
      Rule 12b-2).


 ̈Large
                accelerated filer
            
            oAccelerated
                filer
            
            þNon-accelerated
                filer


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


The
      registrant’s common equity is not publicly traded. The common stock of the
      registrant’s parent, Alpha Natural Resources, Inc., began trading on the New
      York Stock Exchange on February 15, 2005. There was 65,543,546 shares of Alpha
      Natural Resources, Inc. common stock outstanding on February 1, 2007. There
      are
      100 shares of Alpha NR Holding, Inc. common stock outstanding which are not
      publicly traded and are all held by its parent, Alpha Natural Resources,
      Inc.


The
      registrant meets the conditions set forth in General Instruction I(1)(a) and
      (b)
      of Form 10-K and is therefore filing this form with the reduced disclosure
      format.













**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 have acquired
                with our
                existing operations, 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;





•
            changes
                in, renewal of and acquiring new 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;





•
            the
                geological characteristics of Central and Northern Appalachian coal
                reserves;





•
            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;





•
            decline
                in coal prices;





•
            forward
                sales and purchase contracts not accounted for as a
                hedge;




•
            indemnification
                of certain obligations not being
                met;




•
            continued
                funding of the road construction
                business;




•
            disruption
                in coal supplies; and




•
            Other
                  factors, including the other factors discussed in Item 1A, “Risk
                  Factors” of this report.




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.




-2-
 
 Table of Contents





**2006
      ANNUAL REPORT ON FORM 10-K**


**TABLE
      OF CONTENTS**





**Page****PART I**Item 1.
            
            Business
            4Item 1A.
            
            Risk
                Factors
            21Item
                1B.
            
            Unresolved
                Staff Comments
            39Item 2.
            
            Properties
            40Item 3.
            
            Legal
                Proceedings
            44Item 4.
            
            Submission
                of Matters to a Vote of Security
                Holders
            44**PART II**Item 5.
            
            Market
                for Registrant’s Common Equity, Related Stockholder
                Matters and Issuer Purchases of Equity Securities
            44Item 6.
            
            Selected
                Financial Data
            45Item 7.
            
            Management’s
                Discussion and Analysis of Financial Condition and
                Results of Operation
            50Item 7A.
            
            Quantitative
                and Qualitative Disclosures about Market
                Risk
            68Item 8.
            
            Financial
                Statements and Supplementary Data
            70Item 9.
            
            Changes
                in and Disagreements with Accountants on Accounting and
                Financial Disclosure
            122Item 9A.
            
            Controls
                and Procedures
            122Item 9B.
            
            Other
                Information
            123**PART III**Item 10.
            
            Directors,
                Executive Officers and Corporate
                Governance
            123Item 11.
            
            Executive
                Compensation
            123Item 12.
            
            Security
                Ownership of Certain Beneficial Owners and Management
                and Related Stockholder Matters
            123Item 13.
            
            Certain
                Relationships, Related Transactions, and Director
                Independence
            123Item 14.
            
            Principal
                Accountant Fees and Services
            124**PART IV**Item 15.
            
            Exhibits
                and Financial Statement
                Schedules
            124





EX-12:
                STATEMENT REGARDING COMPUTATION
                OF RATIO OF EARNINGS TO FIXED CHARGESEX-31.A:
                CERTIFICATIONEX-31.B:
                CERTIFICATIONEX-32.A:
                CERTIFICATIONEX-32.B:
                CERTIFICATION




-3-
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            of Contents





**PART I**




**Item1.**
            ***Business***




**Overview**





We
      are a leading Appalachian coal supplier. We produce, process and sell steam
      and
      metallurgical coal from eight regional business units, which, as of February
      1,
      2007, are supported by 38 active underground mines ,
      27
      active surface mines and 10 preparation plants located throughout Virginia,
      West
      Virginia, Kentucky, and Pennsylvania, as well as a road construction business
      in
      West Virginia that recovers coal. We are also actively involved in the purchase
      and resale of coal mined by others, the majority of which we blend with coal
      produced from our mines, allowing us to realize a higher overall margin for
      the
      blended product than we would be able to achieve selling these coals separately.





Steam
      coal, which is primarily purchased by large utilities and industrial customers
      as fuel for electricity generation, accounted for approximately 66% of our
      2006
      coal sales volume. The majority of our steam coal sales volume in 2006 consisted
      of high Btu (above 12,500 Btu content per pound), low sulfur (sulfur content
      of
      1.5% or less) coal, which typically sells at a premium to lower-Btu,
      higher-sulfur steam coal. Metallurgical coal, which is used primarily to make
      coke, a key component in the steel making process, accounted for approximately
      34% of our 2006 coal sales volume. Metallurgical coal generally sells at a
      premium over steam coal because of its higher quality and its value in the
      steelmaking process as the raw material for coke. We believe that the use of
      the
      coal we sell will grow as demand for power and steel
      increases.





During
      2006, we sold a total of 29.1 million tons of steam and metallurgical coal
      and generated coal sales revenues of $1,687.6 million, EBITDA of
      $279.4 million and net income of $128.2 million. We define and
      reconcile EBITDA and explain its importance, in note 3 under “Selected
      Financial Data.” Our coal sales during 2006 consisted of 24.7 million tons of
      produced and processed coal, including 1.4 million tons purchased from
      third parties and processed at our processing plants or loading facilities
      prior
      to resale, and 4.4 million tons of purchased coal that we resold without
      processing. Approximately 68% of the purchased coal in 2006 was blended with
      coal produced from our mines prior to resale. Approximately 35% of our sales
      revenue in 2006 was derived from sales made outside the United States, primarily
      in Canada, Italy, France, India, Brazil, and Turkey.





As
      of
      December 31, 2006, we owned or leased 548.6 million tons of proven and probable
      coal reserves. Of our total proven and probable reserves, approximately 82%
      are
      low sulfur reserves, with approximately 57% having sulfur content below 1.0%.
      Approximately 91% of our total proven and probable reserves have a high Btu
      content which creates more energy per unit when burned compared to coals with
      lower Btu content. We believe that our total proven and probable reserves will
      support current production levels for more than 20 years.





As
      discussed in Note 23 to our financial statements, we have one reportable
      segment — Coal Operations — which consists of our coal extracting,
      processing and marketing operations, as well as our purchased coal sales
      function and certain other coal-related activities, including our recovery
      of
      coal incidental to our road construction operations. Our equipment and part
      sales and equipment repairs operations, terminal services, coal analysis
      services, leasing of mineral rights, and the non-coal recovery portion of
      our road construction operations described below under “— Other
      Operations” are not included in our Coal Operations segment.





**History**





Alpha
      NR Holding, Inc. was formed under the laws of the State of Delaware on
      April 22, 2002 as a subsidiary of First Reserve Fund IX, L.P., to
      serve as a holding company of First Reserve Fund IX, L.P.’s ownership
      interest in the Alpha Natural Resources organization. In December 2002, ANR
      Holdings, LLC (“ANR Holdings”) was formed by First Reserve Fund IX, L.P.
      and ANR Fund IX Holdings, L.P. (referred to as the “First Reserve
      Stockholders” or collectively with their affiliates, “First Reserve”) and our
      management to serve as the top-tier holding company of the Alpha Natural
      Resources organization. On February 11, 2005, our parent, Alpha Natural
      Resources, Inc. succeeded to the business of ANR Holdings in a series of
      internal restructuring transactions which we refer to collectively as the
“Internal Restructuring,” and on February 18, 2005 Alpha Natural Resources,
      Inc. completed an initial public offering of its common stock. When we use
      the
      terms “Alpha,” “we,” “our,” “the Company” and similar terms in this report, we
      mean (1) prior to our Internal Restructuring, ANR Fund IX Holdings,
      L.P. and Alpha NR Holding, Inc. and subsidiaries on a combined basis and
      (2) after our Internal Restructuring, Alpha NR Holding, Inc. and its
      consolidated subsidiaries.





-4-
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            of Contents




On
      December 13, 2002, the First Reserve Stockholders, who then owned 100% of
      the membership interests of ANR Holdings, acquired the majority of the Virginia
      coal operations of Pittston Coal Company (our “Predecessor”), a subsidiary of
      the Brink’s Company (formerly known as The Pittston Company), through
      wholly-owned subsidiaries of ANR Holdings for $62.9 million.





On
      January 31, 2003, wholly owned subsidiaries of ANR Holdings acquired
      Coastal Coal Company, LLC for $67.8 million, and on March 11, 2003,
      ANR Holdings and its subsidiaries acquired the U.S. coal production and
      marketing operations of American Metals and Coal International, Inc. (“AMCI”)
      for $121.3 million. Of the consideration for the U.S. AMCI
      acquisition, $69.0 million was provided in the form of an approximate 44%
      membership interest in ANR Holdings issued to the owners of AMCI, which together
      with the issuances of an approximate 1% membership interest to Madison Capital
      Funding, LLC and Alpha Coal Management reduced the First Reserve Stockholders
      membership interest in ANR Holdings to approximately 55%.





On
      November 17, 2003, we acquired the assets of Mears Enterprises, Inc.
      (“Mears”) for $38.0 million.





On
      April 1, 2004, we acquired substantially all of the assets of Moravian Run
      Reclamation Co., Inc. for five thousand dollars in cash and the assumption
      by us
      of certain liabilities, including four active surface mines and two additional
      surface mines under development, operating in close proximity to and serving
      many of the same customers as our AMFIRE business unit located in
      Pennsylvania.





On
      May 10, 2004, we acquired a coal preparation plant and railroad loading
      facility located in Portage, Pennsylvania and related equipment and coal
      inventory from Cooney Bros. Coal Company for $2.5 million in cash and an
      adjacent coal refuse disposal site from a Cooney family trust for
      $0.3 million in cash.





On
      October 13, 2004, our AMFIRE business unit entered into a coal mining lease
      with Pristine Resources, Inc., a subsidiary of International Steel Group Inc.,
      for the right to deep mine a substantial area of the Upper Freeport Seam in
      Pennsylvania.





As
      discussed above, on February 11, 2005, Alpha Natural Resources, Inc.
      succeeded to the business and became the indirect parent entity of ANR Holdings
      in connection with the Internal Restructuring and, on February 18, 2005,
      completed an initial public offering of its common stock (the “IPO”). Pursuant
      to the Internal Restructuring, Alpha NR Holding, Inc. became a direct,
      wholly-owned subsidiary of Alpha Natural Resources, Inc.





On
      April 14, 2005, we sold the assets of our 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 $4.4 million, 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.





On
      October 26, 2005, we acquired the Nicewonder Coal Group’s coal reserves and
      operations in southern West Virginia and southwestern Virginia. The Nicewonder
      acquisition consisted of the purchase of the outstanding capital stock of White
      Flame Energy, Inc., Twin Star Mining, Inc. and Nicewonder Contracting, Inc.,
      the
      equity interests of Powers Shop, LLC and Buchanan Energy, LLC and substantially
      all of the assets of Mate Creek Energy of W. Va., Inc. and Virginia Energy
      Company, and the business of Premium Energy, Inc. by merger. We paid an
      aggregate purchase price of $328.2 million in the Nicewonder acquisition.
      The operations we acquired from the Nicewonder Coal Group constitute our eighth
      business unit, Callaway Natural Resources.





-5-
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On
      May 1,
      2006, we acquired certain coal mining operations in eastern Kentucky from
      Progress Fuels Corp, a subsidiary of Progress Energy (Progress Acquisition)
      for
      $28.8 million, including adjustments for working capital. The Progress
      Acquisition consisted of the purchase of the outstanding capital stock of
      Diamond May Coal Co. and Progress Land Corp. and the assets of Kentucky May
      Coal
      Co., Inc. The operations acquired are adjacent to our Enterprise business unit
      and have been integrated with Enterprise.





On
      December 28, 2006, we paid $3.3 million and were obligated to make an additional
      contribution of $7.0 million in 2007 for a 94% ownership interest in Gallatin
      Materials LLC (“Gallatin”), a lime manufacturing venture near Cincinnati, Ohio.
      Gallatin plans to construct two rotary pre-heater lime kilns to produce
      lime to be sold primarily to coal-burning utilities as a scrubbing agent for
      removing sulfur dioxide from flue gas, helping them to meet increasingly
      stringent air quality standards under the federal Clean Air Act. The lime will
      also be sold to steel producers for use as flux in electric arc and basic oxygen
      furnaces. The minority owners were granted restricted member interests in
      Gallatin, which vest based on performance criteria approximately three years
      from the closing date and which, if earned in their entirety, would reduce
      our
      ownership to 77.5%. We are committed to providing financing through a $3.8
      million loan and a $2.6 million letter of credit to cover project cost
      overruns.





**Mining
      Methods**





We
      produce coal using two mining methods: underground room and pillar mining using
      continuous mining equipment, and surface mining.





*Underground
      Mining.* Underground mines in the United States are typically operated using one of
      two
      different methods: room and pillar mining or longwall mining. In 2006,
      approximately 58% of our coal production volume from mines operated by our
      subsidiaries’ employees and contractors came from underground mining operations
      using the room and pillar method with continuous mining equipment. In room
      and
      pillar mining, rooms are cut into the coal bed leaving a series of pillars,
      or
      columns of coal, to help support the mine roof and control the flow of air.
      Continuous mining equipment is used to cut the coal from the mining face.
      Generally, openings are driven 20 feet wide, and the pillars are generally
      rectangular in shape, measuring 35-50 feet wide by 35-80 feet long. As
      mining advances, a grid-like pattern of entries and pillars is formed. Shuttle
      cars are used to transport coal to the conveyor belt for transport to the
      surface. When mining advances to the end of a panel, retreat mining may begin.
      In retreat mining, as much coal as is feasible is mined from the pillars that
      were created in advancing the panel, allowing the roof to cave. When retreat
      mining is completed to the mouth of the panel, the mined panel is abandoned.
      The
      room and pillar method is often used to mine smaller coal blocks or thin or
      non-contiguous seams, and seam recovery ranges from 35% to 70%, with higher
      seam
      recovery rates applicable where retreat mining is combined with room and pillar
      mining.





The
      other
      underground mining method commonly used in the United States is the longwall
      mining method, which we do not currently use at any of our mines. In longwall
      mining, a rotating drum is trammed mechanically across the face of coal, and
      a
      hydraulic system supports the roof of the mine while it advances through the
      coal. Chain conveyors then move the loosened coal to an underground mine
      conveyor system for delivery to the surface. Our Central Appalachian reserves
      often include non-contiguous seams of coal that can be extracted at a lower
      cost
      using continuous mining as opposed to the more capital intensive longwall
      method.





*Surface
      Mining.* Surface
      mining is used when coal is found close to the surface. In 2006, approximately
      42% of our coal production volume from mines operated by our subsidiaries’
employees and contractors came from surface mines. This method involves the
      removal of overburden (earth and rock covering the coal) with heavy earthmoving
      equipment and explosives, loading out the coal, replacing the overburden and
      topsoil after the coal has been excavated and reestablishing vegetation and
      plant life and making other improvements that have local community and
      environmental benefit. Overburden is typically removed at our mines using large,
      rubber-tired diesel loaders. Seam recovery for surface mining is typically
      90%
      or more.





-6-
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**Coal
      Characteristics**





In
      general, coal of all geological compositions is characterized by end use as
      either steam coal or metallurgical coal. Heat value, sulfur and ash content,
      and
      volatility, in the case of metallurgical coal, are the most important variables
      in the profitable marketing and transportation of coal. These characteristics
      determine the best end use of a particular type of coal. We mine, process,
      market and transport bituminous coal, characteristics of which are described
      below.





*Heat
      Value.* The heat
      value of coal is commonly measured in British thermal units, or “Btus.” A Btu is
      the amount of heat needed to raise the temperature of one pound of water by
      one
      degree Fahrenheit. All of our coal is bituminous coal, a “soft” black coal with
      a heat content that ranges from 9,500 to 15,000 Btus per pound. This coal is
      located primarily in Appalachia, Arizona, the Midwest, Colorado and Utah and
      is
      the type most commonly used for electric power generation in the United States.
      Bituminous coal is also used for metallurgical and industrial steam purposes.
      Of
      our estimated 548.6 million tons of proven and probable reserves,
      approximately 91% has a heat content above 12,500 Btus per pound.





*Sulfur
      Content.* Sulfur
      content can vary from seam to seam and sometimes within each seam. When coal
      is
      burned, it produces sulfur dioxide, the amount of which varies depending on
      the
      chemical composition and the concentration of sulfur in the coal. Low sulfur
      coals are coals which have a sulfur content of 1.5% or less. Demand for low
      sulfur coal has increased, and is expected to continue to increase, as
      generators of electricity strive to reduce sulfur dioxide emissions to comply
      with increasingly stringent emission standards in environmental laws and
      regulations. Approximately 82% of our proven and probable reserves are low
      sulfur coal.





High
      sulfur coal can be burned in plants equipped with sulfur-reduction technology,
      such as scrubbers, which can reduce sulfur dioxide emissions by 50% to 90%.
      Plants without scrubbers can burn high sulfur coal by blending it with lower
      sulfur coal or by purchasing emission allowances on the open market, allowing
      the user to emit a predetermined amount of sulfur dioxide. Some older coal-fired
      plants have been retrofitted with scrubbers, although most have shifted to
      lower
      sulfur coals as their principal strategy for complying with Phase II of the
      Clean Air Act’s Acid Rain regulations. We expect that any new coal-fired
      generation plant built in the United States will use clean coal-burning
      technology.





*Ash &
      Moisture Content.* Ash is
      the inorganic residue remaining after the combustion of coal. As with sulfur
      content, ash content varies from seam to seam. Ash content is an important
      characteristic of coal because electric generating plants must handle and
      dispose of ash following combustion. The absence of ash is also important to
      the
      process by which metallurgical coal is transformed into coke for use in steel
      production. Moisture content of coal varies by the type of coal, the region
      where it is mined and the location of coal within a seam. In general, high
      moisture content decreases the heat value and increases the weight of the coal,
      thereby making it more expensive to transport. Moisture content in coal, as
      sold, can range from approximately 5% to 30% of the coal’s weight.





*Coking
      Characteristics.* The
      coking characteristics of metallurgical coal are typically measured by the
      coal’s fluidity, ARNU and volatility. Fluidity and ARNU tests measure the
      expansion and contraction of coal when it is heated under laboratory conditions
      to determine the strength of coke that could be produced from a given coal.
      Typically, higher numbers on these tests indicate higher coke strength.
      Volatility refers to the loss in mass, less moisture, when coal is heated in
      the
      absence of air. The volatility of metallurgical coal determines the percentage
      of feed coal that actually becomes coke, known as coke yield. Coal with a lower
      volatility produces a higher coke yield and is more highly valued than coal
      with
      a higher volatility, all other metallurgical characteristics being
      equal.





**Mining
      Operations**





We
      currently have eight regional business units, including two in Virginia, four
      predominately in West Virginia, one in Pennsylvania, and one in Kentucky. As
      of February 1,
      2007, these business units include 10 preparation plants, each of which receive,
      blend, process and ship coal that is produced from one or more of our 65 active
      mines (some of which are operated by third parties under contracts with us),
      using two mining methods, underground room and pillar and surface mining. Our
      underground mines generally consist of one or more single or dual continuous
      miner sections which are made up of the continuous miner, shuttle cars, roof
      bolters and various ancillary equipment. Our surface mines are a combination
      of
      mountain top removal, contour, highwall miner, and auger operations using
      truck/loader equipment fleets along with large production tractors. Most of
      our
      preparation plants are modern heavy media plants that generally have both coarse
      and fine coal cleaning circuits. We employ preventive maintenance and rebuild
      programs to ensure that our equipment is modern and well-maintained. During
      2006, most of our preparation plants also processed coal that we purchased
      from
      third party producers before reselling it to our customers. Within each regional
      business unit, mines have been developed at strategic locations in close
      proximity to our preparation plants and rail shipping facilities. Coal is
      transported from our regional business units to customers by means of railroads,
      trucks, barge lines and ocean-going vessels from terminal
      facilities.




-7-
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The
      following table provides location and summary information regarding our eight
      regional business units and the preparation plants and active mines associated
      with these business units as of February 1, 2007:




**Regional
      Business Units**


**Number
                    and Type of****Mines
                    as of****February1,
                    2007****Regional
                    Business Unit**
                
                **Location**
                
                **Preparation****plant(s)****as
                    of**
                  **February
                    1, 2007**
                
                **Under-ground**
                
                **Surface**
                
                **Total**
                
                **Railroad**
                
                **2006
                    Production of Saleable Tons (in 000’s)(1)**Paramont
                
                Virginia
                
                Toms
                  Creek
                
                
                8
                
                
                6
                
                
                14
                
                
                NS
                
                
                5,640Dickenson-Russell
                
                Virginia
                
                McClure
                  River and Moss#3
                
                
                6
                
                
                1
                
                
                7
                
                
                CSX,
                    NS
                
                
                2,140Kingwood
                
                West
                  Virginia
                
                Whitetail
                
                
                1
                
                
                0
                
                
                1
                
                
                CSX
                
                
                1,414Brooks
                    Run
                
                West
                  Virginia
                
                Erbacon
                
                
                3
                
                
                1
                
                
                4
                
                
                CSX
                
                
                2,749Welch
                
                West
                  Virginia
                
                Litwar
                  and Kepler
                
                
                12
                
                
                0
                
                
                12
                
                
                NS
                
                
                2,998AMFIRE
                
                Pennsylvania
                
                Clymer
                  and Portage
                
                
                5
                
                
                13
                
                
                18
                
                
                NS
                
                
                3,398Enterprise
                
                Kentucky
                
                Roxana
                
                
                3
                
                
                3
                
                
                6
                
                
                CSX
                
                
                2,554Callaway
                
                West
                  Virginia/ Virginia
                
                
                
                
                
                0
                
                
                3
                
                
                3
                
                
                NS
                
                
                3,934Total
                
                
                
                
                
                
                
                
                38
                
                
                27
                
                
                65
                
                
                
                
                
                24,827




(1)
            Includes
                coal purchased from third-party producers that was processed at our
                subsidiaries’ preparation plants in 2006.




CSX
      Railroad = CSX


Norfolk
      Southern Railroad = NS





The
      coal production and processing capacity of our mines and processing plants
      is
      influenced by a number of factors including reserve availability, labor
      availability, environmental permit timing and preparation plant
      capacity.





The
      following provides a brief description of our business units as of February
      1,
      2007





*Paramont.* Our
      Paramont business unit produces coal from eight underground mines using
      continuous miners and the room and pillar mining method. Three of the
      underground mines are operated by independent contractors. The coal from these
      mining operations is transported by truck to the Toms Creek preparation plant
      operated by Paramont, or the McClure River or Moss #3 preparation plants
      operated by Dickenson-Russell. At the preparation plant, the coal is cleaned,
      blended and loaded onto rail for shipment to customers. Paramont also operates
      six truck/loader surface mines. Three of these surface mines are operated by
      independent contractors. The coal produced by the surface mines is transported
      to one of our preparation plants or raw coal loading docks where it is blended
      and loaded onto rail for shipment to customers. During 2006, Paramont purchased
      approximately 208,000 tons of coal from third parties that was blended with
      Paramont’s coal and shipped to our customers. As of February 1, 2007, the
      Paramont business unit was operating at a capacity to ship approximately five
      and one half million tons per year.




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*Dickenson-Russell.* Our
      Dickenson-Russell business unit produces coal from six underground mines using
      continuous miners and the room and pillar mining method. Three of the
      underground mines are operated by independent contractors. The coal from these
      underground mines is transported by truck to the McClure River or Moss #3
      preparation plants operated by Dickenson-Russell or the Toms Creek preparation
      plant operated by Paramont where it is cleaned, blended and loaded on rail
      or
      truck for shipment to customers. The Dickenson-Russell business unit also
      operates a fine coal recovery dredge operation where fine coals that were
      previously discarded by the coal cleaning process are recovered, cleaned, and
      blended with other coals for sale. During 2006, Dickenson-Russell purchased
      approximately 137,000 tons of coal from third parties that was blended with
      Dickenson-Russell’s coal and shipped to our customers. As of February 1, 2007,
      the Dickenson-Russell business unit was operating at a capacity to ship
      approximately two million tons per year.





*Kingwood.* Our
      Kingwood business unit produces coal from one underground mine using continuous
      miners and the room and pillar mining method. The Kingwood operation is staffed
      and operated by Kingwood employees. The coal is belted to the Whitetail
      preparation plant operated by Kingwood where it is cleaned and loaded onto
      rail
      or truck for shipment to customers. The Kingwood business unit has no surface
      mining operations. During 2006, Kingwood purchased approximately 37,000 tons
      of
      coal from third parties that was blended with Kingwood’s coal and shipped to our
      customers. As of February 1, 2007, the Kingwood business unit was operating
      at a
      capacity to ship approximately one and one-half million tons per year.





*Brooks
      Run.* Our
      Brooks Run business unit produces coal from three underground mines using
      continuous miners and the room and pillar mining method. All of the mining
      operations at the Brooks Run business unit are staffed and operated by Brooks
      Run employees. The coal is transported by truck to the Erbacon preparation
      plant
      operated by Brooks Run where it is cleaned, blended and loaded onto rail for
      shipment to customers. The Brooks Run business unit has one surface mine
      operated by Brooks Run employees. Brooks Run purchased approximately 15,000
      tons
      of coal from third parties in 2006. As of February 1, 2007, the Brooks Run
      business unit was operating at a capacity to ship approximately two million
      tons
      per year.





*Welch.* Our
      Welch business unit produces coal from twelve underground mines using continuous
      miners and the room and pillar mining method. Three of the underground mines
      are
      operated by our employees, and the others are operated by independent
      contractors. The coal is transported by truck or rail to the Litwar and Kepler
      preparation plants operated by Welch where it is cleaned, blended and loaded
      onto rail for shipment to customers. The Welch business unit has no active
      surface mining operations as of February 1, 2007. During 2006, the Welch
      business unit purchased approximately 868,000 tons of coal from third parties
      that was blended with other coals and shipped to our customers. As of February
      1, 2007, the Welch business unit was operating at a capacity to ship
      approximately three and one-quarter million tons per year.





*AMFIRE.* Our
      AMFIRE business unit produces coal from five underground mines using continuous
      miners and the room and pillar mining method. All of the underground mining
      operations at AMFIRE are staffed and operated by AMFIRE employees. The
      underground coal is delivered directly by truck to the customer, or to the
      Clymer or Portage coal preparation plants or raw coal loading docks where it
      is
      cleaned, blended and loaded onto rail or truck for shipment to customers. AMFIRE
      also operates thirteen truck/loader surface mines, six of which are operated
      by
      independent contractors. The surface mined coal is delivered directly by truck
      to the customer or transported to the Clymer or Portage coal preparation plants
      or raw coal loading docks where it is blended and loaded onto rail or truck
      for
      shipment to customers. During 2006, AMFIRE purchased approximately 137,000
      tons
      of coal from third parties that was blended with AMFIRE’s coal and shipped to
      our customers. As of February 1, 2007, the AMFIRE business unit was operating
      at
      a capacity to ship approximately three and one-quarter million tons per year.





*Enterprise.* Our
      Enterprise business unit produces coal from three underground mines using
      continuous miners and the room and pillar mining method. Two of the underground
      mining operations at Enterprise are staffed and operated by Enterprise
      employees. The coal from these underground mines is transported by truck to
      the
      Roxana coal preparation plant operated by Enterprise where it is cleaned,
      blended and loaded onto rail for shipment to customers. Enterprise also has
      three truck/loader surface mines, two of which are operated by independent
      contractors. The coal produced by the surface mines is transported to the Roxana
      preparation plant and Pioneer load-out facility where it is blended and loaded
      onto rail for shipment to customers. During 2006, Enterprise purchased
      approximately 45,000 tons of coal from third parties that was blended with
      Enterprise’s coal and shipped to our customers. As of February 1, 2007, the
      Enterprise business unit was operating at a capacity to ship approximately
      three
      million tons per year. The Progress acquisition was included in the Enterprise
      operations beginning May 2006.




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*Callaway.* Our
      Callaway business unit produces coal from three surface mining operations
      operated by our Callaway employees and also recovers coal from the road
      construction business operated by our subsidiary Nicewonder Contracting, Inc.
      (NCI).  Coal from our White Flame Surface mine and the coal recovered by
      NCI is trucked to our Mate Creek load-out facility where it is blended and
      loaded onto rail for shipment to customers. Coal from the Premium Energy Surface
      mine and highwall miner is currently trucked to Arch Coal, Inc’s Mingo Logan
      mining complex, where a portion of the coal is sold to Arch Coal Inc. with
      the
      remaining tons to various other customers. Coal from the Twin Star surface
      mine
      is trucked to our Virginia Energy load-out facility where it is loaded onto
      rail
      cars for transport to customers. The Callaway business unit has no active
      underground operations and did not purchase any coal from third parties during
      2006. As of February 1, 2007, the Callaway business unit was operating at a
      capacity to ship approximately four million tons per year, including coal
      recovered by NCI as part of its road construction business.





**Marketing,
      Sales and Customer Contracts**





Our
      marketing and sales force, which is principally based in Latrobe, Pennsylvania,
      included 35
      employees as of December 31, 2006, and consists of sales managers,
      distribution/traffic managers and administrative personnel. In addition to
      selling coal produced in our eight regional business units, we are also actively
      involved in the purchase and resale of coal mined by others, the majority of
      which we blend with coal produced from our mines. We have coal supply
      commitments with a wide range of electric utilities, steel manufacturers,
      industrial customers and energy traders and brokers. Our overall sales
      philosophy is to focus first on the customer’s individual needs and
      specifications, as opposed to simply selling our production inventory. By
      offering coal of both steam and metallurgical grades blended to provide specific
      qualities of heat content, sulfur and ash and other characteristics relevant
      to
      our customers, we are able to serve a diverse customer base. This diversity
      allows us to adjust to changing market conditions and provides us with the
      ability to sustain high sales volumes and sales prices for our coal. Many of
      our
      larger customers are well-established public utilities who have been customers
      of ours or our Predecessor and acquired companies for decades.





We
      sold a
      total of 29.1 million tons of coal in 2006, consisting of 24.7 million tons
      of
      produced and processed coal and 4.4 million tons of purchased coal that we
      resold without processing. Of our total purchased coal sales of 5.8 million
      tons
      in 2006, approximately 3.9 million tons were blended prior to resale, meaning
      the coal was mixed with coal produced from our mines prior to resale, which
      generally allows us to realize a higher overall margin for the blended product
      than we would be able to achieve selling these coals separately. Approximately
      1.4 million tons of our 2006 purchased coal sales were processed by us, meaning
      we washed, crushed or blended the coal at one of our preparation plants or
      loading facilities prior to resale. We sold a total of 26.7 million tons of
      coal
      in 2005, consisting of 20.6 million tons of produced and processed coal and
      6.1
      million tons of purchased coal that we resold without processing. Of our total
      purchased coal sales of 7.6 million tons in 2005, approximately 5.0 million
      tons
      were blended prior to resale. Approximately 1.5 million tons of our 2005
      purchased coal sales were processed by us. We sold a total of 25.3 million
      tons
      of coal in 2004, consisting of 18.9 million tons of produced and processed
      coal
      and 6.4 million tons of purchased coal that we resold without processing. Of
      our
      total purchased coal sales of 7.3 million tons in 2004, approximately 5.9
      million tons were processed prior to resale. The breakdown of tons sold by
      market served for 2006, 2005 and 2004 is set forth in the table
      below:





**Steam
                Coal Sales(1)**
            
            **Metallurgical
                Coal Sales****Year**
            
            **Tons**
            
            **%of Total Sales**
            
            **Tons**
            
            **%of Total Sales****(In
                millions, except percentages)**2006
            
            
            19.1
            
            
            66
            %
            
            10.0
            
            
            34
            %2005
            
            
            16.7
            
            
            62
            %
            
            10.0
            
            
            38
            %2004
            
            
            15.8
            
            
            63
            %
            
            9.5
            
            
            37
            %




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            of Contents




(1)
            Steam
                coal sales include sales to utility and industrial customers. Sales
                of
                steam coal to industrial customers, who we define as consumers of
                steam
                coal who do not generate electricity for sale to third parties, accounted
                for approximately 4%, 3% and 4% of total sales in 2006, 2005 and
                2004,
                respectively.


(2)
            Our
                sales of steam coal during 2006 and 2005 were made primarily to large
                utilities and industrial customers in the Eastern region of the United
                States, and our sales of metallurgical coal during those years 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.





We
      sold
      coal to over 118 different customers in 2006. Our top ten customers in 2006
      accounted for approximately 38% of 2006 revenues and our largest customer during
      2006 accounted for approximately 7% of 2006 revenues. The following table
      provides information regarding our exports (including to Canada) in 2006, 2005
      and 2004 by revenues and tons sold:





**Year**
            
            **Export
                Tons****Sold**
            
            **Export
                Tons****Sold
                as a****Percentage
                of****Total
                Coal Sales**
            
            **Export
                Sale****Revenues
                (1)**
            
            **Export
                Sale****Revenues
                as a****Percentage
                of****Total
                Revenues****(In
                millions, except percentages)**2006
            
            
            7.2
            
            
            25
            %
            $
            668.8
            
            
            35
            %2005
            
            
            8.4
            
            
            31
            %
            $
            737.1
            
            
            45
            %2004
            
            
            8.1
            
            
            32
            %
            $
            597.9
            
            
            48
            %




(1)
            Export
                sale revenues in 2006 and 2005 include approximately $0.7 million
                and $0.6
                million, respectively, in equipment export sales. All other export
                sale
                revenues are coal sales revenues and freight and handling
                revenues.





Our
      export shipments during 2006, 2005 and 2004 serviced customers in 18, 16 and
      18
      countries, respectively, across North America, Europe, South America, Asia
      and
      Africa. Canada was our largest export market in 2006 ,
      with
      sales to Canada accounting for approximately 17% of export revenues and 6%
      of
      total revenues. Canada was our largest export market in 2005 accounting for
      approximately 15% of export revenues and approximately 7% of total revenues,
      while Japan was our largest export market in 2004, with sales to Japan
      accounting for approximately 23% of export revenues and approximately 11% of
      total revenues. All of our sales are made in U.S. dollars, which reduces foreign
      currency risk. A portion of our sales are subject to seasonal fluctuation,
      with
      sales to certain customers being curtailed during the winter months due to
      the
      freezing of lakes that we use to transport coal to those customers.





As
      is
      customary in the coal industry, when market conditions are appropriate and
      particularly in the steam coal market, we enter into long-term contracts
      (exceeding one year in duration) with many of our customers. These arrangements
      allow customers to secure a supply for their future needs and provide us with
      greater predictability of sales volume and sales prices. A significant majority
      of our steam coal sales are shipped under long-term contracts. The majority
      of
      the metallurgical coal sales contracts we entered into during 2004 and 2005
      were
      long-term contracts. During 2006, approximately 63% and 45% of our steam and
      metallurgical coal sales volume, respectively, was delivered pursuant to
      long-term contracts and during 2005, approximately 86% and 75% of our steam
      and
      metallurgical coal sales volume, respectively, was delivered pursuant to
      long-term contracts.





At
      February 5, 2007, 83% of our planned 2007 production was committed and priced
      and 7% was committed and unpriced, with approximately 2.0 million tons
      uncommitted. Committed steam coal prices for 2007 average $48 to $49 per ton
      and
      committed metallurgical prices average $72 to $73 per ton. Approximately 43%
      of
      our planned production in 2008 was committed at February 5, 2007. At December
      31, 2006, we had commitments to purchase 2.4 million tons of coal during
      2007.





The
      terms
      of our contracts result from bidding and negotiations with customers.
      Consequently, the terms of these contracts typically vary significantly in
      many
      respects, including price adjustment features, provisions permitting
      renegotiation or modification of coal sale prices, coal quality requirements,
      quantity parameters, flexibility and adjustment mechanisms, permitted sources
      of
      supply, treatment of environmental constraints, options to extend and force
      majeure, suspension, termination and assignment provisions, and provisions
      regarding the allocation between the parties of the cost of complying with
      future governmental regulations.




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**Distribution**





We
      employ transportation specialists who negotiate freight and terminal agreements
      with various providers, including railroads, trucks, barge lines, and terminal
      facilities. Transportation specialists also coordinate with customers, mining
      facilities and transportation providers to establish shipping schedules that
      meet the customer’s needs. Our produced and processed coal is loaded from our
      ten preparation plants and in certain cases directly from our mines. The coal
      we
      purchased is loaded in some cases directly from mines and preparation plants
      operated by third parties or from an export terminal. Virtually all of our
      coal
      is transported from the mine to our preparation plants by truck or rail, and
      then from the preparation plant to the customer by means of railroads, trucks,
      barge lines and ocean-going vessels from terminal facilities. Rail shipments
      constituted approximately 73% of total shipments of coal volume produced and
      processed coal from our mines to the preparation plant to the customer in 2006.
      The balance was shipped from our preparation plants, loadout facilities or
      mines
      via truck. In 2006, approximately 8% of our coal sales were ultimately delivered
      to customers through transport on the Great Lakes, approximately 12% was moved
      through the Norfolk Southern export facility at Norfolk, Virginia, approximately
      4% was moved through the coal export terminal at Newport News, Virginia operated
      by Dominion Terminal Associates, 2% was moved through the export terminal at
      Baltimore, Maryland, and approximately 1% was moved through an export terminal
      at New Orleans, LA. We own a 32.5%
      interest in the coal export terminal at Newport News, Virginia operated by
      Dominion Terminal Associates. See “— Other Operations.”





**Competition**





With
      respect to our U.S. customers, we compete with numerous coal producers in
      the Appalachian region and with a large number of western coal producers in
      the
      markets that we serve. Competition from coal with lower production costs shipped
      east from western coal mines has resulted in increased competition for coal
      sales in the Appalachian region. We face limited competition from imports for
      our domestic customers. In 2006, only 3% of total U.S. coal consumption was
      imported. Excess industry capacity, which has occurred in the past, tends to
      result in reduced prices for our coal. The most important factors on which
      we
      compete are delivered coal price, coal quality and characteristics,
      transportation costs from the mine to the customer and the reliability of
      supply. Demand for coal and the prices that we will be able to obtain for our
      coal are closely linked to coal consumption patterns of the domestic electric
      generation industry, which has accounted for approximately 92% of domestic
      coal
      consumption over the last five years. These coal consumption patterns are
      influenced by factors beyond our control, including the demand for electricity,
      which is significantly dependent upon summer and winter temperatures in the
      United States, environmental and other government regulations, technological
      developments and the location, availability, quality and price of competing
      fuels for power such as natural gas, nuclear, fuel oil and alternative energy
      sources such as hydroelectric power. Demand for our low sulfur coal and the
      prices that we will be able to obtain for it will also be affected by the price
      and availability of high sulfur coal, which can be marketed in tandem with
      emissions allowances in order to meet Clean Air Act requirements.





Demand
      for our metallurgical coal and the prices that we will be able to obtain for
      metallurgical coal will depend to a large extent on the demand for U.S. and
      international steel, which is influenced by factors beyond our control,
      including overall economic activity and the availability and relative cost
      of
      substitute materials. In the export metallurgical market, during 2006 and 2005,
      we largely competed with producers from Australia, Canada, and other
      international producers of metallurgical coal.





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
      addition to competition for coal sales in the United States and internationally,
      we compete with other coal producers, particularly in the Appalachian region,
      for the services of experienced coal industry employees at all levels of our
      mining operations.




-12-
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            of Contents




**Other
      Operations**





We
      have
      other operations and activities in addition to our normal coal production,
      processing and sales business, including:





*Road
      Construction Business.* NCI
      operates a road construction business under a contract with the State of West
      Virginia Department of Transportation. Pursuant to the contract, NCI is building
      approximately 11 miles of rough grade road in West Virginia over the next four
      to five years and, in exchange, NCI will be compensated by West Virginia based
      on the number of cubic yards of material excavated and/or filled to create
      a
      road bed, as well as for certain other cost components. As the road is
      constructed any coal recovered is sold by NCI as part of its coal operations.





*Maxxim
      Rebuild.* We own
      Maxxim Rebuild Co., LLC, a mining equipment company with facilities in Kentucky
      and Virginia. This business largely consists of repairing and reselling
      equipment and parts used in surface mining and in supporting preparation plant
      operations. Maxxim Rebuild had revenues of $34.9 million for 2006, of which
      approximately 86% was generated by services provided to our other subsidiaries
      and approximately 14% was generated by sales to external customers, including
      $0.7 million to export customers.





*Dominion
      Terminal Associates.* Through
      our subsidiary Alpha Terminal Company, LLC, we hold a 32.5% interest in Dominion
      Terminal Associates, a 22 million-ton annual capacity coal export terminal
      located in Newport News, Virginia. The terminal, constructed in 1982, provides
      the advantages of state of the art unloading/transloading equipment with ground
      storage capability, providing producers with the ability to custom blend export
      products without disrupting mining operations. During 2006, we shipped a total
      of 1.2 million tons of coal to our customers through the terminal. We make
      periodic cash payments in respect of the terminal for operating expenses, which
      are partially offset by payments we receive for transportation incentive
      payments and for renting our unused storage space in the terminal to third
      parties. Our cash payments for expenses for the terminal in 2006 were
      $4.9 million, partially offset by payments received in 2006 of
      $1.7 million. The terminal is held in a partnership with subsidiaries of
      three other companies, Dominion Energy (20%), Arch Coal (17.5%) and Peabody
      Energy (30%). We and our other interested partners are currently pursuing an
      investment of approximately $35.0 million for the construction of a new
      coal import facility at the terminal. Engineering and permitting work on the
      project has been completed. Construction could begin in the second half of
      2007.





*Gallatin
      Materials LLC.* On
      December 28, 2006, the Company paid $3.3 million and we are obligated to make
      an
      additional contribution of $7.0 million in 2007 for a 94% ownership interest
      in
      Gallatin Materials LLC (Gallatin), a lime manufacturing venture near Cincinnati,
      Ohio. Gallatin plans to construct two rotary pre-heater lime kilns to produce
      lime to be sold primarily to coal-burning utilities as a scrubbing agent for
      removing sulfur dioxide from flue gas. The lime will also be sold to steel
      producers for use as flux in electric arc and basic oxygen
      furnaces.





*Miscellaneous.* We
      engage in the sale of certain non-strategic assets such as timber, gas and
      oil
      rights as well as the leasing and sale of non-strategic surface properties
      and
      reserves. We also provide coal and environmental analysis services.





**Employee
      and Labor Relations**





Approximately
      94% of our coal production in 2006 came from mines operated by union-free
      employees, and as of December 31, 2006, over 92% of 3,546 employees were
      union-free. We believe our employee relations are good, and there have been
      no
      material work stoppages at any of our properties in the past ten years.





**Environmental
      and Other Regulatory Matters**





Federal,
      state and local authorities regulate the U.S. coal mining industry with
      respect to matters such as employee health and safety, permitting and licensing
      requirements, air quality standards, water pollution, plant and wildlife
      protection, the reclamation and restoration of mining properties after mining
      has been completed, the discharge of materials into the environment, surface
      subsidence from underground mining, and the effects of mining on groundwater
      quality and availability. These regulations and legislation have had, and will
      continue to have, a significant effect on our production costs and our
      competitive position. Future legislation, regulations or orders, as well as
      future interpretations and more rigorous enforcement of existing laws,
      regulations or orders, may require substantial increases in equipment and
      operating costs to us and delays, interruptions, or a termination of operations,
      the extent of which we cannot predict. We intend to respond to these regulatory
      requirements at the appropriate time by implementing necessary modifications
      to
      facilities or operating procedures. Future legislation, regulations or orders
      may also cause coal to become a less attractive fuel source, thereby reducing
      coal’s share of the market for fuels used to generate electricity. As a result,
      future legislation, regulations or orders may adversely affect our mining
      operations, cost structure or the ability of our customers to use coal.





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We
      endeavor to conduct our mining operations in compliance with all applicable
      federal, state, and local laws and regulations. However, because of extensive
      and comprehensive regulatory requirements, violations occur from time to time.
      None of the violations or the monetary penalties assessed upon us since our
      inception in 2002 has been material. Nonetheless, we expect that future
      liability under or compliance with environmental and safety requirements could
      have a material effect on our operations or competitive position. Under some
      circumstances, substantial fines and penalties, including revocation or
      suspension of mining permits, may be imposed under the laws described below.
      Monetary sanctions and, in severe circumstances, criminal sanctions may be
      imposed for failure to comply with these laws.





As
      of December 31, 2006, we had accrued $77.3 million for reclamation
      liabilities and mine closures, including $7.8 million of current
      liabilities.





*Mining
      Permits and Approvals.* Numerous
      governmental permits or approvals are required for mining operations. When
      we
      apply for these permits and approvals, we may be required to present data to
      federal, state or local authorities pertaining to the effect or impact that
      any
      proposed production or processing of coal may have upon the environment. The
      authorization, permitting and/or implementation requirements imposed by any
      of
      these authorities may be costly and time consuming and may delay commencement
      or
      continuation of mining operations. Regulations also provide that a mining permit
      or modification can be delayed, refused or revoked if an officer, director
      or a
      stockholder with a 10% or greater interest in the entity is affiliated with
      or
      is in a position to control another entity that has outstanding permit
      violations. Thus, past or ongoing violations of federal and state mining laws
      could provide a basis to revoke existing permits and to deny the issuance of
      additional permits.





In
      order
      to obtain mining permits and approvals from state regulatory authorities, mine
      operators, including us, must submit a reclamation plan for restoring, upon
      the
      completion of mining operations, the mined property to its prior or better
      condition, productive use or other permitted condition. Typically, we submit
      our
      necessary permit applications several months, or even years, before we plan
      to
      begin mining a new area. Although permits may take six months or longer to
      obtain, in the past we have generally obtained our mining permits without
      significant delay. However, we cannot be sure that we will not experience
      difficulty in obtaining mining permits in the future.





*Surface
      Mining Control and Reclamation Act.* The
      Surface Mining Control and Reclamation Act of 1977 (“SMCRA”), which is
      administered by the Office of Surface Mining Reclamation and Enforcement
      (“OSM”), establishes mining, environmental protection and reclamation standards
      for all aspects of surface mining as well as many aspects of deep mining. Mine
      operators must obtain SMCRA permits and permit renewals from the OSM, or from
      the applicable state agency if the state agency has obtained primacy. A state
      agency may achieve primacy if the state regulatory agency develops a mining
      regulatory program that is no less stringent than the federal mining regulatory
      program under SMCRA. States in which we have active mining operations have
      achieved primacy and a state agency is the regulatory authority for SMCRA
      permitting and enforcement activities.





SMCRA
      permit provisions include a complex set of requirements which include, but
      are
      not limited to: coal prospecting; mine plan development; topsoil removal,
      storage and replacement; selective handling of overburden materials; mine pit
      backfilling and grading; disposal of excess spoil; protection of the hydrologic
      balance; subsidence control for underground mines; surface drainage control;
      mine drainage and mine discharge control and treatment; post mining land use
      development; and re-vegetation.





The
      mining permit application process is initiated by collecting baseline data
      to
      adequately characterize the pre-mine environmental condition of the permit
      area.
      This work includes, but is not limited to, surveys and/or assessments of the
      following: cultural and historical resources; geology, including soils; existing
      vegetation; benthics; wildlife; potential for endangered species; surface and
      ground water hydrology; climatology; streams; and wetlands. The geologic data
      is
      used to define and model the soil and rock structures that will be encountered
      during the mining process. The geologic data and data from the other surveys
      and/or assessments are used to develop the mining and reclamation plans
      presented in the permit application. The mining and reclamation plans
      incorporate the provisions and performance standards of the state’s equivalent
      SMCRA regulatory program, and are also used to support applications for other
      authorizations and/or permits required to conduct coal mining activities. Also
      included in the permit application is information used for documenting surface
      and mineral ownership, variance requests, access roads, bonding information,
      mining methods, mining phases, other agreements that may relate to coal, other
      minerals, oil and gas rights, water rights, permitted areas, and ownership
      and
      control information required to determine compliance with OSM’s Applicant
      Violator System, including the mining and compliance history of officers,
      directors and principal owners of the entity.





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Once
      a permit application is prepared and submitted to the regulatory agency, it
      goes
      through an administrative completeness review and a thorough technical review.
      Also, before a SMCRA permit is issued, a mine operator must submit a bond or
      otherwise secure the performance of all reclamation obligations. After the
      application is submitted, a public notice or advertisement of the proposed
      permit is required to be given, which begins a notice period that is followed
      by
      a public comment period before a permit can be issued. It is not uncommon for
      a
      SMCRA mine permit application to take over a year to prepare, depending on
      the
      size and complexity of the mine, and anywhere from six months to two years
      or
      even longer for the permit to be issued. The variability in time frame required
      to prepare the permit and issue the permit can be attributed primarily to the
      various regulatory authorities’ discretion in the handling of comments and
      objections relating to the project received from the general public and other
      agencies. Also, it is not uncommon for a permit to be delayed as a result of
      litigation related to the specific permit or another related company’s
      permit.





In
      addition to the bond requirement for an active or proposed permit, the Abandoned
      Mine Land Fund, which was created by SMCRA, requires a fee on all coal
      produced .
      The
      current fee is $0.35 per ton on surface-mined coal and $0.15 per ton
      on deep-mined coal, but tax rate revisions were recently approved and will
      decrease to $0.315 per surface-mined ton and $0.135 per deep-mined ton in
      October 2007. Further reductions will occur in October 2012. The main purpose
      of
      the fee proceeds is to fund the reclamation of mine lands closed or abandoned
      prior to SMCRA’s adoption in 1977. In 2006, we recorded $5.0 million of
      expense related to this reclamation tax.





SMCRA
      stipulates compliance with many other major environmental statutes, including:
      the Clean Air Act; Clean Water Act; Resource Conservation and Recovery Act
      (“RCRA”) and Comprehensive Environmental Response, Compensation and Liability
      Act (“CERCLA” or “Superfund”).





*Surety
      Bonds.* Mine
      operators are often required by federal and/or state laws to assure, usually
      through the use of surety bonds, payment of certain long-term obligations
      including, but not limited to, mine closure or reclamation costs, federal and
      state workers’ compensation costs, coal leases and other miscellaneous
      obligations. Although surety bonds are usually noncancelable during their term,
      many of these bonds are renewable on a yearly basis. The costs of these bonds
      have increased in recent years while the market terms of surety bonds have
      generally become more unfavorable to mine operators. These changes in the terms
      of the bonds have been accompanied by a decrease in recent years in the number
      of companies willing to issue surety bonds. We have a committed bonding facility
      with Travelers Casualty and Surety Company of America, pursuant to which
      Travelers has agreed, subject to certain conditions, to issue surety bonds
      on
      our behalf in a maximum amount of $150.0 million. During the fourth quarter
      of 2006, we also entered into a committed bonding facility with the Chubb Group
      of Insurance Companies. Chubb has agreed, subject to certain conditions, to
      issue surety bonds on our behalf in a maximum amount of $50.0 million. As of
      December 31, 2006, we have posted an aggregate of $138.0 million in
      reclamation bonds and $10.4 million of other types of bonds under these
      facilities.





*Clean
      Air Act.* The
      Clean Air Act and comparable state laws that regulate air emissions affect
      coal
      mining operations both directly and indirectly. Direct impacts on coal mining
      and processing operations include Clean Air Act permitting requirements and/or
      emission control requirements relating to particulate matter which may include
      controlling fugitive dust. The Clean Air Act indirectly affects coal mining
      operations by extensively regulating the emissions of fine particulate matter
      measuring 2.5 micrometers in diameter or smaller, sulfur dioxide, nitrogen
      oxides, mercury and other compounds emitted by coal-fired electricity generating
      plants. Continued tightening of the already stringent regulation of emissions
      from coal-fired power plants could eventually reduce the demand for
      coal.





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Clean
      Air
      Act requirements that may directly or indirectly affect our operations include
      the following:




•
            *Acid
                Rain.*Title IV of the Clean Air Act required a two-phase reduction of
                sulfur dioxide emissions by electric utilities. Phase II became
                effective in 2000 and applies to all coal-fired power plants generating
                greater than 25 Megawatts. Generally, the affected electricity generators
                have sought to meet these requirements by switching to lower sulfur
                fuels,
                installing pollution control devices, reducing electricity generating
                levels or purchasing sulfur dioxide emission allowances. Although
                we
                cannot accurately predict the future effect of this Clean Air Act
                provision on our operations, we believe that implementation of
                Phase II has resulted in, and will continue to result in, an upward
                pressure on the price of lower sulfur coals, as coal-fired power
                plants
                continue to comply with the more stringent restrictions of
                Title IV.





•
            *Fine
                Particulate Matter.*The Clean Air Act requires the U.S. Environmental Protection Agency
                (the “EPA”) to set standards, referred to as National Ambient Air Quality
                Standards (“NAAQS”), for certain pollutants. Areas that are not in
                compliance (referred to as “non-attainment areas”) with these standards
                must take steps to reduce emissions levels. For example, NAAQS currently
                exist for particulate matter with an aerodynamic diameter less than
                or
                equal to 10 microns, or PM10, and for fine particulate matter with
                an
                aerodynamic diameter less than or equal 2.5 microns, or PM2.5. The
                EPA
                designated all or part of 225 counties in 20 states as well as the
                District of Columbia as non-attainment areas with respect to the
                PM2.5
                NAAQS. Individual states must identify the sources of emissions and
                develop emission reduction plans. These plans may be state-specific
                or
                regional in scope. Under the Clean Air Act, individual states have
                up to
                twelve years from the date of designation to secure emissions reductions
                from sources contributing to the problem. Meeting the new PM2.5 standard
                may require reductions of nitrogen oxide and sulfur dioxide emissions.
                Future regulation and enforcement of the new PM2.5 standard will
                affect
                many power plants, especially coal-fired plants and all plants in
                “non-attainment” areas.





•
            *Ozone.*Significant additional emissions control expenditures will be required
                at
                coal-fired power plants to meet the current NAAQS for ozone. Nitrogen
                oxides, which are a by-product of coal combustion, are classified
                as an
                ozone precursor. Accordingly, emissions control requirements for
                new and
                expanded coal-fired power plants and industrial boilers will continue
                to
                become more demanding in the years ahead. For example, in November
                2005,
                EPA issued a final rule, called the Phase 2 Ozone Rule, describing
                the action that states must take to reduce ground level ozone. The
                EPA
                designated counties in 32 states as non-attainment areas under the
                new standard. These states will have until June 2007 to develop plans,
                referred to as state implementation plans or SIPs, for pollution
                control
                measures that allow them to comply with the
                standards.





•
            *NOx
                SIP Call.*The NOx SIP Call program was established by the EPA in October 1998
                to
                reduce the transport of ozone on prevailing winds from the Midwest
                and
                South to states in the Northeast, which said they could not meet
                federal
                air quality standards because of migrating pollution. The program
                is
                designed to reduce nitrous oxide emissions by one million tons per
                year in
                22 eastern states and the District of Columbia. Installation of additional
                control measures, such as selective catalytic reduction devices,
                required
                under the final rules will make it more costly to operate coal-fired
                electricity generating plants, thereby making coal a less attractive
                fuel.





•
            *Clean
                Air Interstate Rule.*The EPA finalized the Clean Air Interstate Rule (CAIR) on
                March 10, 2005. The new CAIR calls for power plants in 29 eastern
                states and the District of Columbia to reduce emission levels of
                sulfur
                dioxide and nitrous oxide. The rule requires states to regulate power
                plants under a cap and trade program similar to the system now in
                effect
                for acid deposition control and to that proposed by the Clear Skies
                Initiative. When fully implemented, this rule is expected to reduce
                regional sulfur dioxide emissions by over 70% and nitrogen oxides
                emissions by over 60% from 2003 levels. The stringency of the cap
                may
                require many coal-fired electricity generation plants to install
                additional pollution control equipment, such as wet scrubbers, which
                could
                decrease the demand for low sulfur coal at these plants and thereby
                potentially reduce market prices for low sulfur coal. Emissions are
                permanently capped and cannot increase. The rule is also subject
                to
                judicial challenge, which makes its impact difficult to
                assess.




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•
            *Clean
                Air Mercury Rule.*On March 15, 2005, the EPA issued the Clean Air Mercury Rule to
                permanently cap and reduce mercury emissions from coal-fired power
                plants.
                The Clean Air Mercury Rule establishes mercury emissions limits from
                new
                and existing coal-fired power plants and creates a market-based
                cap-and-trade program that is expected to reduce nationwide utility
                emissions of mercury in two phases. Stricter limitations on mercury
                emissions from power plants may adversely affect the demand for coal.
                In
                2006, EPA proposed a federal plan to directly regulate mercury emissions
                from coal-fired power plants where certain states have not provided
                their
                own plans.





•
            ***Carbon
                Dioxide*.
                In February 2003, a number of states notified the EPA that they planned
                to
                sue the agency to force it to set new source performance standards
                for
                utility emissions of carbon dioxide and to tighten existing standards
                for
                sulfur dioxide and particulate matter for utility emissions. In June
                2003,
                three of these states sued the EPA seeking a court order requiring
                the EPA
                to designate carbon dioxide as a criteria pollutant and to issue
                a new
                NAAQS for carbon dioxide. In February 2004, EPA entered into a consent
                decree with parties including the states that had given notice of
                intent
                to sue in 2003 to compel the Agency to set new source performance
                standards. Under the consent decree, EPA promulgated final amendments
                to
                the new source performance standards for utility and industrial boilers
                in
                February 2006. In April 2006, ten states, the District of Columbia,
                and
                New York City petitioned the United States Court of Appeals for the
                District of Columbia Circuit for review of those new source performance
                standards for utility and industrial boilers, claiming that the EPA
                improperly refused to regulate carbon dioxide as a criteria pollutant
                and
                that the standards for sulfur dioxide and nitrogen oxides are
                insufficient. In June 2006, the United States Court of Appeals heard
                oral
                argument in a public nuisance action filed by eight states (Connecticut,
                Delaware, Maine, New Hampshire, New Jersey, New York, and Vermont)
                and New
                York City to curb carbon dioxide emissions from power plants. In
                November
                2006, the United States Supreme Court heard oral argument in a case
                that
                commenced in June 2003 challenging the EPA’s refusal to regulate carbon
                dioxide and other greenhouse gas emissions from new motor vehicles
                on the
                ground that it lacks the authority to list carbon dioxide as a criteria
                pollutant. If these lawsuits result in the issuance of a court order
                requiring the EPA to set emission limitations for carbon dioxide,
                this in
                turn could reduce the amount of coal our customers would purchase
                from us.





•
            *Regional
                Emissions Trading*.
                In December 2005, seven Northeastern states (Connecticut, Delaware,
                Maine,
                New Hampshire, New Jersey, New York, and Vermont) signed the Regional
                Greenhouse Gas Initiative (RGGI) Agreement, calling for a ten percent
                reduction of carbon dioxide emissions by 2019, with compliance to
                begin
                January 1, 2009. Maryland signed onto RGGI in July 2006. The RGGI
                final
                model rule was issued on August 15, 2006, and participating states
                are
                developing their state rules. Climate change developments are also
                taking
                place on the west coast in California. In September 2006, California
                adopted greenhouse gas legislation that prohibits long-term base-load
                generation from having a greenhouse gas emissions rate greater than
                that
                of a combined cycle natural gas generator and that allows for long-term
                deals with generators that sequester carbon emissions. In October
                2006, a
                trading partnership between California and the states participating
                in
                RGGI was announced. In December 2006, the California Public Utility
                Commission proposed regulations proposing to set a 1,000 lb/MWh carbon
                dioxide emission standard. The California Public Utility Commission
                is
                expected to adopt final regulations implementing California’s greenhouse
                gas legislation for investor-owned utilities in February 2007. These
                and
                other state climate change rules will likely require additional controls
                on coal-fired utilities and industrial boilers and may even cause
                some
                users of our coal to switch from coal to a lower carbon fuel. There
                can be
                no assurance at this time that a carbon dioxide cap and trade program,
                if
                implemented by the states where our customers operate, will not affect
                the
                future market for coal in this
                region.





•
            ***Regional
                Haze*.
                The EPA has initiated a regional haze program designed to protect
                and to
                improve visibility at and around national parks, national wilderness
                areas
                and international parks. Each state affected by this EPA program
                must
                develop and submit to EPA by mid-2007 a plan to achieve the goals
                of the
                program. The program may result in additional emissions restrictions
                from
                new coal-fired power plants whose operation may impair visibility
                at and
                around federally protected areas. Moreover, this program may require
                certain existing coal-fired power plants to install additional control
                measures designed to limit haze-causing emissions, such as sulfur
                dioxide,
                nitrogen oxides, volatile organic chemicals and particulate matter.
                These
                limitations could affect the future market for
                coal.




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*Clean
      Water Act.* The
      Clean Water Act of 1972 (the “CWA”) and comparable state laws that regulate
      waters of the United States (“Jurisdictional Waters”) can affect coal mining
      operations both directly and indirectly. One of the direct impacts on coal
      mining and processing operations is Clean Water Act permitting requirements
      relating to the discharge of pollutants into Jurisdictional Waters. Indirect
      impacts of the CWA include discharge limits placed on coal-fired power plant
      ash
      handling facilities’ discharges. Continued litigation of CWA issues could
      eventually reduce the demand for coal.





Clean
      Water Act requirements that may directly or indirectly affect our operations
      include, but are not limited to, the following:




•
            *Wastewater
                Discharge Act.*Section 402 of the CWA establishes in-stream water quality criteria
                and treatment standards for wastewater discharge through the National
                Pollutant Discharge Elimination System (“NPDES”). Regular monitoring and
                compliance with reporting requirements and performance standards
                are
                preconditions for the issuance and renewal of NPDES permits that
                govern
                the discharge of pollutants into water. The imposition of future
                restrictions on the discharge of certain pollutants into waters of
                the
                United States could affect the permitting process, increase the costs
                and
                difficulty of obtaining and complying with NPDES permits and could
                adversely affect our coal
                production.





Total
      Maximum Daily Load (“TMDL”) regulations established a process by which states
      designate stream segments as impaired (not meeting present water quality
      standards). Industrial dischargers, including coal mines, will be required
      to
      meet new TMDL effluent standards for these stream segments. Some of our
      operations currently discharge effluents into stream segments that have been
      designated as impaired. The adoption of new TMDL related effluent limitations
      for our coal mines could require more costly water treatment and could adversely
      affect our coal production.





Under
      the CWA, states must conduct an anti-degradation review before approving permits
      for the discharge of pollutants to waters that have been designated as high
      quality. A state’s anti-degradation regulations would prohibit the diminution of
      water quality in these streams. In general, waters discharged from coal mines
      to
      high quality streams may be required to meet new “high quality” standards. This
      could cause increases in the costs, time and difficulty associated with
      obtaining and complying with NPDES permits, and could adversely affect our
      coal
      production.





•
            Dredge
                and Fill Permits Act:*Many
                mining activities, such as the development of refuse impoundments,
                fresh
                water impoundments, refuse fills, valley fills, and other similar
                structures, may result in impacts to Jurisdictional Waters. Jurisdictional
                Waters typically include wetlands, streams (including intermittent
                streams
                and their tributaries) and may, in certain instances, include man-made
                conveyances that have a hydrologic connection to such streams or
                wetlands.
                Prior to conducting such mining activities in jurisdictional waters,
                coal
                companies are required to obtain a Section 404 authorization (referred
                to
                as a dredge or fill permit) from the Army Corps of Engineers (“COE”). The
                COE is authorized to issue two types of Section 404 permits: a general
                permit referred to as a nationwide permit, more specifically a Nationwide
                Permit 21 (“NWP 21”) for surface mining activities and an individual
                permit. The COE may issue nationwide permits for any category of
                activities involving the discharge of dredge or fill material if
                the COE
                determines that such activities are similar in nature and will cause
                only
                minimal adverse environmental effects individually or cumulatively.
                Generally, the COE has used the NWP 21 to authorize impacts to
                jurisdictional waters from mining activities because the NWP process
                is a
                more streamlined permitting approach and consumes less COE resources.*





The
      use of the NWP 21 to authorize stream impacts from mining activities was
      challenged in October 2003 in federal court in southern West Virginia. Although
      the challenge was successful at the district court level, the challenge was
      later overturned at the court of appeals. During the appeal period only, the
      COE
      was enjoined (only in the southern district of West Virginia) from using the
      NWP
      21 to authorize dredge and fill activities for mining impacts. A similar
      challenge was filed in January 2005 prior to the court of appeals overturning
      the West Virginia district court) in federal court in eastern Kentucky and
      no
      decision has been rendered. Although we had operations in both states subject
      to
      the litigation, our Section 404 permits were in place and no production
      activities were interrupted. As a precaution to mitigate the uncertainty
      surrounding the use of the NWP 21 in these areas, we converted certain ongoing
      permits, pending applications, and planned applications from NWP 21 permits
      to
      individual permits. This precautionary step was taken to minimize the potential
      for future production interruptions.




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*Mine
      Safety and Health.* Stringent health and safety standards have been in effect since Congress enacted
      the Coal Mine Health and Safety Act of 1969. The Federal Mine Safety and Health
      Act of 1977 significantly expanded the enforcement of safety and health
      standards and imposed safety and health standards on all aspects of mining
      operations. In addition to federal regulatory programs, all of the states in
      which we operate also have state programs for mine safety and health regulation
      and enforcement. Collectively, federal and state safety and health regulation
      in
      the coal mining industry is perhaps the most comprehensive and pervasive system
      for protection of employee health and safety affecting any segment of
      U.S. industry. In reaction to the recent mine accidents in West Virginia,
      state and federal legislatures and regulatory authorities have increased
      scrutiny of mine safety matters and passed more stringent laws governing mining.
      For example, in 2006, Congress enacted the Mine Improvement and New Emergency
      Response Act of 2006 (“MINER Act”), which imposed additional burdens on coal
      operators, including (i) obligations related to (a) the development of new
      emergency response plans that address post-accident communications, tracking
      of
      miners, breathable air, lifelines, training and communication with local
      emergency response personnel, (b) establishing additional requirements for
      mine
      rescue teams, and (c) promptly notifying federal authorities in the event of
      a
      certain events, (ii) increased penalties for violations of the applicable
      federal laws and regulations, and (iii) the requirement that new standards
      be
      implemented regarding the manner in which closed areas of underground mines
      are
      sealed, and (iv) other matters. Various states also have enacted their own
      new
      laws and regulations addressing many of these same subjects. While existing
      and
      proposed regulations have a significant effect on our operating costs, our
      U.S. competitors are subject to the same degree of regulation.





Under
      the Black Lung Benefits Revenue Act of 1977 and the Black Lung Benefits Reform
      Act of 1977, as amended in 1981, each coal mine operator must secure payment
      of
      federal black lung benefits to claimants who are current and former employees
      and to a trust fund for the payment of benefits and medical expenses to
      claimants who last worked in the coal industry prior to July 1, 1973. The
      trust fund is funded by an excise tax on production of up to $1.10 per
      ton for deep-mined coal and up to $0.55 per ton for surface- mined coal,
      neither amount to exceed 4.4% of the gross sales price. The excise tax does
      not
      apply to coal shipped outside the United States. In 2006, we recorded
      $14.8 million of expense related to this excise tax.





*Coal
      Industry Retiree Health Benefit Act of 1992.* Unlike
      many companies in the coal business, we do not have any liability under the
      Coal
      Industry Retiree Health Benefit Act of 1992 (the “Coal Act”), which requires the
      payment of substantial sums to provide lifetime health benefits to
      union-represented miners (and their dependents) who retired before 1992, because
      liabilities under the Coal Act that had been imposed on our Predecessor or
      acquired companies were retained by the sellers and, if applicable, their parent
      companies, in the applicable acquisition agreements. We should not be liable
      for
      these liabilities retained by the sellers unless they and, if applicable, their
      parent companies, fail to satisfy their obligations with respect to Coal Act
      claims and retained liabilities covered by the acquisition
      agreements.





*Endangered
      Species Act.* The
      federal Endangered Species Act and counterpart state legislation protect species
      threatened with possible extinction. Protection of threatened and endangered
      species may have the effect of prohibiting or delaying us from obtaining mining
      permits and may include restrictions on timber harvesting, road building and
      other mining or agricultural activities in areas containing the affected species
      or their habitats. A number of species indigenous to the areas in which we
      operate are protected under the Endangered Species Act. Based on the species
      that have been identified to date and the current application of applicable
      laws
      and regulations, however, we do not believe there are any species protected
      under the Endangered Species Act that would materially and adversely affect
      our
      ability to mine coal from our properties in accordance with current mining
      plans. The U. S. Fish and Wildlife Service is working closely with OSM and
      State
      regulatory agencies to insure that Threatened and Endangered (T&E) species
      are protected from mining-related impacts. Should more stringent protective
      measures be applied to these T&E species or to their critical habitat, then
      we could experience increased operating costs or difficulty in obtaining future
      mining permits.





*Resource
      Conservation and Recovery Act.* The RCRA
      may affect coal mining operations by establishing requirements for the
      treatment, storage, and disposal of hazardous wastes. Currently, certain coal
      mine wastes, such as overburden and coal cleaning wastes, are exempted from
      hazardous waste management.





Subtitle
      C of RCRA exempted fossil fuel combustion wastes from hazardous waste regulation
      until the EPA completed a report to Congress and made a determination on whether
      the wastes should be regulated as hazardous. In a 1993 regulatory determination,
      the EPA addressed some high volume-low toxicity coal combustion wastes generated
      at electric utility and independent power producing facilities, such as coal
      ash. In May 2000, the EPA concluded that coal combustion wastes do not warrant
      regulation as hazardous under RCRA. The EPA is retaining the hazardous waste
      exemption for these wastes. However, the EPA has determined that national
      non-hazardous waste regulations under RCRA Subtitle D are needed for coal
      combustion wastes disposed in surface impoundments and landfills and used as
      mine-fill, and OSM is currently developing these regulations. The agency also
      concluded beneficial uses of these wastes, other than for mine-filling, pose
      no
      significant risk and no additional national regulations are needed. As long
      as
      this exemption remains in effect, it is not anticipated that regulation of
      coal
      combustion waste will have any material effect on the amount of coal used by
      electricity generators. Most state hazardous waste laws also exempt coal
      combustion waste, and instead treat it as either a solid waste or a special
      waste. Any costs associated with handling or disposal of hazardous wastes would
      increase our customers’ operating costs and potentially reduce their ability to
      purchase coal. In addition, contamination caused by the past disposal of ash
      can
      lead to material liability.




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Due
      to the hazardous waste exemption for coal combustion waste such as ash, much
      coal combustion waste is currently put to beneficial use. For example, in one
      Pennsylvania mine from which we have the right to receive coal, we have used
      some ash as mine fill. The ash we use for this purpose is mixed with lime and
      serves to help alleviate the potential for acid mine drainage.





*Federal
      and State Superfund Statutes.* Superfund and similar state laws may affect coal mining and hard rock operations
      by creating liability for investigation and remediation in response to releases
      of hazardous substances into the environment and for damages to natural
      resources. Under Superfund, joint and several liabilities may be imposed on
      waste generators, site owners or operators and others regardless of fault.
      In
      addition, mining operations may have reporting obligations under the Emergency
      Planning and Community Right to Know Act and the Superfund Amendments and
      Reauthorization Act.





*Climate
      Change.* One
      major by-product of burning coal is carbon dioxide, which is considered a
      greenhouse gas and is a major source of concern with respect to global warming.
      In November 2004, Russia ratified the Kyoto Protocol to the 1992 Framework
      Convention on Global Climate Change (the “Protocol”), which establishes a
      binding set of emission targets for greenhouse gases. With Russia’s accedence,
      the Protocol now has sufficient support and became binding on all those
      countries that have ratified it on February 16, 2005. Four industrialized
      nations have refused to ratify the Protocol — Australia, Liechtenstein,
      Monaco, and the United States. Although the targets vary from country to
      country, if the United States were to ratify the Protocol our nation would
      be
      required to reduce greenhouse gas emissions to 93% of 1990 levels from 2008
      to
      2012. Canada, which accounted for 5.4% of our sales volume in 2006, ratified
      the
      Protocol in 2002. Under the Protocol, Canada will be required to cut greenhouse
      gas emissions to 6% below 1990 levels in 2008 to 2012, either in direct
      reductions in emissions or by obtaining credits through the Protocol’s market
      mechanisms. This could result in reduced demand for coal by Canadian electric
      power generators.





Future
      regulation of greenhouse gases in the United States could occur pursuant to
      future U.S. treaty obligations, statutory or regulatory changes under the
      Clean Air Act, state adoption of a greenhouse regulatory scheme, or otherwise.
      The Bush Administration has proposed a package of voluntary emission reductions
      for greenhouse gases reduction targets which provide for certain incentives
      if
      targets are met. Some states, such as Massachusetts and California, have already
      issued regulations regulating greenhouse gas emissions from large power plants.
      Further, in 2002, the Conference of New England Governors and Eastern Canadian
      Premiers adopted a Climate Change Action Plan, calling for reduction in regional
      greenhouse emissions to 1990 levels by 2010, and a further reduction of at
      least
      10% below 1990 levels by 2020. Increased efforts to control greenhouse gas
      emissions, including the future ratification of the Protocol by the U.S., could
      result in reduced demand for coal.





**Additional
      Information**





As
      a result of our registration statement on Form S-4 being declared effective
      on
      May 11, 2005, we became subject to the informational requirements of the
      Exchange Act of 1934, and, in accordance therewith, we were required to file
      reports and other information with the Securities and Exchange Commission
      (“SEC”) during the fiscal year ended December 31, 2006. Because there were
      fewer than 300 record holders of our senior notes as of January 1, 2007, we
      will not be subject to the informational requirements of the Exchange Act of
      1934 during the fiscal year ending December 31, 2007, and we will also not
      be subject to those informational requirements during future fiscal years in
      which there are fewer than 300 record holders of our senior notes. Under the
      terms of the indenture governing our senior notes, we have agreed that, whether
      or not we are required to do so by the rules and regulations of the SEC, for
      so
      long as any of our senior notes remain outstanding, we will file with the SEC,
      unless the SEC will not accept the filings, all quarterly and annual financial
      information that would be required to be contained in a filing with the SEC
      on
      Forms 10-K and 10-Q if we were required to file those forms. As a result of
      the initial public offering of shares of its common stock, our parent Alpha
      Natural Resources, Inc. became subject to the informational requirements of
      the
      Exchange Act of 1934, and, in accordance therewith, files reports and other
      information with the SEC. You may access and read our SEC filings through our
      website, at www.alphanr.com, or the SEC’s website, at www.sec.gov. You may also
      read and copy any document we file at the SEC’s public reference room located at
      450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
      1-800-SEC-0330 for further information on the public reference room. You may
      also request copies of our filings, at no cost, by telephone at
      (276) 619-4410 or by mail at: Alpha Natural Resources, Inc., One Alpha
      Place, P.O. Box 2345, Abingdon, Virginia 24212, attention: Investor
      Relations.





Our
      Audit Committee Charter, Compensation Committee Charter, Nominating and
      Corporate Governance Committee Charter, Corporate Governance Practices and
      Policies, and Code of Business Ethics adopted by the board of directors of
      Alpha
      Natural Resources, Inc. are also available on our website and available in
      print
      to any stockholder who requests them.




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**Item 1A.**
            ***Risk
                Factors***




***A
      substantial or extended decline in coal prices could reduce our revenues and
      the
      value of our coal reserves.***





Our
      results of operations are substantially dependent upon the prices we receive
      for
      our coal. The prices we receive for coal depend upon factors beyond our control,
      including:




•
            the
                supply of and demand for domestic and foreign
                coal;





•
            the
                demand for electricity;





•
            domestic
                and foreign demand for steel and the continued financial viability
                of the
                domestic and/or foreign steel
                industry;





•
            the
                proximity to, capacity of, and cost of transportation
                facilities;





•
            domestic
                and foreign governmental regulations and
                taxes;





•
            air
                emission standards for coal-fired power
                plants;





•
            regulatory,
                administrative, and judicial
                decisions;





•
            the
                price and availability of alternative fuels, including the effects
                of
                technological
                developments; and





•
            the
                effect of worldwide energy conservation
                measures.





Declines
      in the prices we receive for our coal could adversely affect our operating
      results and our ability to generate the cash flows we require to improve our
      productivity and invest in our operations.




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***Our
      coal mining production and delivery is subject to conditions and events beyond
      our control, which could result in higher operating expenses and/or decreased
      production and sales and adversely affect our operating
      results.***





A
      major ity
      of
      our coal mining operations are conducted in underground mines and the balance
      of
      our operations are at surface mines. The level of our production at these mines
      is subject to operating conditions and events beyond our control that could
      disrupt operations, affect production and the cost of mining at particular
      mines
      for varying lengths of time and have a significant impact on our operating
      results. Adverse operating conditions and events that we or our Predecessor
      have
      experienced in the past include:




•
            delays
                and difficulties in acquiring, maintaining or renewing necessary
                permits
                or mining or surface rights;





•
            changes
                or variations in geologic conditions, such as the thickness of the
                coal
                deposits and the amount of rock embedded in or overlying the coal
                deposit;





•
            mining
                and processing equipment failures and unexpected maintenance
                problems;





•
            limited
                availability of mining and processing equipment and parts from
                suppliers;





•
            interruptions
                due to transportation delays;





•
            adverse
                weather and natural disasters, such as heavy rains and
                flooding;





•
            accidental
                mine water discharges;





•
            the
                termination of material contracts by state or other governmental
                authorities;





•
            the
                unavailability of qualified labor;





•
            strikes
                and other labor-related
                interruptions; and





•
            unexpected
                mine safety accidents, including fires and explosions from methane
                and
                other sources.





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If
      any of
      these conditions or events occur in the future at any of our mines or affect
      deliveries of our coal to customers, they may increase our cost of mining and
      delay or halt production at particular mines or sales to our customers either
      permanently for varying lengths of time, which could adversely affect our
      operating results. For example, in 2004 we experienced mine roof stability
      issues at our Kingwood underground mine, which resulted in a 23% decrease in
      production at this mine for 2004 as compared to 2003 full-year production
      (including production in 2003 prior to our acquisition of the mine). In
      addition, Hurricanes Katrina and Rita, which struck the Gulf Coast in August
      and
      September 2005, resulted in delayed shipments of our coal to our
      customers.




***Any
      change in coal consumption patterns by steel producers or North American
      electric power generators resulting in a decrease in the use of coal by those
      consumers could result in lower prices for our coal, which would reduce our
      revenues and adversely impact our earnings and the value of our coal
      reserves.***





Steam
      coal accounted for approximately 66% and 62% of our coal sales volume during
      2006 and 2005, respectively. The majority of our sales of steam coal for 2006
      and 2005 were to
      U.S.
      and Canadian electric power generators. The amount of coal consumed for U.S.
      and
      Canadian electric power generation is affected primarily by the overall demand
      for electricity, the location, availability, quality and price of competing
      fuels for power such as natural gas, nuclear, fuel oil and alternative energy
      sources such as hydroelectric power, technological developments, and
      environmental and other governmental regulations. We expect many new power
      plants will be built to produce electricity during peak periods of demand,
      when
      the demand for electricity rises above the “base load demand,” or minimum amount
      of electricity required if consumption occurred at a steady rate. However,
      we
      also expect that many of these new power plants will be fired by natural gas
      because they are cheaper to construct than coal-fired plants and because natural
      gas is a cleaner burning fuel. In addition, the increasingly stringent
      requirements of the Clean Air Act may result in more electric power generators
      shifting from coal to natural gas-fired power plants. Any reduction in the
      amount of coal consumed by North American electric power generators could reduce
      the price of steam coal that we mine and sell, thereby reducing our revenues
      and
      adversely impacting our earnings and the value of our coal reserves.





We
      produce metallurgical coal that is used in both the U.S. and foreign steel
      industries. Metallurgical coal accounted for approximately 34% and 38% of our
      coal sales volume during 2006 and 2005, respectively. In recent years,
      U.S. steel producers have experienced a substantial decline in the prices
      received for their products, due at least in part to a heavy volume of foreign
      steel imported into the United States. Although prices for some U.S. steel
      products increased moderately after the Bush administration imposed steel import
      tariffs and quotas in March 2002, those tariffs and quotas were lifted in
      December 2003. Any
      deterioration in conditions in the U.S. steel industry would reduce the
      demand for our metallurgical coal and could impact the collectibility of our
      accounts receivable from U.S. steel industry customers. In addition, the
      U.S. steel industry increasingly relies on electric arc furnaces or
      pulverized coal processes to make steel. These processes do not use coke. If
      this trend continues, the amount of metallurgical coal that we sell and the
      prices that we receive for it could decrease, thereby reducing our revenues
      and
      adversely impacting our earnings and the value of our coal reserves. In the
      international market for metallurgical coal, there are indications that coal
      prices may have begun to level off or decline from their current, historically
      high levels. In a report issued at the end of November 2005, the EIA reported
      that 2005 steel production in China has been well above projections, resulting
      in a glut of steel despite China’s current position as the world’s largest
      consumer of steel.  If the demand and pricing for metallurgical coal in
      international markets decreases in the future, the amount of metallurgical coal
      that we sell and the prices that we receive for it could decrease, thereby
      reducing our revenues and adversely impacting our earnings and the value of
      our
      coal reserves.




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***Forward
      sales and forward purchase contracts that are not accounted for as a hedge
      could cause earnings volatility in our statement of income for a given
      period.***





We
      participate in forward purchase and forward sales contracts that are considered
      derivative instruments under SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* (“SFAS
      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. Changes in fair value are recognized either in earnings
      or
      equity, depending on whether these transactions qualify for hedge accounting.
      Our contracts do not currently qualify for hedge accounting. Accordingly,
      changes in fair value have been recognized in earnings. During 2006, we
      increased coal sales revenue related to mark-to-market gains on open over the
      counter (“OTC”) coal sales contracts in the amount of $6.1 million and increased
      expense related to mark-to-market losses on open OTC coal purchase contracts
      as
      cost of coal sales in the amount of $5.7 million, resulting in an increase
      in
      pretax earnings of $0.4 million. At December 31, 2006, we had unrealized gains
      (losses) on open sales and purchase contracts in the amount of $6.1 million
      and
      ($5.9 million), respectively. These amounts are recorded in prepaid expenses
      and
      other current assets and accrued expenses and other current liabilities,
      respectively.  Due to market price fluctuations, we could see earnings
      volatility that we would normally not incur.




***A
      decline in demand for metallurgical coal would limit our ability to sell our
      high quality steam coal as higher-priced metallurgical coal and could affect
      the
      economic viability of certain of our mines that have higher operating
      costs.***





Portions
      of our coal reserves possess quality characteristics that enable us to mine,
      process and market them as either metallurgical coal or high quality steam
      coal,
      depending on the prevailing conditions in the metallurgical and steam coal
      markets. We decide whether to mine, process and market these coals as
      metallurgical or steam coal based on management’s assessment as to which market
      is likely to provide us with a higher margin. We consider a number of factors
      when making this assessment, including the difference between the current and
      anticipated future market prices of steam coal and metallurgical coal, the
      lower
      volume of saleable tons that results from producing a given quantity of reserves
      for sale in the metallurgical market instead of the steam market, the increased
      costs incurred in producing coal for sale in the metallurgical market instead
      of
      the steam market, the likelihood of being able to secure a longer-term sales
      commitment by selling coal into the steam market and our contractual commitments
      to deliver different types of coals to our customers. During
      2004, we believe that we sold approximately 8% of our produced and processed
      coal as metallurgical coal that we would have sold as steam coal in the market
      conditions prevalent during 2003. We believe that we generated approximately
      $65.0 million in additional revenues by selling this production as
      metallurgical coal rather than steam coal during 2004, based on a comparison
      of
      the actual sales price and volume versus the then-prevailing market price for
      steam coal and the volume of coal that we would have sold if the coal had been
      mined, processed and marketed as steam coal. A decline in the metallurgical
      market relative to the steam market could cause us to shift coal from the
      metallurgical market to the steam market, thereby reducing our revenues and
      profitability.





Most
      of our metallurgical coal reserves possess quality characteristics that enable
      us to mine, process and market them as high quality steam coal. However, some
      of
      our mines operate profitably only if all or a portion of their production is
      sold as metallurgical coal to the steel market. If demand for metallurgical
      coal
      declined to the point where we could earn a more attractive return marketing
      the
      coal as steam coal, these mines may not be economically viable and may be
      subject to closure. Such closures would lead to accelerated reclamation costs,
      as well as reduced revenue and profitability.




***Acquisitions
      that we have completed since our formation, as well as acquisitions that we
      may
      undertake in the future, involve a number of risks, any of which could cause
      us
      not to realize the anticipated benefits.***





Since
      our formation and the acquisition of our Predecessor in December 2002, we have
      completed four significant acquisitions and several smaller acquisitions and
      investments. We continually seek to expand our operations and coal reserves
      through acquisitions. If we are unable to successfully integrate the companies,
      businesses or properties we are able to acquire, our profitability may decline
      and we could experience a material adverse effect on our business, financial
      condition or results of operations. Acquisition transactions involve various
      inherent risks, including:




•
            uncertainties
                in assessing the value, strengths, and potential profitability of,
                and
                identifying the extent of all weaknesses, risks, contingent and other
                liabilities (including environmental or mine safety liabilities)
                of,
                acquisition candidates;





•
            the
                potential loss of key customers, management and employees of an acquired
                business;





•
            the
                ability to achieve identified operating and financial synergies
                anticipated to result from an
                acquisition;





•
            problems
                that could arise from the integration of the acquired
                business; and





•
            unanticipated
                changes in business, industry or general economic conditions that
                affect
                the assumptions underlying our rationale for pursuing the
                acquisition.




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Any
      one or more of these factors could cause us not to realize the benefits
      anticipated to result from an acquisition. For example, in combining our
      Predecessor and acquired companies, we have incurred significant expenses to
      develop unified reporting systems and standardize our accounting functions.
      Additionally, we were unable to profitably operate NKC, which we acquired in
      connection with our acquisition of AMCI. In September 2004, we recorded an
      impairment charge of $5.1 million to reduce the carrying value of the
      assets of NKC to their estimated fair value, and we sold the assets of NKC
      on
      April 14, 2005.





Moreover,
      any acquisition opportunities we pursue could materially affect our liquidity
      and capital resources and may require us to incur indebtedness, seek equity
      capital or both. For instance, in connection with the Nicewonder acquisition,
      we
      issued and subsequently repaid $221.0 million principal amount of
      promissory installment notes of one of our indirect, wholly-owned subsidiaries,
      our parent issued 2,180,233 shares of our common stock valued at
      approximately $53.2 million, and we entered into a new $525.0 million
      credit facility, a portion of the net proceeds of which we used to pay the
      cash
      purchase price and acquisition expenses and the first installment of principal
      due on the promissory notes. In addition, future acquisitions could result
      in
      our assuming more long-term liabilities relative to the value of the acquired
      assets than we have assumed in our previous acquisitions.




***The
      inability of the sellers of our Predecessor and acquired companies to fulfill
      their indemnification obligations to us under our acquisition agreements could
      increase our liabilities and adversely affect our results of operations and
      financial position.***





In
      the acquisition agreements we entered into with the sellers of our Predecessor
      and acquired companies, including the acquisition agreements we entered into
      related to the Nicewonder acquisition, the respective sellers and, in some
      of
      our acquisitions, their parent companies, agreed to retain responsibility for
      and indemnify us against damages resulting from certain third-party claims
      or
      other liabilities, such as workers’ compensation liabilities, black lung
      liabilities, postretirement medical liabilities and certain environmental or
      mine safety liabilities. The failure of any seller and, if applicable, its
      parent company, to satisfy their obligations with respect to claims and retained
      liabilities covered by the acquisition agreements could have an adverse effect
      on our results of operations and financial position if claimants successfully
      assert that we are liable for those claims and/or retained liabilities. The
      obligations of the sellers and, in some instances, their parent companies,
      to
      indemnify us with respect to their retained liabilities will continue for a
      substantial period of time, and in some cases indefinitely. The sellers’
indemnification obligations with respect to breaches of their representations
      and warranties in the acquisition agreements will terminate upon expiration
      of
      the applicable indemnification period (generally 18-24 months from the
      acquisition date for most representations and warranties, and from two to five
      years from the acquisition date for environmental representations and
      warranties), are subject to deductible amounts and will not cover damages in
      excess of the applicable coverage limit. The assertion of third-party claims
      after the expiration of the applicable indemnification period or in excess
      of
      the applicable coverage limit, or the failure of any seller to satisfy its
      indemnification obligations with respect to breaches of its representations
      and
      warranties, could have an adverse effect on our results of operations and
      financial position. See “— If our assumptions regarding our likely future
      expenses related to benefits for non-active employees are incorrect, then
      expenditures for these benefits could be materially higher than we have
      predicted."




***Our
      inability to continue or expand the existing road construction and mining
      business of the Nicewonder Companies could adversely affect the expected
      benefits from the Nicewonder Acquisition.***





One
      of our subsidiaries acquired the business of Nicewonder Contracting, Inc.
      (“NCI”) pursuant to the Nicewonder acquisition. NCI operates a road construction
      business under a contract with the State of West Virginia. Pursuant to the
      contract, NCI is building approximately 11 miles of rough grade highway in
      West Virginia over the next four to five years and, in exchange, NCI will be
      compensated by West Virginia based on the number of cubic yards of material
      excavated and/or filled to create a road bed, as well as for certain other
      cost
      components. In the course of the road construction, NCI will recover any coal
      encountered and sell the coal to its customers, subject to certain costs,
      including coal loading, transportation, coal royalty payments and applicable
      taxes and fees.




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The
      State of West Virginia has only approved funding for a potion of this road
      construction. If West Virginia does not fund the remaining sections of the
      highway project, it would adversely affect NCI’s earnings. Even if West Virginia
      funds the remainder of this project through the next four to five years, we
      are
      uncertain whether the state will fund any similar projects in the future. In
      addition, we have no current experience conducting and completing road projects
      and will rely on the expertise of the existing employees of NCI in order to
      operate the project, and other road projects we may undertake, profitably.
      Furthermore, litigation has been filed against NCI and the State of West
      Virginia claiming that the project violated competitive bidding and prevailing
      wage laws and regulations. If successful, the litigation could make the project
      considerably less advantageous to NCI or restrict or prohibit NCI from
      completing the project.




***The
      loss of, or significant reduction in, purchases by our largest customers could
      adversely affect our revenues and profitability.***





Our
      largest customer during 2006 accounted for approximately 7% of our total
      revenues. We derived approximately 38%
      of
      our 2006 total revenues from sales to our ten largest customers. These customers
      may not continue to purchase coal from us under our current coal supply
      agreements, or at all. If these customers were to significantly reduce their
      purchases of coal from us, or if we were unable to sell coal to them on terms
      as
      favorable to us as the terms under our current agreements, our revenues and
      profitability could suffer materially.




***Changes
      in purchasing patterns in the coal industry may make it difficult for us to
      extend existing supply contracts or enter into new long-term supply contracts
      with customers, which could adversely affect the capability and profitability
      of
      our operations.***





We
      sell a significant portion of our coal under long-term coal supply agreements,
      which are contracts with a term greater than 12 months. The execution of a
      satisfactory long-term coal supply agreement is frequently the basis on which
      we
      undertake the development of coal reserves required to be supplied under the
      contract. We believe that approximately 56% of our 2006 sales volume was sold
      under long-term coal supply agreements. At December 31, 2006, our long-term
      coal
      supply agreements had remaining terms of up to 10 years and an average
      remaining term of approximately two years. When our current contracts with
      customers expire or are otherwise renegotiated, our customers may decide to
      purchase fewer tons of coal than in the past or on different terms, including
      pricing terms less favorable to us. As of February
      05, 2007, approximately 10% and 57%, respectively, of our planned production
      for
      2007 and 2008 was uncommitted. We may not be able to enter into coal supply
      agreements to sell this production on terms, including pricing terms, as
      favorable to us as our existing agreements. For additional information relating
      to our long-term coal supply contracts, see “Business — Marketing, Sales
      and Customer Contracts.”





As
      electric utilities continue to adjust to frequently changing regulations,
      including the Acid Rain regulations of the Clean Air Act, the Clean Air Mercury
      Rule, the Clean Air Interstate Rule and the possible deregulation of their
      industry, they are becoming increasingly less willing to enter into long-term
      coal supply contracts and instead are purchasing higher percentages of coal
      under short-term supply contracts. The industry shift away from long-term supply
      contracts could adversely affect us and the level of our revenues. For example,
      fewer electric utilities will have a contractual obligation to purchase coal
      from us, thereby increasing the risk that we will not have a market for our
      production. The prices we receive in the spot market may be less than the
      contractual price an electric utility is willing to pay for a committed supply.
      Furthermore, spot market prices tend to be more volatile than contractual
      prices, which could result in decreased revenues.




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***Certain
      provisions in our long-term supply contracts may reduce the protection these
      contracts provide us during adverse economic conditions or may result in
      economic penalties upon our failure to meet
      specifications.***





Price
      adjustment, “price reopener” and other similar provisions in long-term supply
      contracts may reduce the protection from short-term coal price volatility
      traditionally provided by these contracts. Price reopener provisions are
      particularly common in international metallurgical coal sales contracts. Some
      of
      our coal supply contracts contain provisions that allow for the price to be
      renegotiated at periodic intervals. Price reopener provisions may automatically
      set a new price based on the prevailing market price or, in some instances,
      require the parties to agree on a new price, sometimes between a pre-set “floor”
and “ceiling.” In some circumstances, failure of the parties to agree on a price
      under a price reopener provision can lead to termination of the contract. Any
      adjustment or renegotiation leading to a significantly lower contract price
      could result in decreased revenues. Accordingly, supply contracts with terms
      of
      one year or more may provide only limited protection during adverse market
      conditions.





Coal
      supply agreements also typically contain force majeure provisions allowing
      temporary suspension of performance by us or the customer during the duration
      of
      specified events beyond the control of the affected party. Most of our coal
      supply agreements contain provisions requiring us to deliver coal meeting
      quality thresholds for certain characteristics such as Btu, sulfur content,
      ash
      content, grindability and ash fusion temperature. Failure to meet these
      specifications could result in economic penalties, including price adjustments,
      the rejection of deliveries or termination of the contracts. Moreover, some
      of
      our agreements where the customer bears transportation costs permit the customer
      to terminate the contract if the transportation costs borne by them increase
      substantially. In addition, some of these contracts allow our customers to
      terminate their contracts in the event of changes in regulations affecting
      our
      industry that increase the price of coal beyond specified limits.





Due
      to the risks mentioned above with respect to long-term supply contracts, we
      may
      not achieve the revenue or profit we expect to achieve from these sales
      commitments.




***Disruption
      in supplies of coal produced by contractors and other third parties could
      temporarily impair our ability to fill customers’ orders or increase our
      costs.***





In
      addition to marketing coal that is produced by our subsidiaries’ employees, we
      utilize contractors to operate some of our mines. Operational difficulties
      at
      contractor-operated mines, changes in demand for contract miners from other
      coal
      producers, and other factors beyond our control could affect the availability,
      pricing, and quality of coal produced for us by contractors. For example, during
      2005, production at our contractor operations ran approximately 25% behind
      plan,
      primarily due to shortages in the supply of labor. As a result of this
      shortfall, we were forced to purchase coal at a higher cost than planned so
      that
      we could meet commitments to customers. To meet customer specifications and
      increase efficiency in fulfillment of coal contracts, we also purchase and
      resell coal produced by third parties from their controlled reserves. The
      majority of the coal that we purchase from third parties is blended with coal
      produced from our mines prior to resale and we also process (which includes
      washing, crushing or blending coal at one of our preparation plants or loading
      facilities) a portion of the coal that we purchase from third parties prior
      to
      resale. We sold 5.8 million tons of coal purchased from third parties
      during 2006, representing approximately 20% of our total sales during 2006.
      We
      believe that approximately 68% of our purchased coal sales in 2006 was blended
      with coal produced from our mines prior to resale, and approximately 5% of
      our
      total sales in 2006 consisted of coal purchased from third parties that we
      processed before resale. The availability of specified qualities of this
      purchased coal may decrease and prices may increase as a result of, among other
      things, changes in overall coal supply and demand levels, consolidation in
      the
      coal industry and new laws or regulations. Disruption in our supply of
      contractor-produced coal and purchased coal could temporarily impair our ability
      to fill our customers’ orders or require us to pay higher prices in order to
      obtain the required coal from other sources. Any increase in the prices we
      pay
      for contractor-produced coal or purchased coal could increase our costs and
      therefore lower our earnings. Although increases in market prices for coal
      generally benefit us by allowing us to sell coal at higher prices, those
      increases also increase our costs to acquire purchased coal, which lowers our
      earnings.




***Competition
      within the coal industry may adversely affect our ability to sell coal, and
      excess production capacity in the industry could put downward pressure on coal
      prices.***





We
      compete with numerous other coal producers in various regions of the United
      States for domestic and international sales. During the mid-1970s and early
      1980s, increased demand for coal attracted new investors to the coal industry,
      spurred the development of new mines and resulted in additional production
      capacity throughout the industry, all of which led to increased competition
      and
      lower coal prices. Recent increases in coal prices could encourage the
      development of expanded capacity by new or existing coal producers. Any
      resulting overcapacity could reduce coal prices and therefore reduce our
      revenues.





Coal
      with lower production costs shipped east from western coal mines and from
      offshore sources has resulted in increased competition for coal sales in the
      Appalachian region. In addition, coal companies with larger mines that utilize
      the long-wall mining method typically have lower mine operating costs than
      we do
      and may be able to compete more effectively on price, particularly if the
      current favorable market weakens. This competition could result in a decrease
      in
      our market
      share in this region and a decrease in our revenues.


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Demand
      for our low sulfur coal and the prices that we can obtain for it are also
      affected by, among other things, the price of emissions allowances. Decreases
      in
      the prices of these emissions allowances could make low sulfur coal less
      attractive to our customers. In addition, more widespread installation by
      electric utilities of technology that reduces sulfur emissions (which could
      be
      accelerated by increases in the prices of emissions allowances), may make high
      sulfur coal more competitive with our low sulfur coal. This competition could
      adversely affect our business and results of operations.





We
      also compete in international markets against coal produced in other countries.
      Measured by tons sold, exports accounted for approximately 25% of our sales
      in
      2006. The demand for U.S. coal exports is dependent upon a number of
      factors outside of our control, including the overall demand for electricity
      in
      foreign markets, currency exchange rates, the demand for foreign-produced steel
      both in foreign markets and in the U.S. market (which is dependent in part
      on tariff rates on steel), general economic conditions in foreign countries,
      technological developments, and environmental and other governmental
      regulations. For example, if the value of the U.S. dollar were to rise
      against other currencies in the future, our coal would become relatively more
      expensive and less competitive in international markets, which could reduce
      our
      foreign sales and negatively impact our revenues and net income. In addition,
      if
      the amount of coal exported from the United States were to decline, this decline
      could cause competition among coal producers in the United States to intensify,
      potentially resulting in additional downward pressure on domestic coal
      prices.




***Fluctuations
      in transportation costs and the availability or reliability of transportation
      could affect the demand for our coal or temporarily impair our ability to supply
      coal to our customers.***





Transportation
      costs represent a significant portion of the total cost of coal for our
      customers. Increases in transportation costs, such as those experienced during
      2005 and 2006, could make coal a less competitive source of energy or could
      make
      our coal production less competitive than coal produced from other sources.
      On
      the other hand, significant decreases in transportation costs could result
      in
      increased competition from coal producers in other parts of the country. For
      instance, coordination of the many eastern loading facilities, the large number
      of small shipments, terrain and labor issues all combine to make shipments
      originating in the eastern United States inherently more expensive on a per-mile
      basis than shipments originating in the western United States.





Historically,
      high coal transportation rates from the western coal producing areas into
      Central Appalachian markets limited the use of western coal in those markets.
      More recently, however, lower rail rates from the western coal producing areas
      to markets served by eastern U.S. producers have created major competitive
      challenges for eastern producers. This increased competition could have a
      material adverse effect on our business, financial condition and results of
      operations.





We
      depend
      upon railroads, trucks, beltlines, ocean vessels and barges to deliver coal
      to
      our customers. Disruption of these transportation services due to
      weather-related problems, mechanical difficulties, strikes, lockouts,
      bottlenecks, terrorist attacks, and other events could temporarily impair our
      ability to supply coal to our customers, resulting in decreased shipments.
      Certain shipments of our coal to customers were delayed by hurricanes in the
      Gulf Coast in 2005. In some cases, this delay will affect the timing of our
      recognition of revenue from these sales. Decreased performance levels over
      longer periods of time could cause our customers to look to other sources for
      their coal needs, negatively affecting our revenues and
      profitability.




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In
      2006, 73% of our produced and processed coal volume was transported from the
      preparation plant to the customer by rail. In the past, we have experienced
      a
      general deterioration in the reliability of the service provided by rail
      carriers, which increased our internal coal handling costs. If there are
      continued disruptions of the transportation services provided by the railroad
      companies we use and we are unable to find alternative transportation providers
      to ship our coal, our business could be adversely affected.





We
      have investments in mines, loading facilities, and ports that in most cases
      are
      serviced by a single rail carrier. Our operations that are serviced by a single
      rail carrier are particularly at risk to disruptions in the transportation
      services provided by that rail carrier, due to the difficulty in arranging
      alternative transportation. If a single rail carrier servicing our operations
      does not provide sufficient capacity, revenue from these operations and our
      return on investment could be adversely impacted. The states of West Virginia
      and Kentucky have recently increased enforcement of weight limits on coal trucks
      on their public roads. It is possible that other states in which our coal is
      transported by truck could undertake similar actions to increase enforcement
      of
      weight limits. Such stricter enforcement actions could result in shipment delays
      and increased costs. An increase in transportation costs could have an adverse
      effect on our ability to increase or to maintain production on a profit-making
      basis and could therefore adversely affect revenues and earnings.




***Our
      business will be adversely affected if we are unable to develop or acquire
      additional coal reserves that are economically
      recoverable.***





Our
      profitability depends substantially on our ability to mine coal reserves
      possessing quality characteristics desired by our customers in a cost-effective
      manner. As of December 31, 2006, we owned or leased 548.6 million tons
      of proven and probable coal reserves that we believe will support current
      production levels for more than 20 years,
      which is less than the publicly reported amount of proven and probable coal
      reserves and reserve lives (based on current publicly reported production
      levels) of the other large publicly traded coal companies. We have not yet
      applied for the permits required, or developed the mines necessary, to mine
      all
      of our reserves. Permits are becoming increasingly more difficult and expensive
      to obtain and the review process continues to lengthen. In addition, we may
      not
      be able to mine all of our reserves as profitably as we do at our current
      operations.





Because
      our reserves are depleted as we mine our coal, our future success and growth
      depend, in part, upon our ability to acquire additional coal reserves that
      are
      economically recoverable. If we are unable to replace or increase our coal
      reserves on acceptable terms, our production and revenues will decline as our
      reserves are depleted. Exhaustion of reserves at particular mines also may
      have
      an adverse effect on our operating results that is disproportionate to the
      percentage of overall production represented by such mines. Our ability to
      acquire additional coal reserves through acquisitions in the future also could
      be limited by restrictions under our existing or future debt agreements,
      competition from other coal companies for attractive properties, or the lack
      of
      suitable acquisition candidates.




***We
      face numerous uncertainties in estimating our recoverable coal reserves, and
      inaccuracies in our estimates could result in decreased profitability from
      lower
      than expected revenues or higher than expected costs.***





Forecasts
      of our future performance are based on, among other things, estimates of our
      recoverable coal reserves. We base our estimates of reserve information on
      engineering, economic and geological data assembled and analyzed by our internal
      engineers and which is periodically reviewed by third-party consultants. There
      are numerous uncertainties inherent in estimating the quantities and qualities
      of, and costs to mine, recoverable reserves, including many factors beyond
      our
      control. Estimates of economically recoverable coal reserves and net cash flows
      necessarily depend upon a number of variable factors and assumptions, any one
      of
      which may, if incorrect, result in an estimate that varies considerably from
      actual results. These factors and assumptions include:




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•
            future
                mining technology improvements;





•
            the
                effects of regulation by governmental
                agencies; and





•
            geologic
                and mining conditions, which may not be fully identified by available
                exploration data and may differ from our experiences in areas we
                currently
                mine. As a result, actual coal tonnage recovered from identified
                reserve
                areas or properties, and costs associated with our mining operations,
                may
                vary from estimates. Any inaccuracy in our estimates related to our
                reserves could result in decreased profitability from lower than
                expected
                revenues or higher than expected costs;
                and  §
            future
              coal prices, operating costs, capital expenditures, severance and excise
              taxes, royalties and development and reclamation
              cost.




***Defects
      in title of any leasehold interests in our properties could limit our ability
      to
      mine these properties or result in significant unanticipated
      costs.***





We
      conduct a significant part of our mining operations on properties that we lease.
      Title to most of our leased properties and mineral rights is not thoroughly
      verified until a permit to mine the property is obtained, and in some cases
      title with respect to leased properties is not verified at all. Our right to
      mine some of our reserves may be materially adversely affected by defects in
      title or boundaries. In order to obtain leases or mining contracts to conduct
      our mining operations on property where these defects exist, we may in the
      future have to incur unanticipated costs or even lose our right to mine, which
      could adversely affect our profitability.




***Mining
      in Central and Northern Appalachia is more complex and involves more regulatory
      constraints than mining in other areas of the United States, which could affect
      our mining operations and cost structures in these
      areas.***





The
      geological characteristics of Central and Northern Appalachian coal reserves,
      such as depth of overburden and coal seam thickness, make them complex and
      costly to mine. As mines become depleted, replacement reserves may not be
      available when required or, if available, may not be capable of being mined
      at
      costs comparable to those characteristic of the depleting mines. In addition,
      as
      compared to mines in other regions, permitting, licensing and other
      environmental and regulatory requirements are more costly and time consuming
      to
      satisfy. These factors could materially adversely affect the mining operations
      and cost structures of, and our customers’ ability to use coal produced by, our
      mines in Central and Northern Appalachia.




***Our
      work force could become increasingly unionized in the future, which could
      adversely affect the stability of our production and reduce our
      profitability.***





Approximately
      94% of our 2006 coal production came from mines operated by union-free
      employees. As of December 31, 2006, over 92% of our 3,546 employees are
      union-free. However, our subsidiaries’ employees have the right at any time
      under the National Labor Relations Act to form or affiliate with a union. Any
      further unionization of our subsidiaries’ employees, or the employees of
      third-party contractors who mine coal for us, could adversely affect the
      stability of our production and reduce our profitability.




***Our
      unionized work force could strike in the future, which could disrupt production
      and shipments of our coal and increase costs.***





One
        of
        our subsidiaries has two negotiated wage agreements with the United Mine
        Workers
        of America (“UMWA”). These agreements, covering 275 employees as of
        December 31, 2006, expire on December 31, 2009. One of our other
        subsidiaries is currently negotiating a wage agreement with the UMWA covering
        an
        aggregate of 24 employees that expired on December 31, 2006. Some or
        all of the affected employees at each location could strike, which would
        adversely affect our productivity, increase our costs, and disrupt shipments
        of
        coal to our customers. Also, one of our other subsidiaries, that is idle,
        had a
        wage agreement with the UMWA that could be terminated by our subsidiary or
        the
        UMWA with notice but since it is idle, no employees are effected at this
        time.
        However, if the operation becomes active again, these employees could be
        affected.





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***Our
      ability to collect payments from our customers could be impaired if their
      creditworthiness deteriorates.***





Our
      ability to receive payment for coal sold and delivered depends on the continued
      creditworthiness of our customers. During 2006, we had $0.7 million of bad
      debt
      expense. Our customer base is changing with deregulation as utilities sell
      their
      power plants to their non-regulated affiliates
      or third parties that may be less creditworthy, thereby increasing the risk
      we
      bear on payment default. These new power plant owners may have credit ratings
      that are below investment grade. In addition, competition with other coal
      suppliers could force us to extend credit to customers and on terms that could
      increase the risk we bear on payment default.





We
      have contracts to supply coal to energy trading and brokering companies under
      which those companies sell coal to end users. If the creditworthiness of the
      energy trading and brokering companies declines, this would increase the risk
      that we may not be able to collect payment for all coal sold and delivered
      to or
      on behalf of these energy trading and brokering companies.




***The
      government extensively regulates our mining operations, which imposes
      significant costs on us, and future regulations could increase those costs
      or
      limit our ability to produce and sell coal.***





The
      coal mining industry is subject to increasingly strict regulation by federal,
      state and local authorities with respect to matters such as:




•
            employee
                health and safety;





•
            mandated
                benefits for retired coal miners;





•
            mine
                permitting and licensing
                requirements;





•
            reclamation
                and restoration of mining properties after mining is
                completed;





•
            air
                quality standards;





•
            water
                pollution;





•
            plant
                and wildlife protection;





•
            the
                discharge of materials into the
                environment;





•
            surface
                subsidence from underground
                mining; and





•
            the
                effects of mining on groundwater quality and
                availability.





The
      costs, liabilities and requirements associated with these regulations may be
      costly and time consuming and may delay commencement or continuation of
      exploration or production operations. Failure to comply with these regulations
      may result in the assessment of administrative, civil and criminal penalties,
      the imposition of cleanup and site restoration costs and liens, the issuance
      of
      injunctions to limit or cease operations, the suspension or revocation of
      permits and other enforcement measures that could have the effect of limiting
      production from our operations. We may also incur costs and liabilities
      resulting from claims for damages to property or injury to persons arising
      from
      our operations. If we are pursued for these sanctions, costs and liabilities,
      our mining operations and, as a result, our profitability could be adversely
      affected.





The
      possibility exists that new legislation and/or regulations and orders may be
      adopted that may materially adversely affect our mining operations, our cost
      structure and/or our customers’ ability to use coal. For example, in reaction to
      recent mine accidents in West Virginia, state and federal legislatures and
      regulatory authorities have increased scrutiny of mine safety matters and passed
      more stringent laws governing mining. In 2006, Congress enacted the MINER Act,
      which imposed additional burdens on coal operators, including (i) obligations
      related to (a) the development of new emergency response plans that address
      post-accident communications, tracking of miners, breathable air, lifelines,
      training and communication with local emergency response personnel, (b) insuring
      the availability of mine rescue teams, and (c) promptly notifying federal
      authorities in the event of a certain events, (ii) increased penalties for
      violations of the applicable federal laws and regulations, and (iii) the
      requirement that new standards be implemented regarding the manner in which
      closed areas of underground mines are sealed and (iv) other matters. Various
      states also have enacted their own new laws and regulations addressing many
      of
      these same subjects. Our compliance with these or any new mine health and safety
      regulations could increase our mining costs. New legislation or administrative
      regulations (or new judicial interpretations or administrative enforcement
      of
      existing laws and regulations), including proposals related to the protection
      of
      the environment that would further regulate and tax the coal industry, may
      also
      require us or our customers to change operations significantly or incur
      increased costs. These regulations, if proposed and enacted in the future,
      could
      have a material adverse effect on our financial condition and results of
      operations.





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***Extensive
      environmental regulations affect our customers and could reduce the demand
      for
      coal as a fuel source and cause our sales to decline.***





The
      Clean Air Act and similar state and local laws extensively regulate the amount
      of sulfur dioxide, particulate matter, nitrogen oxides, and other compounds
      emitted into the air from electric power plants, which are the largest end-users
      of our coal. Such regulations will require significant emissions control
      expenditures for many coal-fired power plants to comply with applicable ambient
      air quality standards. As a result, these generators may switch to other fuels
      that generate less of these emissions or install more effective pollution
      control equipment, possibly reducing future demand for coal and the construction
      of coal-fired power plants.





Various
      new and proposed laws and regulations may require further reductions in
      emissions from coal-fired utilities. For example, under the new Clean Air
      Interstate Rule issued on March 10, 2005, the EPA will further regulate
      sulfur dioxide and nitrogen oxides from coal-fired power plants. When fully
      implemented, this rule is expected to reduce sulfur dioxide emissions in
      affected states by over 70% and nitrogen oxides emissions by over 60% from
      2003
      levels. The stringency of this cap may require many coal-fired sources to
      install additional pollution control equipment, such as wet scrubbers, to
      comply. Installation of additional pollution control equipment required by
      this
      rule could result in a decrease in the demand for low sulfur coal (because
      sulfur would be removed by the new emissions control equipment), potentially
      driving down prices for low sulfur coal. In addition, under the Clean Air Act,
      coal-fired power plants will be required to control hazardous air pollution
      emissions by no later than 2009, which likely will require significant new
      investment in pollution-control devices by power plant operators. Further,
      on
      March 15, 2005, the EPA finalized the Clean Air Mercury Rule intended to
      control mercury emissions from power plants, which could require coal-fired
      power plants to install new pollution controls or comply with a mandatory,
      declining cap on the total mercury emissions allowed from coal-fired power
      plants nationwide. Both the Clean Air Mercury Rule and the Clean Air Interstate
      Rule are subject to administrative reconsideration and judicial challenge.
      These
      standards and future standards could have the effect of making coal-fired plants
      unprofitable, thereby decreasing demand for coal. The majority of our coal
      supply agreements contain provisions that allow a purchaser to terminate its
      contract if legislation is passed that either restricts the use or type of
      coal
      permissible at the purchaser’s plant or results in specified increases in the
      cost of coal or its use.





Several
      proposals are pending in Congress and various states that are designed to
      further reduce emissions of sulfur dioxide, nitrogen oxides and mercury from
      power plants, and certain ones could regulate additional air pollutants. If
      such
      initiatives are enacted into law, power plant operators could choose fuel
      sources other than coal to meet their requirements, thereby reducing the demand
      for coal. Current and possible future governmental programs are or may be in
      place to require the purchase and trading of allowances associated with the
      emission of various substances such as sulfur dioxide, nitrous oxide, mercury
      and carbon dioxide. Changes in the markets for and prices of allowances could
      have a material effect on demand for and prices received for our
      coal.





A
      regional haze program initiated by the EPA to protect and to improve visibility
      at and around national parks, national wilderness areas and international parks
      restricts the construction of new coal-fired power plants whose operation may
      impair visibility at and around federally protected areas, and may require
      some
      existing coal-fired power plants, and certain thermal dryers, to install
      additional control measures designed to limit haze-causing
      emissions.





One
      major by-product of burning coal is carbon dioxide, which is considered a
      greenhouse gas and is a major source of concern with respect to global warming.
      In November 2004, Russia ratified the Kyoto Protocol to the 1992 Framework
      Convention on Global Climate Change (the “Protocol”), which establishes a
      binding set of emission targets for greenhouse gases. With Russia’s accedence,
      the Protocol now has sufficient support and became binding on all those
      countries that have ratified it on February 16, 2005. Four industrialized
      nations have refused to ratify the Protocol — Australia, Liechtenstein,
      Monaco, and the United States. Although the targets vary from country to
      country, if the United States were to ratify the Protocol, our nation would
      be
      required to reduce greenhouse gas emissions to 93% of 1990 levels in a series
      of
      phased reductions from 2008 to 2012. Canada, which accounted for approximately
      5.3% of our 2006 sales volume, ratified the Protocol in 2002. Under the
      Protocol, Canada will be required to cut greenhouse gas emissions to 6% below
      1990 levels in a series of phased reductions from 2008 to 2012, either in direct
      reductions in emissions or by obtaining credits through the Protocol’s market
      mechanisms. This could result in reduced demand for coal by Canadian electric
      power generators.





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Future
      regulation of greenhouse gases in the United States could occur pursuant to
      future U.S. treaty obligations, statutory or regulatory changes under the
      Clean Air Act, or otherwise. The Bush Administration has proposed a package
      of
      voluntary emission reductions for greenhouse gases reduction targets which
      provide for certain incentives if targets are met. Some states, such as
      Massachusetts, have already issued regulations regulating greenhouse gas
      emissions from large power plants. Further, in 2002, the Conference of New
      England Governors and Eastern Canadian Premiers adopted a Climate Change Action
      Plan, calling for reduction in regional greenhouse emissions to 1990 levels
      by
      2010, and a further reduction of at least 10% below 1990 levels by 2020.
      Increased efforts to control greenhouse gas emissions, including the future
      ratification of the Protocol by the United States, could result in reduced
      demand for our coal. See “Environmental and Other Regulatory
      Matters.”




***Our
      operations may impact the environment or cause exposure to hazardous substances,
      and our properties may have environmental contamination, which could result
      in
      material liabilities to us.***





Our
      operations currently use hazardous materials and generate limited quantities
      of
      hazardous wastes from time to time. Our Predecessor and acquired companies
      also
      utilized certain hazardous materials and generated similar wastes. We may be
      subject to claims under federal and state statutes and/or common law doctrines
      for toxic torts, natural resource damages and other damages as well as for
      the
      investigation and clean up of soil, surface water, groundwater, and other media.
      Such claims may arise, for example, out of current or former conditions at
      sites
      that we own or operate currently, as well as at sites that we or our Predecessor
      and acquired companies owned or operated in the past, and at contaminated sites
      that have always been owned or operated by third parties. Our liability for
      such
      claims may be joint and several, so that we may be held responsible for more
      than our share of the contamination or other damages, or even for the entire
      share. We have not been subject to claims arising out of contamination at our
      facilities, and are not aware of any such contamination, but may incur such
      liabilities in the future.





We
      maintain extensive coal slurry impoundments at a number of our mines. Such
      impoundments are subject to extensive regulation. Slurry impoundments maintained
      by other coal mining operations have been known to fail, releasing large volumes
      of coal slurry. Structural failure of an impoundment can result in extensive
      damage to the environment and natural resources, such as streams or bodies
      of
      water that the coal slurry reaches, as well as liability for related personal
      injuries and property damages, and injuries to wildlife. Some of our
      impoundments overlie mined out areas, which can pose a heightened risk of
      failure and of damages arising out of failure. If one of our impoundments were
      to fail, we could be subject to substantial claims for the resulting
      environmental contamination and associated liability, as well as for fines
      and
      penalties.





These
      and other similar unforeseen impacts that our operations may have on the
      environment, as well as exposures to hazardous substances or wastes associated
      with our operations, could result in costs and liabilities that could materially
      and adversely affect us.




***We
      may be unable to obtain and renew permits necessary for our operations, which
      would reduce our production, cash flow and
      profitability.***





Mining
      companies must obtain numerous permits that impose strict regulations on various
      environmental and safety matters in connection with coal mining. These include
      permits issued by various federal and state agencies and regulatory bodies.
      The
      permitting rules are complex and may change over time, making our ability to
      comply with the applicable requirements more difficult or even impossible,
      thereby precluding continuing or future mining operations. Private individuals
      and the public have certain rights to comment upon, submit objections to, and
      otherwise engage in the permitting process, including through court
      intervention. Accordingly, the permits we need may not be issued, maintained
      or
      renewed, or may not be issued or renewed in a timely fashion, or may involve
      requirements that restrict our ability to conduct our mining operations. An
      inability to conduct our mining operations pursuant to applicable permits would
      reduce our production, cash flow, and profitability.





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Permits
      under Section 404 of the Clean Water Act are required for coal companies to
      conduct dredging or filling activities in jurisdictional waters for the purpose
      of creating slurry ponds, water impoundments, refuse areas, valley fills or
      other mining activities. The Army Corps of Engineers (the “COE”) is empowered to
      issue “nationwide” permits for specific categories of filling activity that are
      determined to have minimal environmental adverse effects in order to save the
      cost and time of issuing individual permits under Section 404. Nationwide
      Permit 21 authorizes the disposal of dredge-and-fill material from mining
      activities into the waters of the United States. On October 23, 2003,
      several citizens groups sued the COE in the U.S. District Court for the
      Southern District of West Virginia seeking to invalidate “nationwide” permits
      utilized by the COE and the coal industry for permitting most in-stream
      disturbances associated with coal mining, including excess spoil valley fills
      and refuse impoundments. Although the lower court enjoined the issuance of
      Nationwide 21 permits, that decision was overturned by the Fourth Circuit Court
      of Appeals, which concluded that the COE complied with the Clean Water Act
      in
      promulgating this permit. Although we had no operations that were immediately
      impacted or interrupted, the lower court’s decision required us to convert
      certain current and planned applications for Nationwide 21 permits to
      applications for individual permits. A similar lawsuit was filed on
      January 27, 2005 in the U.S. District Court for the Eastern District
      of Kentucky and remains pending, and other lawsuits may be filed in other states
      where we operate. Although it is not possible to predict the results of the
      Kentucky litigation, it could adversely affect our Kentucky
      operations.




***Due
      to political and economic uncertainties in Venezuela, our investment in Excelven
      Pty Ltd could be at risk for loss***





In
      2004, we acquired a 24.5% interest in Excelven Pty Ltd, which, through its
      subsidiaries, controls
      the rights to the Las Carmelitas mining venture in Venezuela and the related
      Palmarejo export port facility on Lake Maracaibo in Venezuela.  The project
      is currently in the development stage, and final governmental approval of
      the project has not yet been obtained.  Political and economic
      uncertainties in Venezuela could delay or prevent such
      governmental approval from being obtained or otherwise impede execution of
      the
      project. Such political and economic uncertainties could also lead
      to events such as civil unrest, work stoppages or the
      nationalization or other expropriation of private enterprises by the Venezuelan
      government, which could result in a loss of all or a portion of
      our investment in Excelven, which is in excess of $5.8 million to
      date.




***Our
        mining operations consume significant quantities of commodities. If commodity
        prices increase significantly or rapidly, it could impact our cost of
        production.***




Coal
        mines consume large quantities of commodities such as steel, copper, rubber
        products and liquid fuels. Some commodities, such as steel, are needed to
        comply
        with roof control plans required by regulation. The prices we pay for these
        products are strongly impacted by the global commodities market. A rapid
        or
        significant increase in cost of some commodities could impact our mining
        costs
        because we have limited ability to negotiate lower prices, and, in some cases,
        do no have a ready substitute for these commodities.




***We
        have reclamation and mine closure obligations. If the assumptions underlying
        our
        accruals are inaccurate, we could be required to expend greater amounts than
        anticipated.***




The
        Surface Mining Control and Reclamation Act establish operational, reclamation
        and closure standards for all aspects of surface mining as well as most aspects
        of deep mining. We accrue for the costs of current mine disturbance and of
        final
        mine closure, including the cost of treating mine water discharge where
        necessary. Estimates of our total reclamation and mine-closing liabilities
        are
        based upon permit requirements and our experience. The amounts recorded are
        dependent upon a number of variables, including the estimated future retirement
        costs, estimated proven reserves, assumptions involving profit margins,
        inflation rates, and the assumed credit-adjusted risk-free interest rates.
        Furthermore, these obligations are unfunded. If these accruals are insufficient
        or our liability in a particular year is greater than currently anticipated,
        our
        future operating results could be adversely affected.





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***Our
      ability to operate our company effectively could be impaired if we fail to
      attract and retain key personnel.***





Our
      ability to operate our business and implement our strategies depends, in part,
      on the efforts of our executive officers and other key employees. In addition,
      our future success will depend on, among other factors, our ability to attract
      and retain other qualified personnel. The loss of the services of any of our
      executive officers or other key employees or the inability to attract or retain
      other qualified personnel in the future could have a material adverse effect
      on
      our business or business prospects.




***A
      shortage of skilled labor in the Appalachian region could pose a risk to
      achieving improved labor productivity and competitive costs and could adversely
      affect our profitability.***





Efficient
      coal mining using modern techniques and equipment requires skilled laborers,
      preferably with at least a year of experience and proficiency in multiple mining
      tasks. In recent years, a shortage of trained coal miners in the Appalachian
      region has caused us to operate certain units without full staff, which
      decreases our productivity and increases our costs. For example, during the
      year
      of 2005, production at our contractor operations was running approximately
      25%
      behind plan, primarily due to shortages in the supply of labor. If the shortage
      of experienced labor continues or worsens, it could have an adverse impact
      on
      our labor productivity and costs and our ability to expand production in the
      event there is an increase in the demand for our coal, which could adversely
      affect our profitability.





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***Our
      amount of indebtedness could harm our business by limiting our available cash
      and our access to additional capital and could force us to sell material assets
      or take other actions to attempt to reduce our
      indebtedness.***





Our
      financial performance could be affected by our amount of indebtedness. At
      December 31, 2006, we had $445.7 million of indebtedness outstanding,
      representing 56% of our total capitalization. This indebtedness consisted of
      $175.0 million principal of our 10% senior notes due 2012, a $247.5
      term loan under our credit facility and $23.2 million of other
      indebtedness, including $1.5 million of capital lease obligations extending
      through March 2009, $0.7 million principal amount that we incurred in
      connection with the Gallatin Acquisition related to funds loaned by an unrelated
      third party to assist in the construction of the kiln and $21.0 million
      payable to an insurance premium finance company. In addition, under our credit
      facility we had $81.1 million of letters of credit outstanding at
      December 31, 2006.





In
      connection with the Nicewonder acquisition,
      we refinanced all outstanding indebtedness under our prior credit facility
      with
      a new credit facility, which provides for up to $525.0 million of
      borrowings, including a $275.0 million revolving credit facility and a
      $250.0 million term loan. In addition, under the terms of the Nicewonder
      acquisition, one of our indirect, wholly-owned subsidiaries issued
      $221.0 million in promissory installment notes, which have been paid in
      full. We may also incur additional indebtedness in the future.





This
      level of indebtedness could have important consequences to our business. For
      example, it could:




•
            increase
                our vulnerability to general adverse economic and industry
                conditions;





•
            make
                it more difficult to self-insure and obtain surety bonds or letters
                of
                credit;





•
            limit
                our ability to enter into new long-term sales
                contracts;





•
            make
                it more difficult for us to pay interest and satisfy our debt obligations,
                including our obligations with respect to the
                notes;





•
            require
                us to dedicate a substantial portion of our cash flow from operations
                to
                payments on our indebtedness, thereby reducing the availability of
                our
                cash flow to fund working capital, capital expenditures, acquisitions
                and
                other general corporate activities;





•
            limit
                our ability to obtain additional financing to fund future working
                capital,
                capital expenditures, research and development, debt service requirements
                or other general corporate
                requirements;





•
            limit
                our flexibility in planning for, or reacting to, changes in our business
                and in the coal industry;





•
            place
                us at a competitive disadvantage compared to less leveraged
                competitors; and





•
            limit
                our ability to borrow additional
                funds.





If
      our cash flows and capital resources are insufficient to fund our debt service
      obligations or our requirements under our other long-term liabilities, we may
      be
      forced to sell assets, seek additional capital or seek to restructure or
      refinance our indebtedness. These alterna tive
      measures may not be successful and may not permit us to meet our scheduled
      debt
      service obligations, including our obligations with respect to the notes, or
      our
      requirements under our other long term liabilities. In the absence of such
      operating results and resources, we could face substantial liquidity problems
      and might be required to sell material assets or operations to attempt to meet
      our debt service and other obligations. Our credit facility and the indenture
      under which our senior notes were issued restrict our ability to sell assets
      and
      use the proceeds from the sales. We may not be able to consummate those sales
      or
      to obtain the proceeds which we could realize from them and these proceeds
      may
      not be adequate to meet any debt service obligations then due. Furthermore,
      substantially all of our material assets secure our indebtedness under
      our current credit facility.




-36-
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***Despite
      our current leverage, we may still be able to incur substantially more debt.
      This could further exacerbate the risks associated with our significant
      indebtedness.***





We
      may be able to incur substantial additional indebtedness in the future. The
      terms of our new credit facility and the indenture governing our senior notes
      do
      not prohibit us from doing so. Our current credit facility provides for a
      revolving line of credit of up to $275.0 million,
      of which $193.9 million was available as of December 31, 2006. The
      addition of new debt to our current debt levels could increase the related
      risks
      that we now face. For example, the spread over the variable interest rate
      applicable to loans under our credit facility is dependent on our leverage
      ratio, and it would increase if our leverage ratio increases. Additional
      drawings under our revolving line of credit could also limit the amount
      available for letters of credit in support of our bonding obligations, which
      we
      will require as we develop and acquire new mines.




***The
      covenants in our credit facility and the indenture governing the notes impose
      restrictions that may limit our operating and financial
      flexibility.***





Our
      credit facility and the indenture governing our senior notes contain a number
      of
      significant restrictions and covenants that limit our ability and our
      subsidiaries’ ability to, among other things, incur additional indebtedness or
      enter into sale and leaseback transactions, pay dividends, make redemptions
      and
      repurchases of certain capital stock, make loans and investments, create liens,
      engage in transactions with affiliates and merge or consolidate with other
      companies or sell substantially all of our assets.





These
      covenants could adversely affect our ability to finance our future operations
      or
      capital needs or to execute preferred business strategies. In addition, if
      we
      violate these covenants and are unable to obtain waivers from our lenders,
      our
      debt under these agreements would be in default and could be accelerated by
      our
      lenders. If our indebtedness is accelerated, we may not be able repay our debt
      or borrow sufficient funds to refinance it. Even if we were able to obtain
      new
      financing, it may not be on commercially reasonable terms, on terms that are
      acceptable to us, or at all. If our debt is in default for any reason, our
      business, financial condition and results of operations could be materially
      and
      adversely affected.




***Failure
      to obtain or renew surety bonds on acceptable terms could affect our ability
      to
      secure reclamation and coal lease obligations, which could adversely affect
      our
      ability to mine or lease coal.***





Federal
      and state laws require us to obtain surety bonds to secure payment of certain
      long-term obligations such as mine closure or reclamation costs, federal and
      state workers’ compensation costs, coal leases and other obligations. These
      bonds are typically renewable annually. Surety bond issuers and holders may
      not
      continue to renew the bonds or may demand additional collateral or other less
      favorable terms upon those renewals. The ability of surety bond issuers and
      holders to demand additional collateral or other less favorable terms has
      increased as the number of companies willing to issue these bonds has decreased
      over time. Our failure to maintain, or our inability to acquire, surety bonds
      that are required by state and federal law would affect our ability to secure
      reclamation and coal lease obligations, which could adversely affect our ability
      to mine or lease coal. That failure could result from a variety of factors
      including, without limitation:




•
            lack
                of availability, higher expense or unfavorable market terms of new
                bonds;





•
            restrictions
                on availability of collateral for current and future third-party
                surety
                bond issuers under the terms of our credit facility or the indenture
                governing our senior
                notes; and





•
            the
                exercise by third-party surety bond issuers of their right to refuse
                to
                renew the surety.





-37-
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            of Contents





***Failure
      to maintain capacity for required letters of credit could limit our available
      borrowing capacity under our credit facility, limit our ability to obtain or
      renew surety bonds and negatively impact our ability to obtain additional
      financing to fund future working capital, capital expenditure or other general
      corporate requirements.***








At
      December 31, 2006, we had $81.1 million of letters of credit in place,
      of which $70.7 million served as collateral for reclamation surety bonds
      and $10.4 million secured miscellaneous obligations. Our credit facility
      provides for revolving commitments of up to $275.0 million,
      all of which can be used to issue additional letters of credit. In addition,
      obligations secured by letters of credit may increase in the future. Any such
      increase would limit our available borrowing capacity under our current or
      future credit facilities and could negatively impact our ability to obtain
      additional financing to fund future working capital, capital expenditure or
      other general corporate requirements. Moreover, if we do not maintain sufficient
      borrowing capacity under our revolving credit facility for additional letters
      of
      credit, we may be unable to obtain or renew surety bonds required for our mining
      operations.




***If
      our assumptions regarding our likely future expenses related to benefits for
      non-active employees are incorrect, then expenditures for these benefits could
      be materially higher than we have predicted.***





At
      the times that we acquired the assets of our Predecessor and acquired companies,
      the Predecessor and acquired operations were subject to long-term liabilities
      under a variety of benefit plans and other arrangements with active and inactive
      employees. We assumed a portion of these long-term obligations and are
      continuing to incur additional costs from our operations for postretirement,
      workers’ compensation and black lung liabilities. The current and non-current
      accrued portions of these long-term obligations, as reflected in our
      consolidated financial statements as of December 31, 2006, included
      $50.8 million of postretirement medical obligations and $8.3 million
      of self-insured workers’ compensation and black lung obligations. These
      obligations have been estimated based on assumptions that are described in
      the
      notes to our consolidated financial statements included elsewhere in this annual
      report. However, if our assumptions are incorrect, we could be required to
      expend greater amounts than anticipated.





Several
      states in which we operate consider changes in workers’ compensation laws from
      time to time, which, if enacted, could adversely affect us. In addition, if
      any
      of the sellers from whom we acquired our operations fail to satisfy their
      indemnification obligations to us with respect to postretirement claims and
      retained liabilities, then we could be required to expend greater amounts than
      anticipated. See “— The inability of the sellers of our Predecessor and
      acquired companies to fulfill their indemnification obligations to us under
      our
      acquisition agreements could increase our liabilities and adversely affect
      our
      results of operations.” Moreover, under certain acquisition agreements, we
      agreed to permit responsibility for black lung claims related to the sellers’
former employees who are employed by us for less than one year after the
      acquisition to be determined in accordance with law (rather than specifically
      assigned to one party or the other in the agreements). We believe that the
      sellers remain liable as a matter of law for black lung benefits for their
      former employees who work for us for less than one year; however, an adverse
      ruling on this issue could increase our exposure to black lung benefit
      liabilities.




***Demand
      for our coal changes seasonally and could have an adverse effect on the timing
      of our cash flows and our ability to service our existing and future
      indebtedness.***





Our
      business is seasonal, with operating results varying from quarter to quarter.
      We
      have historically experienced lower sales during winter months primarily due
      to
      the freezing of lakes that we use to transport coal to some of our customers.
      As
      a result, our first quarter cash flow and profits have been, and may continue
      to
      be, negatively impacted. Lower than expected sales by us during this period
      could have a material adverse effect on the timing of our cash flows and
      therefore our ability to service our obligations with respect to our existing
      and future indebtedness.




-38-
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            of Contents




***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.***





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 business is affected by general economic conditions,
      fluctuations in consumer confidence and spending, and market liquidity, which
      can decline as a result of numerous factors outside of our control, such as
      terrorist attacks and acts of war. Future terrorist attacks against
      U.S. targets, rumors or threats of war, actual conflicts involving the
      United States or its allies, or military or trade disruptions affecting our
      customers may materially adversely affect our operations and those of our
      customers. As a result, there could be delays or losses in transportation and
      deliveries of coal to our customers, decreased sales of our coal and extension
      of time for payment of accounts receivable from our customers. Strategic targets
      such as energy-related assets may be at greater risk of future terrorist attacks
      than other targets in the United States. In addition, disruption or significant
      increases in energy prices could result in government-imposed price controls.
      It
      is possible that any of these occurrences, or a combination of them, could
      have
      a material adverse effect on our business, financial condition and results
      of
      operations.




***If*** **we are unable to accurately estimate the overall risks or costs when we bid
      on a
      road construction contract which is ultimately awarded to us, we may achieve
      a
      lower than anticipated profit or incur a loss on the
      contract.**





A
      larger percentage of our
      road construction revenues and contract backlog are typically derived from
      fixed
      unit price contracts. Fixed unit price contracts require us to perform the
      contract for a fixed unit price irrespective of our actual costs. As a result,
      we realize a profit on these contracts only if we successfully estimate our
      costs and then successfully control actual costs and avoid cost overruns. If
      our
      cost estimates for a contract are inaccurate, or if we do not execute the
      contract within our cost estimates, then cost overruns may cause us to incur
      losses or cause the contract not to be as profitable as we expected. This,
      in
      turn, could negatively affect our cash flow, earnings and financial position.





The
      costs
      incurred and gross profit realized on those contracts can vary, sometimes
      substantially, from the original projections due to a variety of factors,
      including, but not limited to:





**•**
            onsite
                conditions that differ from those assumed in the original bid;


**•**
            delays
                caused by weather conditions;


**•**
            contract
                modifications creating unanticipated costs not covered by change
                orders;


**•**
            changes
                in availability, proximity and costs of materials, including diesel
                fuel,
                explosives, and parts and supplies for our equipment;


**•**
            coal
                recovery which impacts the allocation of cost to road construction;


**•**
            availability
                and skill level of workers in the geographic location of a project;


**•**
            our
                suppliers’ or subcontractors’ failure to perform;


**•**
            mechanical
                problems with our machinery or equipment;


**•**
            citations
                issued by a governmental authority, including the Occupational Safety
                and
                Health Administration and the Mine Safety and Health Administration;


**•**
            difficulties
                in obtaining required governmental permits or approvals;


**•**
            changes
                in applicable laws and regulations; and


**•**
            claims
                or demands from third parties alleging damages arising from our work.





-39-
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            of Contents





**Item1B.**
            **Unresolved
                Staff Issues**





None





-40-
 Table
            of Contents




**Item2.**
            ***Properties***




**Coal
      Reserves**





We
      estimate that, as of December 31, 2006, we owned or leased total proven and
      probable coal reserves of approximately 548.6 million tons. We believe that
      our total proven and probable reserves will support current production levels
      for more than 20 years. “Reserves” are defined by SEC Industry Guide 7 as
      that part of a mineral deposit which could be economically and legally extracted
      or produced at the time of the reserve determination. “Proven (Measured)
      Reserves” are defined by SEC Industry Guide 7 as reserves for which
      (1) quantity is computed from dimensions revealed in outcrops, trenches,
      workings or drill holes; grade and/or quality are computed from the results
      of
      detailed sampling and (2) the sites for inspection, sampling and
      measurement are spaced so closely and the geologic character is so well defined
      that size, shape, depth and mineral content of reserves are well-established.
      “Probable reserves” are defined by SEC Industry Guide 7 as reserves for which
      quantity and grade and/or quality are computed from information similar to
      that
      used for proven (measured) reserves, but the sites for inspection,
      sampling, and measurement are farther apart or are otherwise less adequately
      spaced. The degree of assurance, although lower than that for proven
      (measured) reserves, is high enough to assume continuity between points of
      observation.





Information
      about our reserves consists of estimates based on engineering, economic and
      geological data assembled and analyzed by our internal engineers, geologists
      and
      finance associates. We periodically update our reserve estimates to reflect
      past
      coal production, new drilling information and other geological or mining data,
      and acquisitions or sales of coal properties. Coal tonnages are categorized
      according to coal quality, mining method, permit status, mineability and
      location relative to existing mines and infrastructure. In accordance with
      applicable industry standards, proven reserves are those for which reliable
      data
      points are spaced no more than 2,700 feet apart. Probable reserves are
      those for which reliable data points are spaced 2,700 feet to
      7,900 feet apart. Further scrutiny is applied using geological criteria and
      other factors related to profitable extraction of the coal. These criteria
      include seam height, roof and floor conditions, yield and
      marketability.





We
      periodically retain outside experts to independently verify our estimates of
      our
      coal reserves. The most recent of these reviews for our operations other than
      the Callaway and Progress reserves was completed in November 2004, and we
      obtained an independent third party review of the Callaway reserves that was
      completed in September 2005 as well as an independent third party review of
      the
      Progress reserves upon acquisition in May 2006. These reviews included the
      preparation of reserve maps and the development of estimates by certified
      professional geologists based on data supplied by us and using standards
      accepted by government and industry, including the methodology outlined in
      U.S. Geological Survey Circular 891. Reserve estimates were developed using
      criteria to assure that the basic geologic characteristics of the reserves
      (such
      as minimum coal thickness and wash recovery, interval between deep mineable
      seams and mineable area tonnage for economic extraction) were in reasonable
      conformity with existing and recently completed mine operation capabilities
      on
      our various properties. As
      a
      result of the November 2004 review, we increased our reserve estimate from
      326.5 million tons as of January 1, 2004 to 514.5 million tons as
      of October 15, 2004.





As
      with
      most coal-producing companies in Appalachia, the great majority of our coal
      reserves are subject to leases from third-party landowners. These leases convey
      mining rights to the coal producer in exchange for a percentage of gross sales
      in the form of a royalty payment to the lessor, subject to minimum payments.
      Five percent of our reserve holdings are owned and require no royalty or per-ton
      payment to other parties. The average royalties paid by us for coal reserves
      from our producing properties was $3.24 per ton in 2006, representing 4.5%
      of
      our 2006 coal sales revenue.





-41-
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Although
      our coal leases have varying renewal terms and conditions, they generally last
      for the economic life of the reserves. According to our current mine plans,
      any
      leased reserves assigned to a currently active operation will be mined during
      the tenure of the applicable lease. Because the great majority of our leased
      or
      owned properties and mineral rights are covered by detailed title abstracts
      prepared when the respective properties were acquired by predecessors in title
      to us and our current lessors, we generally do not thoroughly verify title
      to,
      or maintain title insurance policies on, our leased or owned properties and
      mineral rights.





The
      following table provides the “quality” (sulfur content and average Btu content
      per pound) of our coal reserves as of December 31, 2006.





**Recoverable****Reserves
                Proven&**
            
            
            
            **Sulfur
                Content**
            
            
            
            **Average
                Btu****Regional
                Business Unit**
            
            **State**
            
            **Probable(1)**
            
            **<1%**
            
            **1.0%-1.5%**
            
            **>1.5%**
            
            **>12,500**
            
            **<12,500****(In
                millions of tons)****(In
                millions of tons)**
            
            **(In
                millions of tons)**Paramont/
                Alpha Land and Reserves(2)
            
            Virginia
            
            
            141.7
            
            
            102.3
            
            
            29.8
            
            
            9.6
            
            
            139.4
            
            
            2.3Dickenson-Russell
            
            Virginia
            
            
            27.7
            
            
            27.7
            
            
            0
            
            
            0
            
            
            27.7
            
            
            0Kingwood
            
            West
              Virginia
            
            
            28.0
            
            
            0
            
            
            17.0
            
            
            11.0
            
            
            28.0
            
            
            0Brooks
                Run
            
            West
              Virginia
            
            
            25.2
            
            
            6.4
            
            
            18.8
            
            
            0
            
            
            10.1
            
            
            15.1Welch
            
            West
              Virginia
            
            
            89.3
            
            
            89.3
            
            
            0
            
            
            0
            
            
            89.3
            
            
            0AMFIRE
            
            Pennsylvania
            
            
            64.5
            
            
            14.0
            
            
            21.7
            
            
            28.8
            
            
            55.1
            
            
            9.4Enterprise/Enterprise
                Land & Reserve, Inc(3)
            
            Kentucky
            
            
            151.1
            
            
            49.8
            
            
            49.2
            
            
            52.1
            
            
            140.5
            
            
            10.6Callaway
            
            West
              Virginia and Virginia
            
            
            21.1
            
            
            21.1
            
            
            0
            
            
            0
            
            
            9.0
            
            
            12.1Totals
            
            
            
            
            
            548.6
            
            
            310.6
            
            
            136.5
            
            
            101.5
            
            
            499.1
            
            
            49.5Percentages
            
            
            
            
            
            
            
            
            57
            %
            
            25
            %
            
            18
            %
            
            91
            %
            
            9
            %




(1)
            Recoverable
                reserves represent the amount of proven and probable reserves that
                can
                actually be recovered taking into account all mining and preparation
                losses involved in producing a saleable product using existing methods
                under current law. The reserve numbers set forth in the table exclude
                reserves for which we have leased our mining rights to third parties.
                Reserve information reflects a moisture factor of 6.5%. This moisture
                factor represents the average moisture present on our delivered
                coal.


(2)
            Includes
                proven and probable reserves in Virginia controlled by our subsidiary
                Alpha Land and Reserves, LLC. Alpha Land and Reserves, LLC subleases
                a
                portion of the mining rights to its proven and probable reserves
                in
                Virginia to our subsidiary Paramont Coal Company Virginia,
                LLC.


(3)
            Includes
                proven and probable reserves in Kentucky controlled by our subsidiary
                Enterprise Land & Reserve Inc obtained from the Progress Energy
                acquisition.




-42-
 Table
            of Contents




The
      following table summarizes, by regional business unit, the tonnage of our coal
      reserves that is assigned to our operating mines, our property interest in
      those
      reserves and whether the reserves consist of steam or metallurgical coal, as
      of
      December 31, 2006.





**Recoverable****Reserves
                Proven &**
            
            **Total
                Tons**
            
            **Total
                Tons****Regional
                Business Unit**
            
            **State**
            
            **Probable(1****)**
            
            **Assigned(2****)**
            
            **Unassigned(2)**
            
            **Owned**
            
            **Leased**
            
            **Coal
                Type(3)****(In
                millions of tons)****(In
                millions of tons)**
            
            **(In
                millions of tons)**Paramont/
                Alpha Land and Reserves(4)
            
            Virginia
            
            
            141.7
            
            
            56.5
            
            
            85.2
            
            
            0
            
            
            141.7
            
            Steam
                and MetallurgicalDickenson-Russell
            
            Virginia
            
            
            27.7
            
            
            27.7
            
            
            0
            
            
            0
            
            
            27.7
            
            Steam
                and MetallurgicalKingwood
            
            West
              Virginia
            
            
            28.0
            
            
            19.6
            
            
            8.4
            
            
            0
            
            
            28.0
            
            Steam
                and MetallurgicalBrooks
                Run
            
            West
              Virginia
            
            
            25.2
            
            
            12.5
            
            
            12.7
            
            
            2.4
            
            
            22.8
            
            Steam
                and MetallurgicalWelch
            
            West
              Virginia
            
            
            89.3
            
            
            43.4
            
            
            45.9
            
            
            1.1
            
            
            88.2
            
            Steam
                and MetallurgicalAMFIRE.
            
            Pennsylvania
            
            
            64.5
            
            
            60.2
            
            
            4.3
            
            
            3.5
            
            
            61.0
            
            Steam
                and MetallurgicalEnterprise/Enterprise
                Land and Reserve Inc(5)
            
            Kentucky
            
            
            151.1
            
            
            17.9
            
            
            133.2
            
            
            20.2
            
            
            130.9
            
            SteamCallaway
            
            West
              Virginia and Virginia
            
            
            21.1
            
            
            18.9
            
            
            2.2
            
            
            1.1
            
            
            20.0
            
            Steam
                and MetallurgicalTotals
            
            
            
            
            
            548.6
            
            
            256.7
            
            
            291.9
            
            
            28.3
            
            
            520.3Percentages
            
            
            
            
            
            
            
            
            47
            %
            
            53
            %
            
            5
            %
            
            95
            %





(1)
            Recoverable
                reserves represent the amount of proven and probable reserves that
                can
                actually be recovered taking into account all mining and preparation
                losses involved in producing a saleable product using existing methods
                under current law. The reserve numbers set forth in the table exclude
                reserves for which we have leased our mining rights to third parties.
                Reserve information reflects a moisture factor of 6.5%. This moisture
                factor represents the average moisture present on our delivered
                coal.


(2)
            Assigned
                reserves represent recoverable coal reserves that can be mined without
                a
                significant capital expenditure for mine development, whereas unassigned
                reserves will require significant capital expenditures to mine the
                reserves.


(3)
            Almost
                all of our reserves that we currently market as metallurgical coal
                also
                possess quality characteristics that would enable us to market them
                as
                steam coal.


(4)
            Includes
                proven and probable reserves in Virginia controlled by our subsidiary
                Alpha Land and Reserves, LLC. Alpha Land and Reserves, LLC subleases
                a
                portion of the mining rights to its proven and probable reserves
                in
                Virginia to our subsidiary Paramont Coal Company Virginia,
                LLC.


(5)
            Includes
                proven and probable reserves in Kentucky controlled by our subsidiary
                Enterprise Land & Reserve Inc obtained from the Progress Energy
                acquisition.




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The following map shows the locations of our properties, including the
      number of mines and preparation plants as of February 1, 2007 and 2006
      production of saleable tons for each of our eight regional business
      units:







See
      Item 1. Business, of this report for additional information regarding our
      coal operations and properties.




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**Item3.**
            ***Legal
                Proceedings***


**


*General.* We are a
      party to a number of legal proceedings incident to our normal business
      activities. While we cannot predict the outcome of these proceedings, we do
      not
      believe that any liability arising from these matters individually or in the
      aggregate should have a material impact upon our consolidated cash flows,
      results of operations or financial condition.





**Item 4.**
            ***Submission
                of Matters to a Vote of Security
                Holders***





Omitted
      pursuant to General Instruction I(2) (c ) of Form 10-k





**PART II**




**Item5.**
            ***Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity
                Securities***





Alpha
      NR Holding, Inc. is a wholly owned subsidiary of Alpha Natural Resources, Inc.
      and, accordingly, there is no market for common stock of Alpha NR Holding,
      Inc.





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**Item 6.**
            ***Selected
                Financial Data***





The
      following table presents selected financial and other data about us and our
      Predecessor for the most recent five fiscal periods. The selected financial
      data
      as of December 31, 2006 and 2005 and for the years then ended have been derived
      from the audited consolidated financial statements and related footnotes of
      Alpha NR Holding, Inc. and subsidiaries included in this annual report. The
      selected historical financial data as of December 31, 2004 and for the year
      then
      ended have been derived from the combined financial statements of ANR Fund
      IX
      Holdings, L.P. and Alpha NR Holding, Inc. and subsidiaries (the owners of a
      majority of the membership interests of ANR Holdings prior to the Internal
      Restructuring) and the related notes, included elsewhere in this annual report.
      The selected historical financial data as of December 31, 2003 and for the
      year
      then ended and for the period from December 14, 2002 to December 31, 2002 have
      been derived from the audited combined balance sheet of ANR Fund IX Holdings,
      L.P. and Alpha NR Holding, Inc. and subsidiaries not included in this annual
      report. The selected historical financial data for the period from January
      1,
      2002 through December 13, 2002 (the “Predecessor Period”) have been derived from
      our Predecessor’s combined financial statements not included in this annual
      report. You should read the following table in conjunction with the financial
      statements, the related notes to those financial statements, and “Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.”





The
      results of operations for the historical periods included in the following
      table
      are not necessarily indicative of the results to be expected for future periods.
      In addition, see Item 1A “Risk Factors” of this report for a discussion of
      risk factors that could impact our future results of operations.


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 Table
            of Contents
   Alpha
                  NR Holding, Inc and Subsidiaries
              
              ANR
                  FUND IX Holdings, L.P. and Alpha NR Holding, Inc. and
                  Subsidiaries
              
              PredecessorYear
                  Ended December 31, 2006
              
              Year
                  Ended December 31, 2005
              
              Year
                  Ended December 31, 2004
              
              Year
                  Ended December 31, 2004
              
              December
                  14, 2002 to December 31, 2002
              
              January
                  1, 2002 to
                December
                  13, 2002**(In
                  thousands)****Statement
                  of Operations Data:**Revenues:Coal
                  revenues
              
              $
              1,687,553
              
              $
              1,413,174
              
              $
              1,079,981
              
              $
              694,596
              
              $
              6,260
              
              $
              154,715Freight
                  and handling revenues
              
              
              188,366
              
              
              185,555
              
              
              141,100
              
              
              73,800
              
              
              1,009
              
              
              17,001Other
                  revenues
              
              
              34,743
              
              
              27,926
              
              
              28,347
              
              
              13,453
              
              
              101
              
              
              6,031Total
                  revenues
              
              
              1,910,662
              
              
              1,626,655
              
              
              1,249,428
              
              
              781,849
              
              
              7,370
              
              
              177,747Costs
                  and expenses:Cost
                  of coal sales (exclusive of items shown separately below)
              
              
              1,352,450
              
              
              1,184,092
              
              
              920,359
              
              
              626,265
              
              
              6,268
              
              
              158,924Freight
                  and handling costs
              
              
              188,366
              
              
              185,555
              
              
              141,100
              
              
              73,800
              
              
              1,009
              
              
              17,001Cost
                  of other revenues
              
              
              22,982
              
              
              23,675
              
              
              22,994
              
              
              12,488
              
              
              120
              
              
              7,973Depreciation,
                  depletion and amortization
              
              
              140,851
              
              
              73,122
              
              
              55,261
              
              
              35,385
              
              
              274
              
              
              6,814Selling,
                  general and administrative expenses (exclusive of depreciation
                  and
                  amortization shown separately above)
              
              
              67,952
              
              
              88,422
              
              
              40,607
              
              
              21,926
              
              
              471
              
              
              8,797Costs
                  to exit business
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              25,274Total
                  costs and expenses
              
              
              1,772,601
              
              
              1,554,866
              
              
              1,180,321
              
              
              769,864
              
              
              8,142
              
              
              224,783Refund
                  of federal black lung excise tax
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              2,049Other
                  operating income, net
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,430Income
                  (loss) from operations
              
              
              138,061
              
              
              71,789
              
              
              69,
                  107
              
              
              11,985
              
              
              (772
              )
              
              (45,557
              )Other
                  income (expense):Interest
                  expense
              
              
              (41,774
              )
              
              (29,647
              )
              
              (20,041
              )
              
              (7,848
              )
              
              (203
              )
              
              (35
              )Interest
                  income
              
              
              839
              
              
              1,064
              
              
              531
              
              
              103
              
              
              6
              
              
              2,072Miscellaneous
                  income
              
              
              523
              
              
              91
              
              
              722
              
              
              574
              
              
              —
              
              
              —Total
                  other income (expense), net
              
              
              (40,412
              )
              
              (28,492
              )
              
              (18,788
              )
              
              (7,171
              )
              
              (197
              )
              
              2,037Income
                  (loss) before income taxes and minority interest
              
              
              97,649
              
              
              43,297
              
              
              50,319
              
              
              4,814
              
              
              (969
              )
              
              (41,520
              )Income
                  tax expense (benefit)
              
              
              (30,519
              )
              
              18,953
              
              
              5,150
              
              
              898
              
              
              (334
              )
              
              (17,198
              )Minority
                  interest
              
              
              —
              
              
              2,918
              
              
              22,781
              
              
              1,164
              
              
              —
              
              
              —Income
                  (loss) from continuing operations
              
              
              128,168
              
              
              21,426
              
              
              22,388
              
              
              2,752
              
              
              (635
              )
              
              (24,322
              )Loss
                  from discontinued operations
              
              
              —
              
              
              (213
              )
              
              (2,373
              )
              
              (490
              )
              
              —
              
              
              —Net
                  income (loss)
              
              $
              128,168
              
              $
              21,213
              
              $
              20,015
              
              $
              2,262
              
              $
              (635
              )
              $
              (24,322
              )




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Alpha
                NR Holding, Inc and Subsidiaries
              
              ANR
                  FUND IX Holdings, L.P. and Alpha NR Holding, Inc. and
                  Subsidiaries
              
              PredecessorYear
                  Ended December 31, 2006
              
              Year
                  Ended December 31, 2005
              
              Year
                  Ended December 31, 2004
              
              Year
                  Ended December 31, 2004
              
              December
                  14, 2002 to December 31, 2002
              
              January
                  1, 2002 to December 13, 2002(In
                  thousands)**Balance
                  sheet data (at period end):**Cash
                  and cash equivalents
              
              $
              33,256
              
              $
              39,622
              
              $
              7,391
              
              $
              11,246
              
              $
              8,444
              
              $
              88Operating
                  and working capital
              
              
              123,211
              
              
              40,760
              
              
              56,257
              
              
              32,714
              
              
              (12,223
              )
              
              4,268
              )Total
                  assets
              
              
              1,150,372
              
              
              1,016,939
              
              
              477,121
              
              
              379,336
              
              
              108,442
              
              
              156,328Notes
                  payable and long-term debt, including current portion
              
              
              445,651
              
              
              485,803
              
              
              201,705
              
              
              84,964
              
              
              25,743
              
              
              —Stockholders’
                  equity and partners’ capital (deficit)
              
              
              353,194
              
              
              222,951
              
              
              45,933
              
              
              86,367
              
              
              23,384
              
              
              (132,997
              )**Statement
                  of cash flows data:**Net
                  cash provided by (used in):Operating
                  activities
              
              $
              208,663
              
              $
              153,837
              
              $
              106,776
              
              $
              54,104
              
              $
              (295
              )
              $
              (13,816
              )Investing
                  activities
              
              
              (160,046
              )
              
              (339,387
              )
              
              (86,202
              )
              
              (100,072
              )
              
              (38,893
              )
              
              (22,054
              )Financing
                  activities
              
              
              (54,943
              )
              
              217,781
              
              
              (24,429
              )
              
              48,770
              
              
              47,632
              
              
              35,783
              )Capital
                  expenditures
              
              
              131,943
              
              
              122,342
              
              
              72,046
              
              
              27,719
              
              
              960
              
              
              21,866**Other
                  data**Production:Produced/processed
              
              
              24,827
              
              
              20,602
              
              
              19,069
              
              
              17,199Purchased
              
              
              4,090
              
              
              6,284
              
              
              6,543
              
              
              3,938Total
              
              
              28,917
              
              
              26,886
              
              
              25,612
              
              
              21,137Tons
                  Sold:Steam
              
              
              19,050
              
              
              16,674
              
              
              15,836
              
              
              14,809Met
              
              
              10,029
              
              
              10,023
              
              
              9,490
              
              
              6,804Total
              
              
              29,079
              
              
              26,697
              
              
              25,326
              
              
              21,613Coal
                  sales realization/ton:Steam
              
              $
              49.05
              
              $
              41.33
              
              $
              32.66
              
              $
              27.14Met
              
              $
              75.09
              
              $
              72.24
              
              $
              59.31
              
              $
              37.35Total
              
              $
              58.03
              
              $
              52.93
              
              $
              42.64
              
              $
              32.14Cost
                  of coal sales/ton
              
              $
              46.51
              
              $
              44.35
              
              $
              36.34
              
              $
              28.98Coal
                  margin/ton
              
              $
              11.52
              
              $
              8.58
              
              $
              6.30
              
              $
              3.16Ratio
                of earnings to fixed charges(2)
              
              
              3.25
              
              
              2.32
              
              
              2.34
              
              
              1.46
              
              
              (3.55
              )
              
              (77.94
              )Deficiency
                amount(2)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (969
              )
              
              (41,520
              )EBITDA,
                  as adjusted(3)
              
              $
              279,435
              
              $
              144,908
              
              $
              119,327
              
              $
              47,663







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(1)
            EBITDA
                is defined as net income (loss) plus interest expense, income tax
                expense
                (benefit), depreciation, depletion and amortization, less interest
                income.
                EBITDA, as adjusted is EBITDA, further adjusted for minority interest.
                EBITDA and EBITDA, as adjusted, are non-GAAP measures used by management
                to measure operating performance, and management also believes it
                is a
                useful indicator of our ability to meet debt service and capital
                expenditure requirements. Because EBITDA and EBITDA, as adjusted,
                are not
                calculated identically by all companies, our calculation may not
                be
                comparable to similarly titled measures of other
                companies.





EBITDA
      and EBITDA, as adjusted, are calculated as follows (unaudited, in
      thousands):





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**
            
            **2003**Net
                income
            
            $
            128,168
            
            $
            21,213
            
            $
            20,015
            
            $
            2,262Interest
                expense
            
            
            41,774
            
            
            29,647
            
            
            20,041
            
            
            7,848Interest
                income
            
            
            (839
            )
            
            (1,064
            )
            
            (531
            )
            
            (103
            )Income
                tax expense (benefit)
            
            
            (30,519
            )
            
            18,861
            
            
            3,960
            
            
            668Depreciation,
                depletion and amortization
            
            
            140,851
            
            
            73,405
            
            
            56,012
            
            
            36,054EBITDA
            
            
            279,435
            
            
            142,
                062
            
            
            99,497
            
            
            46,729Minority
                interest
            
            
            —
            
            
            2,846
            
            
            19,830
            
            
            934EBITDA,
                as adjusted
            
            $
            279,435
            
            $
            144,908
            
            $
            119,327
            
            $
            47,663





(2)
            For
                purposes of this computation, “earnings” consists of income (loss) before
                income taxes and after minority interest plus fixed charges and
                amortization of capitalized interest. “Fixed charges” consist of interest
                expense on all indebtedness plus capitalized interest and amortization
                of
                deferred costs of financing and the estimated interest component
                of lease
                rental expense. The deficiency amount is calculated for periods for
                which
                the ratio of earnings to fixed charges is less than
                one-to-one.





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**Item 7.**
            ***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 and our “Selected Historical Financial
      Data” included elsewhere in this annual report. The historical financial
      information discussed below for 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 on a combined basis, which prior
      to
      the completion of our Internal Restructuring were the owners of a majority
      of
      the membership interests of ANR Holdings, our top-tier holding company, and
      for
      Alpha Natural Resources, Inc. and subsidiaries on a consolidated basis for
      periods from and after the completion of our Internal
      Restructuring.





**Overview**





We
      produce, process and sell steam and metallurgical (met) coal from eight regional
      business units, which, as of February 1, 2007, are supported by 38 active
      underground mines, 27 active surface mines and 10 preparation plants located
      throughout Virginia, West Virginia, Kentucky, and Pennsylvania, as well as
      a
      road construction business in West Virginia that recovers coal. We also sell
      coal produced by others, 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. Our
      sales of steam coal in 2006 and 2005 accounted for approximately 66% and 62%,
      respectively, of our annual coal sales volume, and our sales of metallurgical
      coal in 2006 and 2005, which generally sells at a premium over steam coal,
      accounted for approximately 34% and 38%, respectively, of our annual coal sales
      volume. The increase in our percentage of steam coal sold was mainly due to
      our
      recent acquisitions which lead to an overall increase in tons sold while total
      met tons sold remained unchanged. Our sales of steam coal during 2006 and 2005
      were made primarily to large utilities and industrial customers in the Eastern
      region of the United States, and our sales of met coal during those years 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 35% of our sales revenue in 2006 and
      45%
      of our sales revenue in 2005 was derived from sales made outside the United
      States, primarily in Canada, Japan, Brazil, Korea and several countries in
      Europe. This decrease is due to a 6% decrease in export tons sold combined
      with
      an increase in our overall sales revenue.





In
      addition, we generate other revenues from equipment and parts sales, equipment
      repair, road construction, 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.





Our
      primary expenses are for 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, coal handling and processing operations and coal recovery
      incidental to our road 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 and processing operations, which we report in
      our
      other revenues and cost of other revenues, respectively.





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*Internal
      Restructuring and Our* *Parent’s
      Initial Public Offering.* On
      February 11, 2005, we completed a series of transactions in connection with
      the Internal Restructuring for the purpose of transitioning our top-tier holding
      company from a limited liability company to a corporation, and on
      February 18, 2005, our parent completed the initial public offering of our
      common stock. Further information regarding our Internal Restructuring and
      our
      parent’s initial public offering can be found in Note 2 to our consolidated
      financial statements included in this annual report. As a result of our parent’s
      initial public offering and our Internal Restructuring, we have incurred during
      the period after the initial public offering and Internal Restructuring and
      will
      continue to incur additional expenses that we did not incur in prior periods,
      including expenses associated with compliance with corporate governance and
      periodic financial reporting requirements for public companies. Moreover, all
      of
      our income is now subject to income tax and therefore the effective tax rates
      reflected in our financial statements for periods prior to the Internal
      Restructuring are not indicative of our effective tax rates after our Internal
      Restructuring.





As
      part
      of our Internal Restructuring, our executive officers and certain other key
      employees exchanged their interests in ANR Holdings for shares of our parent’s
      common stock and the right to participate in a distribution of the proceeds
      our
      parent received from the underwriters as a result of the underwriters’ exercise
      of their over-allotment option in connection with the initial public offering.
      As a result, we recorded stock-based compensation expense equal to the fair
      value of the unrestricted shares issued and distributions paid in the amount
      of
      $45.8 million for the year ended December 31, 2005. In addition, as a
      result of the conversion of outstanding options held by members of our
      management to purchase units of Alpha Coal Management into the ACM Converted
      Options, we recorded stock-based compensation of $0.7 million in 2005. The
      aggregate amount of stock-based compensation expense we recorded in 2005 was
      $46.5 million, equal to the $45.8 million of expense associated with
      distributions paid and the vested portions of shares issued in the Internal
      Restructuring and amortization expense from the unvested portions of shares
      issued in the Internal Restructuring, and $0.7 million of amortization
      expense from the ACM Converted Options. In addition, we had deferred stock-based
      compensation of $15.6 million, including $12.8 million and
      $2.6 million related to our Internal Restructuring and the ACM Converted
      Options, respectively, that we will record as non-cash stock-based compensation
      expense over the remaining term of the applicable two-year and five-year vesting
      periods, respectively, thereby reducing our earnings in those
      periods.





In
      connection with our Internal Restructuring, our parent assumed the obligation
      of
      ANR Holdings to make distributions to (1) affiliates of AMCI in an
      aggregate amount of $6.0 million, representing the approximate incremental
      tax resulting from the recognition of additional tax liability resulting from
      our Internal Restructuring, and (2) First Reserve Fund IX, L.P. in an
      aggregate amount of approximately $4.5 million, representing the
      approximate value of tax attributes conveyed as a result of the Internal
      Restructuring (collectively, the “Tax Distributions”). The Tax Distributions to
      affiliates of AMCI were paid in cash in five equal installments of $1.2 million
      on April 15, 2005, June 15, 2005, September 15, 2005,
      January 13, 2006 and April 17, 2006. The Tax Distributions to First Reserve
      Fund IX, L.P. are in three installments of approximately $2.1 million,
      $2.1 million and $0.3 million on December 15, 2007, 2008 and
      2009, respectively. Our parent will pay the Tax Distributions in cash or, to
      the
      extent our subsidiaries are not permitted by the terms of our credit facility
      or
      the indenture governing our senior notes to distribute cash to our parent to
      pay
      the Tax Distributions, in shares of our parent’s common stock.





*NKC
      Disposition.* On
      April 14, 2005, we sold the assets of NKC to an unrelated third party for
      cash in the amount of $4.4 million, 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. For the six months ended June 30, 2005, NKC
      contributed revenues of $4.5 million, an after-tax and minority interest
      loss of $0.2 million on sales of 0.1 million tons of steam coal sold.
      In connection with the closing of the transaction, National King Coal, LLC
      was
      renamed NatCoal LLC, and Gallup Transportation and Transloading Company, LLC
      was
      renamed GTTC LLC. We recorded a gain on this sale of $0.7 million and have
      reported NKC as discontinued operations for all periods presented
      herein.




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*Nicewonder
      Acquisition and 2005 Financing.* On
      October 26, 2005, we completed the acquisition of certain privately held
      coal reserves and operations of the Nicewonder Coal Group in southern West
      Virginia and southwestern Virginia for an aggregate purchase price of
      $328.2 million, consisting of cash at closing in the amount of
      $35.2 million, a cash payment of $1.9 million made to the sellers
      in April 2006, transaction costs of $4.7 million, $221.0 million
      principal amount of promissory installment notes of one of our indirect, wholly
      owned subsidiaries (of which $181.1 million was paid on November 2,
      2005 and $39.9 million was paid on January 13, 2006), a payment on
      February 6, 2006 in the amount of $12.3 million for working capital,
      and 2,180,233 shares of our parent’s common stock valued at approximately
      $53.2 million for accounting purposes. For this purpose, the value of the
      common stock issued was based on the average closing prices of our parent’s
      common stock for the five trading days surrounding October 20, 2005, the
      date the number of shares to be issued under the terms of the acquisition
      agreement became fixed without subsequent revision. In connection with the
      Nicewonder Acquisition, we also agreed to make royalty payments to the former
      owners of the acquired companies in the amount of $0.10 per ton of coal
      mined and sold from White Flame Energy’s Surface Mine No. 10. The
      Nicewonder Acquisition consisted of the purchase of the outstanding capital
      stock of White Flame Energy, Inc., Twin Star Mining, Inc. and Nicewonder
      Contracting, Inc., the equity interests of Powers Shop, LLC and Buchanan Energy,
      LLC and substantially all of the assets of Mate Creek Energy of W. Va., Inc.
      and
      Virginia Energy Company, and the business of Premium Energy, Inc. by
      merger.





Also
      on
      October 26, 2005, in connection with our acquisition of the Nicewonder Coal
      Group, we entered into a new $525.0 million credit facility consisting of a
      $250.0 term loan facility and a $275.0 revolving credit facility. We used the
      net proceeds of the term loan facility and a portion of the proceeds from
      drawings under the revolving credit facility to finance the Nicewonder
      Acquisition and to refinance our $175.0 million prior credit
      facility.





*Progress
      Acquisition* On May
      1, 2006, we completed the acquisition of certain coal mining operations in
      eastern Kentucky from Progress Fuels Corp, a subsidiary of Progress Energy,
      for
      $28.8 million, including an adjustment for working capital. The Progress
      acquisition consisted of the purchase of the outstanding capital stock of
      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 have been integrated into Enterprise.





*Gallatin
      Acquisition* On
      December 28, 2006, we paid $3.3 million and we are obligated to make an
      additional contribution of $7.0 million in 2007 for a 94% ownership interest
      in
      Gallatin Materials LLC (Gallatin), a lime manufacturing venture near Cincinnati,
      Ohio. Gallatin plans to construct two rotary pre-heater lime kilns to produce
      lime to be sold primarily to coal-burning utilities as a scrubbing agent for
      removing sulfur dioxide from flue gas. The lime is also expected to be sold
      to
      steel producers for use as flux in electric arc and basic oxygen furnaces.
      The
      minority owners were granted restricted member interests in Gallatin which
      vest
      based on performance criteria over approximately three years from the closing
      date and which, if earned in their entirety, would reduce our ownership to
      77.5%. We are committed to providing financing to Gallatin through a $3.8
      million subordinated loan and provided a $2.6 million letter of credit to cover
      cost overruns.





*Forward
      Purchase and Forward Sales Contracts* In
      the
      course of preparing our second quarter financial statements, we and our
      independent auditors identified certain forward purchase and forward sales
      contracts that were considered derivative instruments under SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities,* that did
      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 we reviewed these contracts to assess the impact, if any, which
      mark to market adjustments would have had on previously issued financial
      statements. Upon completion of that review, we concluded that previously issued
      financial statements were not materially misstated. At the beginning of the
      second quarter of 2006, we recorded adjustments to mark to market all of our
      open contracts for coal sales and purchases in the over-the-counter market
      (OTC)
      and certain third party purchases and sales contracts. These adjustments
      resulted in an decrease in coal sales revenues of $0.5 million and a
      decrease in cost of coal sales of $2.3 million, resulting in a net after-tax
      increase to net income in the amount of $1.0 million.





*Staff
      Accounting Bulletin No. 108* On
      September 13, 2006, the Securities and Exchange Commission issued Staff
      Accounting Bulletin No. 108, “ *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* ”
(“SAB
      108”), which provides interpretive guidance on the consideration of effects of
      prior year misstatements in quantifying current year misstatements for the
      purpose of a materiality assessment. SAB 108 is effective for us for the year
      ended December 31, 2006 and provided for a one time transitional cumulative
      effect adjustment to retained earnings as of January 1, 2006 for errors which
      were not previously deemed to be material, but which are material under the
      guidance of SAB 108. As a result of the adoption of SAB 108, we changed our
      method of accounting for costs related to acid mine drainage and also for
      certain materials and supplies which are used in mining operations. We recorded
      a cumulative effect adjustment to increase beginning retained earnings by $0.7
      million (net of income tax effect of $0.2 million) for the combined effect
      of
      these accounting changes.




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***Coal
      Pricing Trends,  Uncertainties and Outlook***


The
      strong coal pricing environment that has contributed to our growth in revenues
      during 2006 and 2005 began to moderate in the second half of 2006 due to an
      increase in customer stockpiles, mild weather and increased coal production
      which lead to an oversupply of coal in the marketplace. With
      utilities adjusting their coal inventories to more normalized levels, and U.S.
      coal supply outpacing consumption in 2006, the market has softened for steam
      coal with little indication of when conditions might improve and support price
      improvements. Met coal markets have been more insulated from significant price
      movement, and we have contracted most of our met business for 2007, including
      virtually all domestic business. Met coal sales are expected to account for
      30-35 percent of expected 2007 sales volumes.





While
      our
      outlook on coal pricing remains positive, future coal prices are subject to
      factors beyond our control and we cannot predict whether and for how long this
      current coal pricing environment will continue. As of February 5, 2007, 83
      percent of our planned 2007 production was committed and priced and 7 percent
      was committed and unpriced, with approximately 2.0 million tons uncommitted.
      Committed steam coal prices for 2007 average $48 to $49 per ton and met coal
      prices average $72 to $73 per ton. Approximately 42 percent of our planned
      production in 2008 is committed.





We
      are
      exercising production discipline during this weaker market period and we are
      also reviewing all of our projected capital expenditures for 2007 in order
      to
      prioritize those expenditures in favor of operations that are able to achieve
      sustainable operating margins in a softer pricing environment. We have made
      a
      number of changes to our operating subsidiaries mine plans which in the
      aggregate should reduce our annual production going forward by about 1.0 million
      tons. Our business is very sensitive to changes in supply and demand and we
      will
      be carefully managing our mines in 2007 to preserve profit margins.  
Events beyond our control could impact our profit margin.





During
      the second half of 2006, we experienced growing productivity challenges due
      to
      geology issues related to the high quality, high revenue reserves we choose
      to
      mine and the unavailability of experienced labor at certain locations. As a
      result, productivity levels declined and costs increased. Additionally, training
      and integrating new miners takes time and their productivity levels during
      this
      period are not equal to that of more experienced miners.





For
      additional information regarding some of the risks and uncertainties that affect
      our business, see Item 1A “Risks Factors.”





**Unaudited
      Pro Forma Financial Information**





The
      following unaudited pro forma statement of income data for the years ended
      December 31, 2005 and 2004 gives effect to the 2004 Financings, Internal
      Restructuring, initial public offering, Nicewonder Acquisition and 2005
      Financing as if each of these transactions described above had occurred on
      January 1, 2004 (in thousands):





**Year
                Ended December 31,****2005**
            
            **2004**Revenues
            
            $
            1,799,129
            
            
            1,397,315Income
                from continuing operations
            
            $
            22,315
            
            
            15,676Loss
                from discontinued operations
            
            
            (266
            )
            
            (4,054
            )Net
                income
            
            $
            22,049
            
            
            11,622




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***Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005***




*Summary*





For
      the year ended December 31, 2006, we recorded revenues of
      $1,910.7 million compared to $1,626.7 million for the year ended
      December 31, 2005, an increase of $284.0 million. Net income increased
      from $21.2 million in 2005 to $128.2 million in 2006 and operating
      income increased $66.0 million to $138.1 million. Included in our 2006
      results was a tax benefit from the reversal of a portion of our valuation
      allowance for deferred tax assets in the amount of $55.6 million, after-tax
      stock-based compensation charges of $12.8 million related to our IPO, as
      well as $5.2 million after-tax charge for the buyout of a multi-year legacy
      coal
      supply agreement. Our results for 2005 were unfavorably impacted by an after-tax
      charge of $46.5 million for stock based compensation also related to our IPO.
      Tons sold increased from 26.7 million tons in 2005 to 29.1 million
      tons in 2006 mainly due to the impact of the Nicewonder and Progress
      acquisitions, representing 5.3 million tons, partially offset by a reduction
      of
      1.7 million tons of purchased coal sold. Coal margin, which we define as coal
      revenues less cost of coal sales, divided by coal revenues, increased from
      16.2%
      in 2005 to 19.9% in 2006.





*Revenues*





**Year
                Ended December 31,**
            
            **Increase
                (Decrease)****2006**
            
            **2005**
            
            **$
                or Tons**
            
            **%****(In
                thousands, except per ton data)**Coal
                revenues
            
            $
            1,687,553
            
            $
            1,413,174
            
            $
            274,379
            
            
            19
            %Freight
                and handling revenues
            
            
            188,366
            
            
            185,555
            
            
            2,811
            
            
            2
            %Other
                revenues
            
            
            34,743
            
            
            27,926
            
            
            6,817
            
            
            24
            %Total
                revenues
            
            $
            1,910,662
            
            $
            1,626,655
            
            $
            284,007
            
            
            17
            %Tons
                sold
            
            
            29,079
            
            
            26,698
            
            
            2,381
            
            
            9
            %Coal
                sales realization per ton sold
            
            $
            58.03
            
            $
            52.93
            
            $
            5.10
            
            
            10
            %


**


*Coal
      Revenues.* Coal
      revenues increased for the year ended December 31, 2006 by
      $274.4 million or 19%, to $1,687.6 million, as compared to the year
      ended December 31, 2005. This increase was due primarily to a
      $5.10 per ton increase in the average sales price of our coal and the sale
      of 2.4 million additional tons over the comparable period last year. Tons
      sold increased from 26.7 million tons in 2005 to 29.1 million tons in
      2006 mainly due to the addition of the Nicewonder and Progress acquisitions,
      representing 5.3 million tons, partially offset by a reduction of 1.7 million
      tons of purchased coal sold. The mark-to-market adjustment for certain forward
      sales contracts increased revenues by $6.1 million. The increase in the average
      sales price of our coal was due to the general increase in coal prices during
      the period. Met coal prices increased by $2.85 per ton to $75.09 per
      ton and steam coal prices increased by $7.72 per ton to an average of
      $49.05 per ton including the effects of the $7.0 million payment of
      terminate a multi-year coal contract, which was recorded as a reduction in
      steam
      coal revenues. Our sales mix of met coal and steam coal based on volume in
      2006
      was 34% and 66%, respectively compared with 38% and 62% in 2005.





*Freight
      and Handling Revenues.* Freight
      and handling revenues increased to $188.4 million for the year ended
      December 31, 2006, an increase of $2.8 million compared to the year
      ended December 31, 2005 due to an increase in freight costs, arising
      primarily from fuel surcharges. These revenues are offset by equivalent costs
      and do not contribute to our profitability.





*Other
      Revenues.* Other
      revenues increased for the year ended December 31, 2006 by
      $6.8 million, or 24%, to $34.7 million, as compared to the same period
      for 2005. Revenues from our road construction operations were $24.0 million,
      a
      $20.2 million increase mainly due to a full year of operations in 2006.
      This increase was mostly offset by a decrease in revenues from outside sales
      by
      Maxxim Rebuild of $7.1 million, a decrease in fees from coal processing and
      handling operations of $7.6 million, net of an increase in rents, royalties
      and
      other in the amount of $1.3 million. Other revenues attributable to our Coal
      Operations segment were $4.3 million in 2006 and $10.4 million in
      2005.





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*Costs
      and Expenses*





**Year
                Ended December 31.**
            
            **Increase
                (Decrease)****2006**
            
            **2005**
            
            **$**
            
            **%****(In
                thousands, except per ton data)**Cost
                of coal sales (exclusive of items shown separately below)
            
            $
            1,352,450
            
            $
            1,184,092
            
            $
            168,358
            
            
            14
            %Freight
                and handling costs
            
            
            188,366
            
            
            185,555
            
            
            2,811
            
            
            2
            %Cost
                of other revenues
            
            
            22,982
            
            
            23,675
            
            
            (693
            )
            
            (3
            )%Depreciation,
                depletion and amortization
            
            
            140,851
            
            
            73,122
            
            
            67,729
            
            
            93
            %Selling,
                general and administrative expenses (exclusive of depreciation and
                amortization shown separately above)
            
            
            67,952
            
            
            88,422
            
            
            (20,470
            )
            
            (23
            )%Total
                costs and expenses
            
            $
            1,772,601
            
            $
            1,554,866
            
            $
            217,735
            
            
            14
            %Cost
                of coal sales per ton sold
            
            $
            46.51
            
            $
            44.35
            
            $
            2.16
            
            
            5
            %


**


*Cost
      of Coal Sales.* For the
      year ended December 31, 2006, our cost of coal sales, which excludes
      charges for depreciation, depletion and amortization, increased
      $168.4 million, or 14%, to $1,352.5 million compared to the year ended
      December 31, 2005. The mark-to-market adjustment on certain forward
      purchase contracts increased cost of coal sales by $5.7 million. Approximately
      $208.2 million of the year ended December 31, 2006 increase in costs were
      associated with our Nicewonder and Progress acquisitions, partially offset
      by a
      reduction in spending for purchased coal of $100.0 million. In addition, our
      cost of coal sales increased as a result of increased prices for labor, diesel
      fuel and other mine supplies, the performance and cost of contract mining
      services, and increased variable sales-related costs, such as royalties and
      severance taxes. The average cost per ton sold increased 5% from $44.35 per
      ton in 2005 to $46.51 per ton in 2006. Our cost of coal sales as a
      percentage of coal revenues decreased from 84% in 2005 to 80% in 2006. For
      the
      years ended December 31, 2006 and 2005 our average cost per ton for our
      produced and processed coal sales was $44.33 and $40.07, respectively, and
      our
      average cost per ton for coal that we purchased from third parties and resold
      without processing was $58.76 and $58.88, respectively.





*Freight
      and Handling Costs.* Freight
      and handling costs increased $2.8 million to $188.4 million during
      2006 as compared to 2005 due to an increase in freight costs, arising primarily
      from fuel surcharges. These costs were offset by an equivalent amount of freight
      and handling revenue.





*Cost
      of Other Revenues.* Cost of
      other revenues decreased $0.7 million, or 3%, to $23.0 million for the
      year ended December 31, 2006 as compared to the prior year due to a
      decrease in costs associated with lower coal processing and handling volumes
      in
      the amount of $7.3 million, a decrease in Maxxim Rebuild’s outside sales
      activity of $7.0 million mostly offset by a $13.9 million increase in costs
      associated with our road construction operations primarily driven by a full
      year
      of road construction activity in 2006.  This cost does not include
      related charges for depreciation and amortization.





*Depreciation,
      Depletion and Amortization.* Depreciation, depletion, and amortization increased $67.7 million, or 93%,
      to $140.9 million for the year ended December 31, 2006 as compared to
      the same period of 2005 due to capital additions resulting in additional
      depreciation and due to the impact of the Nicewonder and Progress acquisitions.
      Depreciation, depletion and amortization attributable to our Coal Operations
      segment were $133.0 million in 2006 and $70.8 million 2005.
      Depreciation, depletion and amortization per ton sold for our produced and
      processed coal increased from $3.55 per ton for the year ended
      December 31, 2005 to $5.71 per ton in the same period of 2006 mainly
      our acquisitions.





*Selling,
      General and Administrative Expenses.* Selling,
      general and administrative expenses (SG&A) decreased $20.5 million, or
      23%, to $68.0 million for the year ended December 31, 2006 compared to the
      same period in 2005 primarily due to a decrease in stock-based compensation
      charges. Stock-based compensation charges included in SG&A totaled $18.2
      million and $46.5 million in 2006 and 2005, respectively. Stock-based
      compensation charges in the amount of $12.8 and $46.5 million in 2006 and 2005,
      respectively, are related to our parent’s IPO. These charges ended at December
      31, 2006. This decrease was mostly offset wages and benefits in the amount
      of
      $5.3 million driven by a 7.5% increase in administrative personnel and the
      additional expense related to our key employee retention plan and an increase
      in
      professional fees ($1.1 million) related to being a public company. Our SG&A
      expenses as a percentage of total revenues decreased from 5.4% in 2005 to 3.6%
      in 2006.




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*Interest
      Expense*





Interest
      expense increased $12.1 million to $41.8 million due to an increase in our
      average amount of debt outstanding in 2006 related
      to Nicewonder Acquisition and a general increase in interest rates.





*Interest
      Income*





Interest
      income decreased $0.2 million to $0.8 million. This decrease is due to
      the reduction in the average amount outstanding on an
      interest bearing note receivable from a coal supplier mostly offset by
      additional interest earned on invested cash.





*Income
      Tax Expense (Benefit)*





Income
      tax benefit for the year ended December 31, 2006 was $30.5 million as
      compared to income tax expense from continuing operations of $19.0 million for the year ended December 31, 2005. Our
      effective tax rates for the year ended December 31, 2006 and 2005 were
      (31.3%) and 43.8%, respectively. The effective tax rate for 2006 was lower
      than
      the statutory federal tax rate due primarily to the reversal of a portion of
      the
      valuation allowance for deferred tax assets, the additional tax benefits
      associated with percentage depletion, and the extraterritorial income exclusion
      - partially offset by non-deductible stock-based compensation charges associated
      with our parent’s IPO and state income taxes.





Since
      our formation and through the third quarter of 2006, we did not weigh
      significantly our forecast of future taxable income (subjective evidence) as
      we
      had not yet established an adequate earnings history (defined by us as at least
      three years) to provide objective evidence of the ability to generate future
      income. Accordingly, we had recorded a valuation allowance against a substantial
      portion of our deferred tax asset. As of December 31, 2006, we have a three
      year
      history of cumulative earnings. As a result, we believe we are able to place
      a
      higher degree of reliance on our projections of future taxable income. Based
      on
      the results of a comprehensive analysis completed in the fourth quarter of
      2006,
      we have concluded that it was more likely than not that a portion of it’s deferred tax asset previously reserved through a valuation allowance will
      be realized. As a result, we recorded a tax benefit in the fourth quarter 2006
      of $55.6 million.





Excluding
      this reversal of the valuation allowance, the effective tax rate would have
      been
      approximately 25.7% for 2006.





The
      effective tax rate for 2005 is higher than the statutory federal tax rate due
      primarily to 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 that is not deductible for tax
      purposes. To a much lesser extent, state income taxes contributed to the
      increase in the
      effective tax rate above the statutory rate. The increase in expected income
      tax
      expense related to the stock-based compensation charge and state income taxes
      is
      offset in part by the tax benefits associated with percentage depletion, the
      extraterritorial income exclusion, a reduction in valuation allowance of
      $6.1 million, and the effect of not providing taxes on the minority
      interest and pass-through entity prior to the Internal
      Restructuring.





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***Year
      Ended December 31, 2005 Compared to Year Ended December 31,
      2004***





*Summary*





For
      the year ended December 31, 2005, we recorded revenues of $1,62 6.7 million
      compared to $1,249.4 million for the year ended December 31, 2004, an
      increase of $377.2 million over the previous year. Net income increased
      from $20.0 million in 2004 to $21.2 million for 2005 and operating
      income increased $3.0 million to $72.1 million. Included in our 2005
      results were after-tax stock-based compensation charges of $46.5 million
      related to our IPO. Tons sold increased from 25.3 million tons in 2004 to
      26.7 million tons in 2005 mainly due to the impact of the Nicewonder
      acquisition and the opening of new mines as a result of our organic growth
      strategy. Coal margin, which we define as coal revenues less cost of coal sales,
      divided by coal revenues, increased from 14.8% in 2004 to 16.2% in
      2005.




*Revenues*





**Year
                Ended December31,**
            
            **Increase
                (Decrease)****2005**
            
            **2004**
            
            **$
                or Tons**
            
            %**(In
                thousands, except per ton data)**Coal
                revenues
            
            $
            1,413,174
            
            $
            1,079,981
            
            $
            333,193
            
            
            31
            %Freight
                and handling revenues
            
            
            185,555
            
            
            141,100
            
            
            44,455
            
            
            32
            %Other
                revenues
            
            
            27,926
            
            
            28,347
            
            
            (421
            )
            
            (2
            %)Total
                revenues
            
            $
            1,626,655
            
            $
            1,249,428
            
            $
            377,227
            
            
            30
            %Tons
                sold
            
            
            26,698
            
            
            25,326
            
            
            1,372
            
            
            5
            %Coal
                sales realization per ton sold
            
            $
            52.93
            
            $
            42.64
            
            $
            10.29
            
            
            24
            %





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*C* *oal
      Revenues.* Coal
      revenues increased for the year ended December 31, 2005 by
      $333.2 million or 31%, to $1,413.2 million, as compared to the year
      ended December 31, 2004. This increase was due to a $10.29 per ton
      increase in the average sales price of our coal and the sale of 1.4 million
      additional tons over the comparable 2004 period. The acquisition of the
      Nicewonder Coal Group accounted for almost one-half of the increase in tons
      sold. The increase in the average sales price of our coal was due to the general
      increase in coal prices during the period and to our ability to take advantage
      of the exceptionally high metallurgical coal (met coal) sale prices by
      processing and marketing as met coal some coal qualities that would
      traditionally have been marketed as steam coal. Met coal prices increased by
      $12.93 per ton to $72.24 per ton as steam coal prices increased by
      $8.67 per ton to an average of $41.33 per ton. Our sales mix of met
      coal and steam coal in 2005 was essentially unchanged from 2004 at 38% and
      62%,
      respectively. We sold 0.5 million more met tons in 2005 than in the prior
      year.





*Freight
      and Handling Revenues.* Freight
      and handling revenues increased to $185.6 million for the year ended
      December 31, 2005, an increase of $44.5 million compared to the year
      ended December 31, 2004 due to an increase of 0.3 million tons of
      export shipments and a general increase in freight costs. However, these
      revenues are offset by equivalent costs and do not contribute to our
      profitability.





*Other
      Revenues.* Other
      revenues decreased for the year ended December 31, 2005 by
      $0.4 million, or 2%, to $27.9 million, as compared to the same period
      for 2004. Revenues from our Maxxim Rebuild operation decreased by
      $4.4 million as that operation has directed more of its services to our
      companies. In addition to this decrease, our other revenues in 2004 included
      a
      gain of $1.5 million on the partial satisfaction of our obligation to
      reclaim certain properties retained by the seller in the Pittston acquisition.
      Partially offsetting this decrease were increases in our coal processing and
      handling revenues of $1.9 million and road construction revenues in the
      amount of $3.8 million. The road construction revenues began with our
      acquisition of the Nicewonder Coal Group. Other revenues attributable to our
      Coal Operations segment were $10.4 million in 2005 and $10.4 million
      in 2004.




*Costs
      and Expenses*





**Year
                Ended December 31.**
            
            **Increase
                (Decrease)****2005**
            
            **2004**
            
            **$**
            
            **%****(In
                thousands, except per ton data)**Cost
                of coal sales (exclusive of items shown separately below)
            
            $
            1,184,092
            
            $
            920,359
            
            $
            263,733
            
            
            29
            %Freight
                and handling costs
            
            
            185,555
            
            
            141,100
            
            
            44,455
            
            
            32
            %Cost
                of other revenues
            
            
            23,675
            
            
            22,994
            
            
            681
            
            
            3
            %Depreciation,
                depletion and amortization
            
            
            73,122
            
            
            55,261
            
            
            17,861
            
            
            32
            %Selling,
                general and administrative expenses (exclusive of depreciation and
                amortization shown separately above)
            
            
            88,422
            
            
            40,607
            
            
            47,815
            
            
            118
            %Total
                costs and expenses
            
            $
            1,554,866
            
            $
            1,180,321
            
            $
            374,545
            
            
            32
            %Cost
                of coal sales per ton sold
            
            $
            44.35
            
            $
            36.34
            
            $
            8.01
            
            
            22
            %


**


*Cost
      of Coal Sales.* For the
      year ended December 31, 2005, our cost of coal sales, which excludes
      charges for depreciation, depletion and amortization, increased
      $263.7 million, or 29%, to $1,184.1 million compared to the year ended
      December 31, 2004. Included in the increase in costs of $263.7 million
      was approximately $20.7 million of cost from our new Callaway business
      unit. Our cost of coal sales increased as a result of increased prices for
      labor, mine supplies, the performance and cost of contract mining services,
      higher prices for purchased coal, and increased variable sales-related costs,
      such as royalties and severance taxes. The average cost per ton sold increased
      22% from $36.34 per ton in 2004 to $44.35 per ton in 2005. Our cost of
      coal sales as a percentage of coal revenues decreased from 85% in 2004 to 84%
      in
      2005. For the years ended December 31, 2005 and 2004 our average cost per
      ton for our produced and processed coal sales was $40.07 and $33.04,
      respectively, and our average cost per ton for coal that we purchased from
      third
      parties and resold without processing was $58.88 and $45.21,
      respectively.





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*Freight
      and Handling Costs.* Freight
      and handling costs increased $44.5 million to $185.6 million during
      2005 as compared to 2004, mainly due to a 0.3 million ton increase in
      export shipments and a general increase in freight rates. These costs are offset
      by an equivalent amount of freight and handling revenue.





*Cost
      of Other Revenues.* Cost of
      other revenues increased $0.7 million, or 3%, to $23.7 million for the
      year ended December 31, 2005 as compared to the prior year due to the
      higher costs associated with our coal processing and handling operations in
      the
      amount of $2.3 million and the $2.7 million cost attributed to our
      road construction operations acquired from the Nicewonder Coal Operations.
      These
      cost increases were almost offset by a reduction of costs at our Maxxim Rebuild
      operations in the amount of $4.4 million.  This cost does not include
      related charges for depreciation and amortization.





*Depreciation,
      Depletion and Amortization.* Depreciation, depletion, and amortization increased $17.9 million, or 32%,
      to $73.1 million for the year ended December 31, 2005 as compared to
      the same period of 2004 due to capital additions resulting in additional
      depreciation and due to the impact of the Nicewonder Acquisition. Depreciation,
      depletion and amortization attributable to our Coal Operations segment were
      $70.8 million in 2005 and $51.7 million 2004. Depreciation, depletion
      and amortization per ton sold for our produced and processed coal increased
      from
      $2.93 per ton for the year ended December 31, 2004 to $3.55 per
      ton in the same period of 2005.





*Selling,
      General and Administrative Expenses.* Selling,
      general and administrative expenses increased $47.8 million, or 117%, to
      $88.4 million for the year ended December 31, 2005 compared to the
      same period in 2004. This increase is mainly attributable to our stock-based
      compensation charges in the amount of $46.5 million related to our parent’s
      IPO. Our selling, general and administrative expenses as a percentage of total
      revenues increased from 3.3% in 2004 to 5.4% in 2005.




*Interest
      Expense*





Interest
      expense increased $9. 6 million
      to $29.6 million during 2005 compared to 2004. The increase was mainly due
      to higher levels of borrowings and higher variable interest rates in
      2005.




*Interest
      Income*





Interest
      income increased from $0.5 million to $1.1 million as a result of
      interest received on a note receivable issued in 2004 and an improved cash
      management system that allows us to put excess cash to work in secure cash
      equivalents.




*Income
      Tax Expense*





Income
      tax expense from continuing operations increased $13.8 million to
      $19.0 million for the year ended December 31, 2005 as compared to the
      year ended December 31, 2004. Our effective tax rates for the year ended
      December 31, 2005 and 2004 were 43.8% and 10.2%, respectively.





The
      effective tax rate for 2005 is higher than the statutory federal tax rate due
      primarily to 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 that is not deductible for tax
      purposes. To a much lesser extent, state income taxes increased the effective
      tax rate above the statutory rate. The increase in expected income tax expense
      related to the stock-based compensation charge and state income taxes is offset
      in part by the tax benefits associated with percentage depletion, the
      extraterritorial income exclusion, a
      reduction in valuation allowance of $6.1 million, and the effect of not
      providing taxes on the minority interest and pass-through entity prior to the
      Internal Restructuring.





The
      effective tax rate for 2004 is lower than the statutory federal tax rate
      primarily due to the Company not being subject to tax with respect to the
      portion of our income before taxes which is attributable to ANR Fund IX
      Holdings, L. P.’s portion of our earnings and the minority interest’s share in
      the earnings of ANR Holdings prior to the Internal Restructuring. In addition,
      income tax expense was further reduced by the tax benefits associated with
      percentage depletion and the extraterritorial income exclusion, partially offset
      by state income taxes and the increase in the valuation allowance of
      $0.6 million.




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**Liquidity
      and Capital Resources**





Our
      primary liquidity and capital resource requirements are to finance the cost
      of
      our coal production and purchases, make capital expenditures, pay income taxes,
      and service our debt and reclamation obligations. Our primary sources of
      liquidity are cash flow from sales of our produced and purchased coal, other
      revenue and borrowings under our senior credit facility.





At
      December 31, 2006, our available liquidity was $227.2 million,
      including cash and cash equivalents of $33.3 million and
      $193.9 million available under our credit facility. Our total indebtedness
      was $445.7 million at December 31, 2006, a decrease of
      $40.2 million from the year ended December 31, 2005 primarily due to our payment of the final installment of the notes associated
      with the Nicewonder acquisition. Our cash capital spending for the year ended
      December 31, 2006 was $131.9 million, and we expect to spend from
      $120 million to $150 million in cash capital spending in 2007,
      including capital expenditures for our lime manufacturing venture. In addition,
      we have secured non-recourse project financing of $20.6 million for our lime
      manufacturing venture.





Based
      on
      the terms of our outstanding capital lease obligations and indebtedness as
      of
      December 31, 2006, projected 2007 payments of principal on capital lease
      obligations and indebtedness are $24.2 million in the aggregate, of which
      $7.7 million, $7.8 million, $7.9 million and $0.8 million due in each of the
      four quarters of 2007, respectively. Based on our projection of cash to be
      generated from operations in 2007 and projected availability under our revolving
      line of credit, we believe that cash from operations and available borrowings
      will be sufficient to meet our working capital requirements, anticipated capital
      expenditures and debt repayment requirements during each quarter of
      2007.





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***Cash
      Flows***





Net
      cash provided by operating activities in 2006 was $210.1 million, an increase
      of
      $60.4 million from the
      $149.6 million of net cash provided by operations during 2005. This
      increase is due to an increase in net income of $107.0 million and a decrease
      in
      non-cash charges of $6.2 million, offset in part by an increase in cash required
      for operating assets and liabilities in the amount of $40.4 million due to
      an
      increase in our overall business activity.





Net
      cash
      used in investing activities was $179.3 million less in 2006 over the year
      ago period mainly due to a decrease in the cash required for acquisitions offset
      by an increase in cash used for capital expenditures.





Net
      cash
      provided by financing activities decreased by $278.4 million to in 2006
      from 2005. In 2005, we completed our previously discussed Internal Restructuring
      and initial public offering. The proceeds from the IPO were used to repay
      shareholders’ notes issued as part of the Internal Restructuring. During 2006,
      we made payments on notes payable in the amount of $58.3 million, a net
      repayment of $3.4 million of long-term debt and paid $2.4 million in
      distributions to former members of ANR Holding, LLC.





Net
      cash
      provided by operating activities in 2005 was $153.8 million, an increase of
      $47.1 million from the $106.8 million of net cash provided by
      operations during 2004. An increase in our net income and an increase in our
      non-cash charges (mainly due to our stock-based compensation) provided more
      cash
      in 2005 than the comparable period in 2004 in the amount of $46.3 million
      and a decrease in our net investment in operating assets and liabilities
      contributed $0.8 million to our operating cash flow increase in
      2005.





Net
      cash
      used in investing activities consumed $253.2 million more cash in 2005 over
      the year ago period mainly due to the Nicewonder Coal Group acquisition
      ($221.9 million) and an increase in capital expenditures in the amount of
      $50.3 million.





Net
      cash
      provided by financing activities increased by $242.2 million to
      $217.8 million in the year ended December 31, 2005 over the year ended
      December 31, 2004. During the year ended December 31, 2004, we
      recapitalized our company by issuing $175.0 million of 10% senior
      notes and entered into a new credit facility. We used the proceeds to repay
      our
      then existing credit facility and to pay distributions to the members of ANR
      Holdings, LLC. Net cash used by financing activities was $24.4 million
      during 2004. In the year ended December 31, 2005, we completed
      our previously discussed Internal Restructuring, IPO and 2005 Financing.
      The proceeds from our parent’s IPO were used to repay shareholders’ notes issued
      as part of the Internal Restructuring. The proceeds from the new credit facility
      we entered into in connection with the 2005 Financing were used to repay the
      2004 credit facility and to finance the Nicewonder Coal Group acquisition.
      Our
      long-term debt increased approximately $126.7 million during 2005 and has
      been used to fund our cash needs for the purchase of capital equipment and
      the
      Nicewonder acquisition.




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***Credit
      Facility and Long-term Debt***





As
      of December 31, 2006, our total long-term indebtedness, including capital
      lease obligations, consisted of the following (in thousands):





**December
                31,****2006**10%
                Senior notes due 2012
            
            $
            175,000Term
                Loan
            
            
            247,500Capital
                lease obligation
            
            
            1,510Other
            
            
            700Total
                long-term debt
            
            
            424,710Less
                current portion
            
            
            3,254Long-term
                debt, net of current portion
            
            $
            421,456





Our
      current credit facility and the indenture governing the senior notes each impose
      certain restrictions on our subsidiaries, including restrictions on our
      subsidiaries’ ability to: incur debt; grant liens; enter into agreements with
      negative pledge clauses; provide guarantees in respect of obligations of any
      other person; pay dividends and make other distributions; make loans,
      investments, advances and acquisitions; sell assets; make redemptions and
      repurchases of capital stock; make capital expenditures; prepay, redeem or
      repurchase debt; liquidate or dissolve; engage in mergers or consolidations;
      engage in affiliate transactions; change businesses; change our fiscal year;
      amend certain debt and other material agreements; issue and sell capital stock
      of subsidiaries; engage in sale and leaseback transactions; and restrict
      distributions from subsidiaries. In addition, our current credit facility
      provides that we must meet or exceed certain interest coverage ratios and must
      not exceed certain leverage ratios.





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Borrowings
      under our current credit facility are subject to mandatory prepayment
      (1) with 100% of the net cash proceeds received from asset sales or other
      dispositions of property by us and our subsidiaries (including insurance
      and other condemnation proceedings), subject to certain exceptions and
      reinvestment provisions, and (2) with 100% of the net cash proceeds
      received by us and our subsidiaries from the issuance of debt securities or
      other incurrence of debt, excluding certain indebtedness.




***Other***





As
      a regular part of our business, we review opportunities for, and engage in
      discussions and negotiations concerning, the acquisition of coal mining assets
      and interests in coal mining companies and related businesses, and acquisitions
      of, or combinations with, coal mining companies and related businesses. When
      we
      believe that these opportunities are consistent with our growth plans and our
      acquisition criteria, we will make bids or proposals and/or enter into letters
      of intent and other similar agreements, which may be binding or nonbinding,
      that
      are customarily subject to a variety of conditions and usually permit us to
      terminate the discussions and any related agreement if, among other things,
      we
      are not satisfied with the results of our due diligence investigation. Any
      acquisition opportunities we pursue could materially affect our liquidity and
      capital resources and may require us to incur indebtedness, seek equity capital
      or both. There can be no assurance that additional financing will be available
      on terms acceptable to us, or at all.




***Analysis
      of Material Debt Covenants***





We
      were in compliance with all covenants under our current credit facility and
      the
      indenture governing our senior notes as of December 31, 2006.





The
      financial covenants in our current credit facility require, among other things,
      that:




•
            We
                must maintain a leverage ratio, defined as the ratio of consolidated
                adjusted debt (consolidated debt less unrestricted cash and cash
                equivalents) to Adjusted EBITDA (as defined in the new credit agreement),
                of not more than 4.00 at December 31,2005,
                March 31, June 30, September 30 and December 31, 2006,
                3.75 at March 31, June 30, September 30 and
                December 31, 2007, and 3.50 at March 31, 2008 and each quarter
                end thereafter, with Adjusted EBITDA being computed using the most
                recent
                four quarters; and





•
            We
                must maintain an interest coverage ratio, defined as the ratio of
                Adjusted
                EBITDA to cash interest expense, of 2.50 or greater on the last day
                of any
                fiscal quarter.





Based
      upon Adjusted EBITDA (as defined in our current credit agreement), our leverage
      ratio and interest coverage ratio (as such ratios are defined in the credit
      agreement) at December 31, 2006 were 1.44
      and
      7.52, respectively. Adjusted EBITDA is used in our current credit facility
      to
      determine compliance with many of the covenants under the facility. A breach
      of
      the covenants in the credit facility that are tied to ratios based on Adjusted
      EBITDA could result in a default under the credit facility and the lenders
      could
      elect to declare all amounts borrowed due and payable. Any acceleration under
      our credit facility would also result in a default under our
      indenture.





Adjusted
      EBITDA is defined in our current credit facility as EBITDA, further adjusted
      to
      exclude non-recurring items, non-cash items and other adjustments permitted
      in
      calculating covenant compliance under our credit facility, as shown in the
      table
      below. We believe that the inclusion of supplementary adjustments to EBITDA
      applied in presenting Adjusted EBITDA is appropriate to provide additional
      information to investors to demonstrate compliance with our financial
      covenants.




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**Three
                Months**
              **Ended**
              **March
                31,**
              **2006**
            
            **Three
                Months**
              **Ended**
              **June
                30,**
              **2006**
            
            **Three
                Months**
              **Ended**
              **September
                30,**
              **2006**
            
            **Three
                Months**
              **Ended**
              **December
                31,**
              **2006**
            
            **Twelve
                Months**
              **Ended**
              **December
                31,**
              **2006****(In
                thousands)**Net
                Income
            
            $
            27,212
            
            $
            23,128
            
            $
            14,544
            
            $
            63,284
            
            $
            128,168Interest
                expense, net
            
            
            10,089
            
            
            10,615
            
            
            10,579
            
            
            9,652
            
            
            40,935Income
                tax expense (benefit)
            
            
            9,620
            
            
            8,676
            
            
            4,744
            
            
            (53,559
            )
            
            (30,519
            )Depreciation,
                depletion, and amortization
            
            
            33,634
            
            
            34,207
            
            
            36,422
            
            
            36,588
            
            
            140,851EBITDA
            
            
            80,555
            
            
            76,626
            
            
            66,289
            
            
            55,965
            
            
            279,435Change
                in fair value of coal forward purchase and sales contracts
            
            
            —
            
            
            (4,336
            )
            
            2,060
            
            
            2,097
            
            
            (179
            )Other
                allowable adjustments
            
            
            529
            
            
            531
            
            
            (379
            )
            
            (467
            )
            
            214Accretion
                expense
            
            
            1,077
            
            
            1,169
            
            
            1,226
            
            
            1,402
            
            
            4,874Amortization
                of deferred gains
            
            
            (393
            )
            
            (249
            )
            
            (257
            )
            
            (97
            )
            
            (996
            )Stock-based
                compensation charges
            
            
            3,833
            
            
            6,112
            
            
            5,814
            
            
            4,622
            
            
            20,381Adjusted
                EBITDA
            
            $
            85,601
            
            $
            79,853
            
            $
            74,753
            
            $
            63,522
            
            $
            303,729Leverage
                ratio(1)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1.44Interest
                coverage ratio(2)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            7.52


(1)
            Leverage
                ratio is defined in our credit facility as total debt divided by
                Adjusted
                EBITDA.





(2)
            Interest
                coverage ratio is defined in our credit facility as Adjusted EBITDA
                divided by cash interest expense.




**Contractual
      Obligations**





The
      following is a summary of our significant contractual obligations as of
      December 31, 2006 (in thousands):





**2007**
            
            **2008-2009**
            
            **2010-2011**
            
            **After
                2011**
            
            **Total**Long-term
                debt and capital leases(1)
            
            $
            3,254
            
            $
            6,456
            
            $
            5,000
            
            $
            410,000
            
            $
            424,710Equipment
                purchase commitments
            
            
            38,264
            
            
            —
            
            
            —
            
            
            —
            
            
            38,264Operating
                leases
            
            
            6,454
            
            
            3,952
            
            
            2,390
            
            
            8,652
            
            
            21,448Minimum
                royalties
            
            
            12,475
            
            
            24,643
            
            
            23,129
            
            
            34,791
            
            
            95,038Coal
                purchase commitments
            
            
            118,797
            
            
            —
            
            
            —
            
            
            —
            
            
            118,797Gallatin
                commitments
            
            
            10,800
            
            
            —
            
            
            —
            
            
            —
            
            
            10,800Coal
                contract buyout
            
            
            680
            
            
            1,304
            
            
            624
            
            
            —
            
            
            2,608Total
            
            $
            190,724
            
            $
            36,355
            
            $
            31,143
            
            $
            453,443
            
            $
            711,665




(1)
            Long-term
                debt and capital leases include principal amounts due in the years
                shown.
                Interest payable on these obligations, with interest rates ranging
                between
                8.0% and 12.15% on our loans and capital leases, would be approximately
                $37.3 million in 2007, $74.1 million in 2008 to 2009,
                $73.0 million in 2010 to 2011, and $26.0 million after
                2011.




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Additionally,
      we have long-term liabilities relating to asset retirement obligations, workers’
compensation and black lung benefits and postretirement benefits. The table
      below reflects the estimated payments for these obligations (in
      thousands):





**Within****1
                Year**
            
            **2-3
                Years**
            
            **4-5
                Years**
            
            **After
                5 Years**
            
            **Total**Asset
                retirement obligtion
            
            $
            7,842
            
            
            14,284
            
            
            19,629
            
            
            65,671
            
            
            107,426Postretirement
            
            
            135
            
            
            1,395
            
            
            3,565
            
            
            304,279
            
            
            309,374Workers’
                compensation benefits and black lung benefits
            
            
            1,055
            
            
            1,620
            
            
            963
            
            
            4,705
            
            
            8,343Total
            
            $
            9,032
            
            
            17,299
            
            
            24,157
            
            
            374,655
            
            
            425,143




**Off-Balance
      Sheet Arrangements**





In
      the normal course of business, we are a party to certain off-balance sheet
      arrangements. These arrangements include 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
      our
      consolidated balance sheets, and we do not expect any material adverse effects
      on our financial condition, results of operations or cash flows to result from
      these off-balance sheet arrangements.





From
      time to time, we provide guarantees to financial institutions to facilitate
      the
      acquisition of mining equipment by third parties who mine coal for us. This
      arrangement is beneficial to us because it helps insure a continuing source
      of
      coal production.





Federal
      and state laws require us to secure payment of certain long-term obligations
      such as mine closure and reclamation costs, federal and state workers’
compensation, coal leases and other obligations. We typically secure these
      payment obligations by using surety bonds, an off-balance sheet instrument.
      The
      use of surety bonds is less expensive for us than the alternative of posting
      a
      100% cash bond or a bank letter of credit, either of which would require a
      greater use of our credit facility. We then use bank letters of credit to secure
      our surety bonding obligations as a lower cost alternative than securing those
      bonds with cash. Under our $150.0 million
      committed bonding facility, we are required to provide bank letters of credit
      in
      an amount up to 50% of the aggregate bond liability. Recently, surety bond
      costs
      have increased, while the market terms of surety bonds have generally become
      less favorable to us. To the extent that surety bonds become unavailable, we
      would seek to secure our reclamation obligations with letters of credit, cash
      deposits or other suitable forms of collateral.





As
      of
      December 31, 2006, we have a committed bonding facility with Travelers
      Casualty and Surety Company of America, pursuant to which Travelers has agreed,
      subject to certain conditions, to issue surety bonds on our behalf in a maximum
      amount of $150.0 million. During the fourth quarter of 2006, we also
      entered into a committed bonding facility with the Chubb Group of Insurance
      Companies. Chubb has agreed, subject to certain conditions, to issue surety
      bonds on our behalf in a maximum amount of $50.0 million. As of
      December 31, 2006, we have posted an aggregate of $138.0 million in
      reclamation bonds and $10.4 million of other types of bonds under these
      facilities. We maintained letters of credit as of December 31, 2006
      totaling $81.1 million to secure reclamation and other surety bond
      obligations.





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**Critical
      Accounting Policies and Estimates**





Our
      discussion and analysis of our financial condition, results of operations,
      liquidity and capital resources is based upon our consolidated financial
      statements, which have been prepared in accordance with U.S. generally
      accepted accounting principles (“GAAP”). GAAP requires that we make estimates
      and judgments that affect the reported amounts of assets, liabilities, revenues
      and expenses, and related disclosure of contingent assets and liabilities.
      On an
      ongoing basis, we evaluate our estimates. We base our estimates on historical
      experience and on various other assumptions that we believe are reasonable
      under
      the circumstances, the results of which form the basis for making judgments
      about the carrying values of assets and liabilities that are not readily
      apparent from other sources. Actual results may differ from these
      estimates.





*Reclamation.* Our
      asset retirement obligations arise from the federal Surface Mining Control
      and
      Reclamation Act of 1977 and similar state statutes, which require that mine
      property be restored in accordance with specified standards and an approved
      reclamation plan. Significant reclamation activities include reclaiming refuse
      and slurry ponds, reclaiming the pit and support acreage at surface mines,
      and
      sealing portals at deep mines. We account for the costs of our reclamation
      activities in accordance with the provisions of SFAS No. 143, *“Accounting
      for Asset Retirement Obligations.”* We
      determine the future cash flows necessary to satisfy our reclamation obligations
      on a mine-by-mine basis based upon current permit requirements and various
      estimates and assumptions, including estimates of disturbed acreage, cost
      estimates, and assumptions regarding productivity. Estimates of disturbed
      acreage are determined based on approved mining plans and related engineering
      data. Cost estimates are based upon third-party costs. Productivity assumptions
      are based on historical experience with the equipment that is expected to be
      utilized in the reclamation activities. In accordance with the provisions of
      SFAS No. 143, we determine the fair value of our asset retirement
      obligations. In order to determine fair value, we must also estimate a discount
      rate and third-party margin. Each is discussed further below:




•
            *Discount
                Rate.*SFAS No. 143 requires that asset retirement obligations be
                recorded at fair value. In accordance with the provisions of
                SFAS No. 143, we utilize discounted cash flow techniques to
                estimate the fair value of our obligations. We base our discount
                rate on
                the rates of treasury bonds with maturities similar to expected mine
                lives, adjusted for our credit
                standing.





•
            *Third-Party
                Margin.*SFAS No. 143 requires the measurement of an obligation to be
                based upon the amount a third party would demand to assume the obligation.
                Because we plan to perform a significant amount of the reclamation
                activities with internal resources, a third-party margin was added
                to the
                estimated costs of these activities. This margin was estimated based
                upon
                our historical experience with contractors performing similar types
                of
                reclamation activities. The inclusion of this margin will result
                in a
                recorded obligation that is greater than our estimates of our cost
                to
                perform the reclamation activities. If our cost estimates are accurate,
                the excess of the recorded obligation over the cost incurred to perform
                the work will be recorded as a gain at the time that reclamation
                work is
                completed.





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On
      at least an annual basis, we review our entire reclamation liability and make
      necessary adjustments for permit changes as granted by state authorities,
      additional costs resulting from accelerated mine closures, and revisions to
      cost
      estimates and productivity assumptions, to reflect current experience. At
      December 31, 2006, we had recorded asset retirement obligation liabilities
      of $77.3 million, including amounts reported as current. While the precise
      amount of these future costs cannot be determined with certainty, as of
      December 31, 2006, we estimate that the aggregate undiscounted cost of
      final mine closures is approximately $107.4 million.





*Coal
      Reserves.* There
      are numerous uncertainties inherent in estimating quantities of economically
      recoverable coal reserves, many of which are beyond our control. As a result,
      estimates of economically recoverable coal reserves are by their nature
      uncertain. Information about our reserves consists of estimates based on
      engineering, economic and geological data assembled by our internal engineers
      and geologists and reviewed by a third party consultant. Some of the factors
      and
      assumptions that impact economically recoverable reserve estimates
      include:




•
            geological
                conditions;





•
            historical
                production from the area compared with production from other producing
                areas;





•
            the
                assumed effects of regulations and taxes by governmental
                agencies;





•
            assumptions
                governing future prices; and





•
            future
                operating costs.





Each
      of these factors may in fact vary considerably from the assumptions used in
      estimating reserves. For these reasons, estimates of the economically
      recoverable quantities of coal attributable to a particular group of properties,
      and classifications of these reserves based on risk of recovery and estimates
      of
      future net cash flows, may vary substantially. Actual production, revenues
      and
      expenditures with respect to reserves will likely vary from estimates, and
      these
      variances may be material.





*Postretirement
      Medical Benefits.* We have
      long-term liabilities for postretirement benefit cost obligations. Detailed
      information related to these liabilities is included in the notes to our
      financial statements included elsewhere in this annual report. Liabilities
      for
      postretirement benefit costs are not funded. The liability is actuarially
      determined, and we use various actuarial assumptions, including the discount
      rate and future cost trends, to estimate the costs and obligations for
      postretirement benefit costs. The discount rate assumption is determined
      from a published yield-curve table matched to the timing of our projected cash
      out flows. The discount rate used to determine the net periodic benefit cost
      for
      postretirement benefits other than pensions was 5.50% for the year ended
      December 31, 2006 and 5.75% for the year ended December 31, 2005. We
      make assumptions related to future trends for medical care costs in the
      estimates of retiree health care and work-related injury and illness
      obligations. If our assumptions do not materialize as expected, actual cash
      expenditures and costs that we incur could differ materially from our current
      estimates. Moreover, regulatory changes could increase our requirement to
      satisfy these or additional obligations. Below we have provided two sensitivity
      analyses to demonstrate the significance of these assumptions in relation to
      reported amounts.





Health care cost trend rate (dollars in thousands):





**One-Percentage-**
            
            **One-Percentage-****Point
                Increase**
            
            **Point
                Decrease**Effect
                on total service and interest cost components
            
            $
            83
            
            $
            (65
            )Effect
                on accumulated postretirement benefit obligation
            
            
            692
            
            
            (562
            )





Discount
                rate (dollars in thousands):
            
            **One
                Half-**
            
            **One
                Half-****Percentage-**
            
            **Percentage-****Point
                Increase**
            
            **Point
                Decrease**Effect
                on total service and interest cost components
            
            $
            (293
            )
            $
            292Effect
                on accumulated postretirement benefit obligation
            
            
            (3,968
            )
            
            4,309




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We
      recorded an additional liability of $17.5 million (13.2, net of tax) as a result
      of the adoption of SFAS No. 158, *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement
      Plans* ,
      which
      requires that any unfunded portion of the Accumulated Pension Benefit Obligation
      (“APBO”) be, recognized on the balance sheet as additional liabilities.





*Workers’
      Compensation.* Workers’
compensation is a system by which individuals who sustain personal injuries
      due
      to job-related accidents are compensated for their disabilities, medical costs,
      and on some occasions, for the costs of their rehabilitation, and by which
      the
      survivors of workers who suffer fatal injuries receive compensation for lost
      financial support. The workers’ compensation laws are administered by state
      agencies with each state having its own set of rules and regulations regarding
      compensation that is owed to an employee who is injured in the course of
      employment. Our operations are covered through a combination of a self-insurance
      program and an insurance policy. We accrue for any self-insured liability by
      recognizing costs when it is probable that a covered liability has been incurred
      and the cost can be reasonably estimated. Our estimates of these costs are
      adjusted based upon actuarial studies. Actual losses may differ from these
      estimates, which could increase or decrease our costs.





*Coal
      Workers’ Pneumoconiosis.* We are
      required by federal and state statutes to provide benefits to employees for
      awards related to coal workers’ pneumoconiosis disease (black lung). These
      claims are covered by a third-party insurance provider in all locations where
      we
      operate with the exception of West Virginia. The Company is self-insured for
      state black lung related claims at certain locations in West Virginia. We
      account for black lung benefits under the provisions of SFAS No. 106, *Employers’
      Accounting for Postretirement Benefit Other than Pension* ,
      and
      SFAS No. 158, *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement
      Plans.*





Charges
      are made to operations for state black lung claims in West Virginia, as
      determined by an independent actuary at the present value of the actuarially
      computed liability for such benefits over the employee’s applicable term of
      service. Effective December 31, 2006, we adopted Statement of Financial
      Accounting Standards No. 158 (“FASB 158”), *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement
      Plans* ,
      which
      requires that we recognize on its balance sheet the amount of the Company’s
      unfunded Accumulated Benefit Obligation (“ABO”) at the end of the year.





*Income
      Taxes.* We
      account for income taxes in accordance with SFAS No. 109,
“*Accounting for Income Taxes*”, which requires the recognition of
      deferred tax assets and liabilities using enacted tax rates for the effect
      of
      temporary differences between the book and tax bases of recorded assets and
      liabilities. SFAS No. 109 also requires that deferred tax assets be
      reduced by a valuation allowance if it is more likely than not that some portion
      or all of the deferred tax asset will not be realized. In evaluating the need
      for a valuation allowance, we analyze both positive and negative evidence as
      required by SFAS No. 109. Such evidence includes objective evidence obtained
      from our historical earnings, future sales commitments, outlooks on the coal
      industry by us and third parties, expected level of future earnings (with
      sensitivities on expectations considered), timing of temporary difference
      reversals, ability or inability to meet forecasted earnings, unsettled industry
      circumstances, ability to carry back and utilize a future tax loss (if a loss
      were to occur), available tax planning strategies, limitations on deductibility
      of temporary differences, and the impact the alternative minimum tax has on
      utilization of deferred tax assets. As further described in Note 29, we reported
      three consecutive years of positive earnings history in the fourth quarter
      of
      2006. This objective evidence, coupled with a review of the aforementioned
      areas
      in the fourth quarter, resulted in our recording of a reversal of a significant
      portion of the valuation allowance. The valuation allowance is monitored and
      reviewed quarterly. If our conclusions change in the future regarding the
      realization of a portion or all of our net deferred tax assets, we may record
      a
      change to the valuation allowance through income tax expense in the period
      the
      determination is made.





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**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 we recognize in our 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 our
      2007
      fiscal year, with the cumulative effect of the change in accounting principle
      recorded as an adjustment to beginning retained earnings. We do not expect
      the
      adoption of FIN 48 to have a material effect on our financial
      statements.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (“SFAS
      157”). SFAS 157 defines fair value, establishes a framework for measuring fair
      value and enhances disclosures about fair value measures required under other
      accounting pronouncements, but does not change existing guidance as to whether
      or not an instrument is carried at fair value. SFAS No. 157 is effective for
      fiscal years beginning after November 15, 2007. We are currently reviewing
      the
      provisions of SFAS 157 to determine the impact on our financial statements,
      if
      any.




**Discussion
      of Seasonality Impacts on Operations**





Our
      business is seasonal, with operating results varying from quarter to quarter.
      We
      have historically experienced lower sales during winter months primarily due
      to
      the freezing of lakes that we use to transport coal to some of our customers.
      As
      a result, our first quarter cash flow and profits have been, and may continue
      to
      be, negatively impacted. Lower than expected sales by us during this period
      could have a material adverse effect on the timing of our cash flows and
      therefore our ability to service our obligations with respect to our existing
      and future indebtedness.




**Item7A.**
            ***Quantitative
                and Qualitative Discussions about Market
                Risk***





In
      addition to risks inherent in operations, we are exposed to market risks. The
      following discussion provides additional detail regarding our exposure to the
      risks of changing coal and diesel fuel prices and interest rates.





***Commodity
      Price Risk***





We
      are exposed to market price risk in the normal course of selling coal. As of February
      5, 2007, less than 10% and 60% of our estimated 2007 and 2008 expected
      production, respectively, was uncommitted. As compared to prior years, we have
      increased the proportion of our planned future production in 2007 and 2008
      for
      which we have contracts to sell coal, which has the effect of reducing our
      market price risk.





We
      use
      significant quantities of diesel fuel in our operations and are also exposed
      to
      risk in the market price for diesel fuel. We have entered into a forward
      physical purchase contract and diesel fuel swap agreement to reduce the
      volatility in the price of diesel fuel for our operations. The diesel fuel
      swap
      agreement is not designated as a hedge and therefore the changes in the fair
      value for this derivative instrument contract is required to be recorded in
      cost of sales. As of December 31, 2006 approximately 11.0 million gallons or
      40
      percent of the Company’s anticipated 2007 fuel usage has been fixed with the
      physical purchase and swap agreements.  Included in the 11.0 million
      gallons is the physical purchase of 9.0 million gallons at $1.79 per gallon
      for
      the first six months of 2007 and the notional amount of 2.0 million gallons
      at
      $1.87 per gallon for the last six months of 2007.





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We
      purchase coal in the OTC market and directly from third parties to supplement
      and blend with our produced and processed coal in order to provide coal of
      the
      quality and quantity to meet certain of our customers' requirements. We also
      sell in the OTC market to fix the price of uncommitted future production from
      our mines. Certain of these purchase and sale contracts meet the definition
      of a
      derivative instrument. Any derivative instruments that we hold are held for
      purposes other than trading. Our
      risk
      management policy prohibits the use of derivatives for speculative purpose.
      The
      use of purchase and sales contracts which are considered derivative instruments
      could materially affect our results of operations as a result of the requirement
      to mark them to market at the end of each reporting period. However, we believe
      that use of these instruments will not have a material adverse effect on our
      financial position or results of operations because these transactions account
      for only a small portion of our business.





These
      transactions give rise to commodity price risk, which represents the potential
      loss that can be caused by an adverse change in the price of coal. Outstanding
      purchase and sales contracts at December31, 2006 that are considered derivative
      instruments are summarized as follows:




**Purchase
                Contracts**
            
            Purchase
                Price Range
            
            Tons
                Outstanding
            
            Delivery
                Period
            
            Mark-To-Market
                Adjustment(In
                Millions)$
            40.00-50.00
            
            630,000
            
            01/01/07-12/31/07
            
            $
            (5.6
            )$
            51.00-60.00
            
            17,500
            
            01/01/07-12/31/07
            
            $
            (0.3
            )647,500
            
            
            
            
            $
            (5.9
            )


**Sales
                  Contracts**
              
              Selling
                  Price Range
              
              Tons
                  Outstanding
              
              Delivery
                  Period
              
              Mark-To-Market
                  Adjustment(In
                  Millions)$
              45.00-$50.00
              
              240,000
              
              01/01/07-12/31/07
              
              $
              1.7$
              51.00-60.00
              
              300,500
              
              10/01/06-12/31/07
              
              $
              4.4540,500
              
              
              
              
              $
              6.1




**Interest
      Rate Risk**





All
      of
      our borrowings under our New
      Citicorp Credit Facility are at a
      variable rate, exposing us to the effect of rising interest rates in the United
      States. As of December 31, 2006, we have a $247.5 million term loan outstanding
      with a variable interest rate based upon the 3-month London Interbank Offered
      Rate (“LIBOR”) (5.36% at December 31, 2006) plus an applicable margin (1.75% at
      December 31, 2006).  To reduce our exposure to rising interest rates,
      effective May 22, 2006 we entered into a pay-fixed, receive variable interest
      rate swap on the notional amount of $233.1 million for a period of approximately
      six and one-half years. In effect, this swap converted the variable interest
      rates based on the LIBOR to a fixed interest rate of 5.59% plus the applicable
      margin defined in the debt agreement (1.75%, at December 31, 2006) for a portion
      of our term loan.  A one percentage point increase in interest rates would
      result in an annualized increase in interest expense of approximately $0.1
      million based on our variable rate borrowing as of December 31, 2006 in excess
      of the notional amount of the interest rate swap of $ 233.1 million at December
      31, 2006. We account for the interest rate swap as a cash flow hedge and
      accordingly changes in fair value of the swap are recorded to other
      comprehensive income (loss).  The fair value of the swap at year end
      December 31, 2006 was a liability of $7.2 million ($5.4 million net of
      tax).




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**Item 8.**
            ***Financial
                Statements and Supplementary
                Data***




**Report
      of Independent Registered Public Accounting Firm**


The
      Board
      of Directors


Alpha
      NR
      Holding, Inc.:




We
      have
      audited the accompanying consolidated balance sheets of Alpha NR Holding, Inc.
      and subsidiaries (the Company) as of December 31, 2006 and 2005, and
      the related consolidated statements of income, stockholder's equity and
      partners’ capital and comprehensive income, and cash flows for each of the years
      in the three-year period ended December 31, 2006. These consolidated
      financial statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these consolidated financial
      statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Alpha NR Holding, Inc.
      and
      subsidiaries as of December 31, 2006 and 2005, and the results of their
      operations and their cash flows for each of the years in the three-year period
      ended December 31, 2006, in conformity with U.S. generally accepted
      accounting principles.





As
      discussed in notes 3 and 17 to the consolidated financial statements, the
      Company changed its method for accounting and reporting for share-based payments
      and its method of accounting for postretirement benefits, respectively in 2006.
      Also, as discussed in note 3 to the consolidated financial statements, the
      Company changed its method of quantifying errors in 2006.







/s/KPMG
      LLP





Roanoke,
      Virginia


February
      27, 2007





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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**(A
      Wholly-owned subsidiary of Alpha Natural Resources, Inc.)**


**CONSOLIDATED
      BALANCE SHEETS**





**December
                31,****2006**
            
            **2005****(In
                thousands)****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            33,256
            
            $
            39,622Trade
                accounts receivable, net
            
            
            171,195
            
            
            147,961Notes
                and other receivables
            
            
            6,466
            
            
            10,330Inventories
            
            
            76,844
            
            
            76,788Due
                from affiliate
            
            
            4,581
            
            
            3,423Prepaid
                expenses and other current assets
            
            
            50,891
            
            
            44,072Total
                current assets
            
            
            343,233
            
            
            322,196Property,
                plant, and equipment, net
            
            
            637,136
            
            
            582,750Goodwill
            
            
            20,547
            
            
            18,641Other
                intangibles, net
            
            
            11,720
            
            
            11,014Deferred
                income taxes
            
            
            94,897
            
            
            38,967Other
                assets
            
            
            42,839
            
            
            43,371Total
                assets
            
            $
            1,150,372
            
            
            1,016,939**LIABILITIES
                AND STOCKHOLDER’S EQUITY**Current
                liabilities:Current
                portion of long-term debt
            
            $
            3,254
            
            $
            3,242Notes
                payable
            
            
            20,941
            
            
            59,014Bank
                overdraft
            
            
            23,781
            
            
            17,060Trade
                accounts payable
            
            
            75,986
            
            
            99,746Deferred
                income taxes
            
            
            7,601
            
            
            11,243Accrued
                expenses and other current liabilities
            
            
            88,459
            
            
            91,131Total
                current liabilities
            
            
            220,022
            
            
            281,436Long-term
                debt
            
            
            421,456
            
            
            423,547Workers’
                compensation benefits
            
            
            7,169
            
            
            5,901Postretirement
                medical benefits
            
            
            50,712
            
            
            24,461Asset
                retirement obligations
            
            
            69,495
            
            
            46,296Deferred
                gains on sale of property interests
            
            
            3,885
            
            
            5,762Other
                liabilities
            
            
            24,439
            
            
            6,585Total
                liabilities
            
            
            797,178
            
            
            793,988Stockholder's
                equity:Additional
                paid-in capital
            
            
            224,815
            
            
            204,438Accumulated
                other comprehensive loss
            
            
            (19,019
            )
            
            —Retained
                earnings
            
            
            147,398
            
            
            18,513Total
                stockholder’s equity
            
            
            353,194
            
            
            222,951Total
                liabilities and stockholder’s equity
            
            $
            1,150,372
            
            $
            1,016,939




See
      accompanying notes to consolidated financial statements.





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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**(A
      Wholly-owned subsidiary of Alpha Natural Resources, Inc.)**


**CONSOLIDATED
      STATEMENTS OF INCOME**





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004****(In
                thousands)**Revenues:Coal
                revenues
            
            $
            1,687,553
            
            $
            1,413,174
            
            $
            1,079,981Freight
                and handling revenues
            
            
            188,366
            
            
            185,555
            
            
            141,100Other
                revenues
            
            
            34,743
            
            
            27,926
            
            
            28,347Total
                revenues
            
            
            1,910,662
            
            
            1,626,655
            
            
            1,249,428Costs
                and expenses:Cost
                of coal sales (exclusive of items shown separately below)
            
            
            1,352,450
            
            
            1,184,092
            
            
            920,359Freight
                and handling costs
            
            
            188,366
            
            
            185,555
            
            
            141,100Cost
                of other revenues
            
            
            22,982
            
            
            23,675
            
            
            22,994Depreciation,
                depletion and amortization
            
            
            140,851
            
            
            73,122
            
            
            55,261Selling,
                general and administrative expenses (exclusive of depreciation and
                amortization shown separately above)
            
            
            67,952
            
            
            88,422
            
            
            40,607Total
                costs and expenses
            
            
            1,772,601
            
            
            1,554,866
            
            
            1,180,321Income
                from operations
            
            
            138,061
            
            
            71,789
            
            
            69,107Other
                income (expense):Interest
                expense
            
            
            (41,774
            )
            
            (29,647
            )
            
            (20,041
            )Interest
                income
            
            
            839
            
            
            1,064
            
            
            531Miscellaneous
                income
            
            
            523
            
            
            91
            
            
            722Total
                other income (expense), net
            
            
            (40,412
            )
            
            (28,492
            )
            
            (18,788
            )Income
                from continuing operations before income taxes and minority
                interest
            
            
            97,649
            
            
            43,297
            
            
            50,319Income
                tax expense (benefit)
            
            
            (30,519)
            )
            
            18,953
            
            
            5,150Income
                before minority interest
            
            
            128,168
            
            
            24,344
            
            
            45,169Minority
                interest
            
            
            —
            
            
            2,918
            
            
            22,781Income
                from continuing operations
            
            
            128,168
            
            
            21,426
            
            
            22,388Discontinued
                operations (Note25):Loss
                from discontinued operations before income taxes and minority
                interest
            
            
            —
            
            
            (378
            )
            
            (6,514
            )Income
                tax benefit
            
            
            —
            
            
            (93
            )
            
            (1,190
            )Minority
                interest
            
            
            —
            
            
            (72
            )
            
            (2,951
            )Loss
                from discontinued operations
            
            
            —
            
            
            (213
            )
            
            (2,373
            )Net
                income
            
            
            128,168
            
            
            21,213
            
            
            20,015




See
      accompanying notes to consolidated financial statements.





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**ALPHA
                      NR HOLDING, INC. AND SUBSIDIARIES****(A
                      Wholly-owned subsidiary of Alpha Natural Resources,
                      Inc.)****CONSOLIDATED
                      STATEMENTS OF STOCKHOLDER'S EQUITY AND PARTNERS’ CAPITAL AND COMPREHENSIVE
                      INCOME****ANR
                      Fund IX****Alpha
                      NR Holding, Inc.**
                  
                  **Holdings,
                      L.P.****Total
                      Stockholder’s****Additional**
                  
                  **Accumulated**
                  
                  
                  
                  **Total**
                  
                  
                  
                  **Equity
                      and****Common**
                  
                  **Paid-In**
                  
                  **Other
                      Comprehensive**
                  
                  
                  
                  **Stockholder’s**
                  
                  **Partners’**
                  
                  **Partners’****Stock**
                  
                  **Capital**
                  
                  **Income**
                  
                  **Retained Earnings**
                  
                  **Equity**
                  
                  **Capital**
                  
                  **Capital****(In
                      thousands, except per share amounts)**Balances,
                      December 31, 2003
                  
                  
                  —
                  
                  
                  75,710
                  
                  
                  —
                  
                  
                  1,442
                  
                  
                  77,152
                  
                  
                  9,215
                  
                  
                  86,367Net
                      income
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  17,386
                  
                  
                  17,386
                  
                  
                  2,629
                  
                  
                  20,015Noncash
                      distribution of Virginia Tax Credit
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (292
                  )
                  
                  (292
                  )Distributions
                  
                  
                  —
                  
                  
                  (53,557
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (53,557
                  )
                  
                  (6,600
                  )
                  
                  (60,157
                  )Balances,
                      December 31, 2004
                  
                  
                  —
                  
                  
                  22,153
                  
                  
                  —
                  
                  
                  18,828
                  
                  
                  40,981
                  
                  
                  4,952
                  
                  
                  45,933Noncash
                      distribution of Virginia Tax Credit
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (40
                  )
                  
                  (40
                  )Net
                      income prior to Internal Restructuring
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  2,320
                  
                  
                  2,320
                  
                  
                  379
                  
                  
                  2,699Distribution
                      to First Reserve Fund IX, L.P. and ANR Fund IX Holdings, L.P.
                      prior to the Internal Restructuring
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (7,920
                  )
                  
                  (7,920
                  )
                  
                  (1,243
                  )
                  
                  (9,163
                  )Adjustments
                      to give effect to the Internal Restructuring (Note 2)
                  
                  
                  —
                  
                  
                  48,168
                  
                  
                  —
                  
                  
                  (13,228
                  )
                  
                  (34,940
                  )
                  
                  (4,048
                  )
                  
                  30,892Change
                      in net deferred income taxes recognized upon the completion
                      of the
                      Internal Restructuring
                  
                  
                  —
                  
                  
                  34,498
                  
                  
                  —
                  
                  
                  —
                  
                  
                  34,498
                  
                  
                  —
                  
                  
                  34,498Capital
                      contribution by Parent for stock-based compensation
                  
                  
                  —
                  
                  
                  46,435
                  
                  
                  —
                  
                  
                  —
                  
                  
                  46,435
                  
                  
                  —
                  
                  
                  46,435Capital
                      contribution by Parent for equity issued by Parent in connection
                      with
                      Acquisition
                  
                  
                  —
                  
                  
                  53,184
                  
                  
                  —
                  
                  
                  —
                  
                  
                  53,184
                  
                  
                  —
                  
                  
                  53,184Net
                      income subsequent to Internal Restructuring
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  18,513
                  
                  
                  18,513
                  
                  
                  —
                  
                  
                  18,513Balances,
                      December 31, 2005
                  
                  $
                  —
                  
                  
                  204,438
                  
                  
                  —
                  
                  
                  18,513
                  
                  
                  222,951
                  
                  
                  —
                  
                  
                  222,951Comprehensive
                      IncomeNet
                      Income
                  
                  $
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  128,168
                  
                  
                  128,168
                  
                  
                  —
                  
                  
                  128,168Change
                      in derivative financial instrument, net of income tax of
                      $1,787
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (5,437
                  )
                  
                  —
                  
                  
                  (5,437
                  )
                  
                  —
                  
                  
                  (5,437
                  )Total
                      Comprehensive Income
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  —
                  
                  
                  122,731Initial
                      impact of adoption of Staff Accounting Bulletin No. 108, net
                      of income tax
                      (note 3 (t))
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  717
                  
                  
                  717
                  
                  
                  —
                  
                  
                  717Exercise
                      of stock options
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Amortization
                      of unearned stock-based compensation
                  
                  
                  —
                  
                  
                  20,377
                  
                  
                  —
                  
                  
                  —
                  
                  
                  20,377
                  
                  
                  —
                  
                  
                  20,377Initial
                      impact of adoption of Statement of Financial Accounting Standards
                      No. 158,
                      net of income tax
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (13,582
                  )
                  
                  —
                  
                  
                  (13,582
                  )
                  
                  —
                  
                  
                  (13,582
                  )Balances,
                      December 31, 2006
                  
                  $
                  —
                  
                  
                  224,815
                  
                  
                  (19,019
                  )
                  
                  147,398
                  
                  
                  353,194
                  
                  
                  —
                  
                  
                  353,194






-74-
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          of Contents




**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**(A
      Wholly-owned subsidiary of Alpha Natural Resources, Inc.)**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004****(In
                thousands)**Operating
                activities:Net
                income
            
            $
            128,168
            
            $
            21,213
            
            $
            20,015Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation,
                depletion and amortization
            
            
            140,851
            
            
            73,405
            
            
            56,012Amortization
                and write-off of debt issuance costs
            
            
            2,282
            
            
            3,357
            
            
            4,474Minority
                interest
            
            
            —
            
            
            2,846
            
            
            19,830Accretion
                of asset retirement obligation
            
            
            4,874
            
            
            3,514
            
            
            3,301Virginia
                tax credit
            
            
            —
            
            
            (343
            )
            
            (4,872
            )Stock-based
                compensation— non-cash
            
            
            20,382
            
            
            46,520
            
            
            91Gain
                on sale of discontinued operations
            
            
            —
            
            
            (704)
            )
            
            —Impairment
                charge
            
            
            —
            
            
            —
            
            
            5,100Deferred
                income tax expense (benefit)
            
            
            (48,720
            )
            
            3,736
            
            
            2,711Gain
                on sale of fixed assets
            
            
            (972
            )
            
            (1,585
            )
            
            (666
            )Other
                non-cash items
            
            
            (553
            )
            
            1,070
            
            
            708Changes
                in operating assets and liabilities:Trade
                accounts receivable
            
            
            (24,101
            )
            
            (52,102
            )
            
            (25,775
            )Notes
                and other receivables
            
            
            3,124
            
            
            13,276
            
            
            (1,062
            )Inventories
            
            
            7,940
            
            
            (16,182
            )
            
            (21,040)
            )Due
                from affiliate
            
            
            (1,158
            )
            
            (3,423
            )Prepaid
                expenses and other current assets
            
            
            14,662
            
            
            4,490
            
            
            5,568Other
                assets
            
            
            (3,688
            )
            
            (6,033
            )
            
            805Trade
                accounts payable
            
            
            (28,359
            )
            
            48,462
            
            
            9,742Accrued
                expenses and other current liabilities
            
            
            (14,123
            )
            
            5,453
            
            
            27,243Workers’
                compensation benefits
            
            
            875
            
            
            1,155
            
            
            3,018Postretirement
                medical benefits
            
            
            8,716
            
            
            8,824
            
            
            4,975Asset
                retirement obligation expenditures
            
            
            (3,187
            )
            
            (4,142
            )
            
            (3,306
            )Other
                liabilities
            
            
            1,650
            
            
            1,030
            
            
            (96
            )Net
                cash provided by operating activities
            
            
            208,663
            
            
            153,837
            
            
            106,776Investing
                activities:Capital
                expenditures
            
            
            (131,943
            )
            
            (122,342
            )
            
            (72,046
            )Proceeds
                from disposition of property, plant, and equipment
            
            
            1,471
            
            
            5,450
            
            
            1,096Purchase
                of net assets of acquired companies
            
            
            (31,532
            )
            
            (221,869
            )
            
            (2,891
            )Investment
                in affiliate
            
            
            (344
            )
            
            (1,234
            )
            
            (4,500)
            )Issuance
                of note receivable to coal supplier
            
            
            —
            
            
            —
            
            
            (10,000
            )Collections
                on note receivable from coal supplier
            
            
            3,000
            
            
            5,608
            
            
            1,519Payment
                of additional consideration on previous acquisition
            
            
            —
            
            
            (5,000
            )
            
            —Decrease
                in due from affiliate
            
            
            —
            
            
            —
            
            
            620Other
            
            
            (698
            )
            
            —
            
            
            —Net
                cash used in investing activities
            
            
            (160,046
            )
            
            (339,387
            )
            
            (86,202
            )




See
      accompanying notes to consolidated financial statements.





(Continued)





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            of Contents




**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**(A
      Wholly-owned subsidiary of Alpha Natural Resources, Inc.)**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS - (continued)**





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004****(In
                thousands)**Financing
                activities:Repayments
                on notes payable
            
            
            (58,315
            )
            
            (15,228
            )
            
            (14,425
            )Proceeds
                from issuance of long-term debt
            
            
            286,821
            
            
            323,000
            
            
            175,000Repayment
                of long-term debt
            
            
            (290,210
            )
            
            (82,743
            )
            
            (61,422
            )Increase
                in bank overdraft
            
            
            6,721
            
            
            7,036
            
            
            4,170Distributions
                to prior members of ANR Holdings, LLC prior to Internal
                Restructuring
            
            
            —
            
            
            (7,732
            )
            
            (115,572
            )Debt
                issuance costs
            
            
            —
            
            
            (8,201
            )
            
            (10,525
            )Other
            
            
            —
            
            
            1,649
            
            
            (1,655
            )Net
                cash provided by (used in) financing activities
            
            
            (54,983
            )
            
            217,781
            
            
            (24,429
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            (6,366
            )
            
            32,231
            
            
            (3,855
            )Cash
                and cash equivalents at beginning of year
            
            
            39,622
            
            
            7,391
            
            
            11,246Cash
                and cash equivalents at end of year
            
            $
            33,256
            
            $
            39,622
            
            $
            7,391





See
      accompanying notes to consolidated financial statements.





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            of Contents




**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(In
      thousands, except percentages and share data)**




**(1)**
            **Business
                and Basis of Presentation**




***Organization
      and Business***




Alpha
      NR Holding, 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, our parent company 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, and on February 18, 2005, Alpha completed the
      initial public offering of its common stock. The internal restructuring and
      initial public offering are discussed in Note (2). Prior to the internal
      restructuring transactions, 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
      FR Affiliates were entities under the common control of First Reserve GP IX,
      Inc. and were formed in 2002 to acquire coal mining assets in the Appalachian
      region of the United States. In December 2002, the FR Affiliates formed ANR
      Holdings, LLC (ANR Holdings). ANR Holdings was the parent of Alpha Natural
      Resources, LLC and the latter entity and its subsidiaries acquired our
      predecessor, the majority of the Virginia coal operations of Pittston Coal
      Company, a subsidiary of The Brink’s Company (formerly known as The Pittston
      Company), on December 13, 2002.





The
      acquisition of Coastal Coal Company, LLC was completed on January 31, 2003
      by subsidiaries of ANR Holdings. The acquisition of the majority of the North
      American operations of American Metals and Coal International, Inc. (U.S. AMCI)
      was completed on March 11, 2003. Concurrent with the acquisition of
      U.S. AMCI, ANR Holdings issued additional membership interests in the
      aggregate amount of 45.3% to the former owners of U.S. AMCI, Madison
      Capital Funding, LLC and members of management in exchange for the net assets
      of
      U.S. AMCI and cash. After completion of this transaction, the FR Affiliates
      owned 54.7% of ANR Holdings. Other major acquisitions include the acquisition
      of
      Mears Enterprises, Inc. and affiliated entities on November 17, 2003, and
      the acquisition of the Nicewonder Coal Group on October 26, 2005. See
      Note 21 for further discussion concerning acquisitions.





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
      $28,795, including an adjustment for working capital. The Progress acquisition
      consisted of the purchase of the outstanding capital stock of Diamond May Coal
      Co. and Progress Land Corp. and the assets of Kentucky May Coal Co., Inc. The
      operations acquired are adjacent to the Company’s Enterprise business unit and
      have been integrated into Enterprise.





On
      December 28, 2006, the Company paid $3,300 and is obligated to make an
      additional contribution of $7,000 in 2007 for a 94% ownership interest in
      Gallatin Materials LLC (Gallatin), a lime manufacturing venture near Cincinnati,
      Ohio. Gallatin plans to construct two rotary pre-heater lime kilns to produce
      lime to be sold to coal-burning utilities as a scrubbing agent for removing
      sulfur dioxide from flue gas. The lime will also be sold to steel producers
      for
      use as flux in electric arc and basic oxygen furnaces. The minority owners
      were
      granted restricted member interest which vest based on performance criteria
      over
      a period of approximately three years from the closing date and which, if earned
      in their entirety, would reduce the Company’s ownership to 77.5%.




***Basis
      of Presentation***




The
      consolidated financial statements for the year ended December 31, 2006 include
      Alpha and its majority owned and controlled subsidiaries. The financial
      statements for the year ended December 31, 2005 include 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 December 31, 2005. The financial statements
      for the year ended December 31, 2004 are presented on a combined basis
      including the combined financial results for the FR Affiliates and subsidiaries.
      The entities included in the financial statements are collectively referred
      to
      as “the Company”.





On
      April 14, 2005, the Company sold the assets of its Colorado mining
      subsidiary, National King Coal LLC, and related trucking subsidiary, Gallup
      Transloading Company LLC, to an unrelated third party. The results of these
      operations for the years ended December 31, 2005 and 2004 have been
      reported as discontinued operations. See also Note 25.




-77-
 Table
            of Contents




**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




**(2)**
            **Internal
                Restructuring and Public
                Offerings**





On February 11,
      2005, the Company completed a series of transactions to transition from a
      structure in which the Company’s top-tier holding company was a limited
      liability company, ANR Holdings, to one in which the top-tier holding company
      is
      a corporation, Alpha Natural Resources, Inc., which was formed on
      November 29, 2004. These transactions are referred to collectively as the
      Internal Restructuring, and they included the following:




•
            Alpha
                Coal Management, LLC (ACM) was dissolved and liquidated, after which
                (1) the interests in ANR Holdings previously held by ACM were
                distributed to and held directly by the Company’s officers and employees
                who were owners of ACM prior to its dissolution and (2) outstanding
                options to purchase units in ACM were automatically converted into
                options
                to purchase up to596,985 shares
                of Alpha Natural Resources, Inc. common stock at an exercise price
                of
                $12.73 per share, and Alpha Natural Resources, Inc. assumed the
                obligations of ACM under the Alpha Coal Management, LLC 2004 Long-Term
                Incentive Plan.





•
            Alpha
                Natural Resources, Inc. assumed the obligations of ANR Holdings to
                make
                distributions to (1) affiliates of AMCI in an aggregate amount of
                $6,000, representing the approximate incremental tax resulting from
                the
                recognition of additional tax liability resulting from the Internal
                Restructuring and (2) First Reserve Fund IX, L.P. in an
                aggregate amount of approximately $4,500, representing the approximate
                value of tax attributes conveyed as a result of the Internal Restructuring
                (collectively, the Sponsor Distributions). The Sponsor Distributions
                to
                affiliates of AMCI were paid in cash in five equal installments on
                the
                dates for which estimated income tax payments are due in each of
                April
                2005, June 2005, September 2005, January 2006 and April 2006. The
                Sponsor
                Distributions to First Reserve Fund IX, L.P. are payable in three
                installments of approximately $2,100, $2,100 and $300 on December 15,
                2007, 2008 and 2009, respectively. The Sponsor Distributions will
                be
                payable in cash or, to the extent Alpha Natural Resources, Inc. is
                not
                permitted by the terms of the senior credit facility or the indenture
                governing the senior notes to pay the Sponsor Distributions in cash,
                in
                shares of Alpha Natural Resources, Inc. common
                stock.





•
            First
                Reserve Fund IX, L.P., the direct parent of Alpha NR Holding, Inc.,
                contributed all of the outstanding common stock of Alpha NR Holding,
                Inc.
                to Alpha Natural Resources, Inc. in exchange for 12,462,992 shares of
                Alpha Natural Resources, Inc. common stock and demand promissory
                notes in
                an aggregate adjusted principal amount of
                $206,734.





•
            ANR
                Fund IX Holdings, L.P., Madison Capital Funding, LLC and affiliates
                of AMCI contributed all of their membership interests in ANR Holdings
                to
                Alpha Natural Resources, Inc. in exchange for 13,052,431 shares of
                Alpha Natural Resources, Inc. common stock and demand promissory
                notes in
                an aggregate adjusted principal amount of
                $310,958.





•
            The
                officers and employees who were the members of ACM contributed all
                of
                their interests in ANR Holdings to Alpha Natural Resources, Inc.
                in
                exchange for 2,772,157 shares of Alpha Natural Resources, Inc. common
                stock. Of these shares, 82,297 were for the officers’ and employees’
                purchased interest. One half of the remainder, 1,344,930 shares,
                were
                immediately vested and resulted in compensation expense being recorded
                at
                $19 per share (based upon the initial public offering price for the
                Company’s stock on February 18, 2005), or $25,554 in total. The
                remaining 1,344,930 shares vested over the two year period ending
                December 31, 2006. The $25,554 in compensation expense related to
                these shares was deferred and amortized to expense over the vesting
                period
                through December 31, 2006.





•
            The
                Board of Directors of Alpha Natural Resources, Inc. declared a pro
                rata
                distribution to the former members of ANR Holdings in an aggregate
                amount
                equal to the net proceeds Alpha Natural Resources, Inc. received
                upon the
                exercise by the underwriters of their over-allotment option with
                respect
                to the public offering described
                below.




-78-
 Table
            of Contents




**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




•
            The
                Company, the FR Affiliates and affiliates of AMCI amended certain
                of the
                post-closing arrangements previously entered into as part of the
                Company’s
                acquisition of U.S. AMCI.





•
            Alpha
                Natural Resources, Inc. contributed the membership interests in ANR
                Holdings received in the Internal Restructuring to Alpha NR Holding,
                Inc.
                and another indirect wholly-owned subsidiary of Alpha Natural Resources,
                Inc.





On
      February 18, 2005, Alpha Natural Resources, Inc. completed the initial
      public offering of 33,925,000 shares of its common stock, including
      4,425,000 shares issued pursuant to the exercise in full of the
      underwriters’ over-allotment option. Alpha Natural Resources, Inc. received net
      proceeds (after deducting issuance costs) of $598,066 from the offering. Alpha
      Natural Resources, Inc. used $517,692 of the net proceeds to repay all
      outstanding principal and accrued interest on its demand promissory notes issued
      in the Internal Restructuring to the FR Affiliates, affiliates of AMCI and
      Madison Capital Funding LLC. In addition, $78,610 of the net proceeds were
      distributed by Alpha Natural Resources, Inc. on a pro rata basis to its
      stockholders of record as of the close of business on February 11, 2005
      pursuant to the distribution declared by Alpha Natural Resources, Inc.’s Board
      of Directors in connection with the Internal Restructuring. Included in the
      pro
      rata distribution was $7,475 distributed to officers and employees who were
      the
      members of ACM, which was recorded as compensation expense.





On
      January 24, 2006, a secondary public offering of the common stock of Alpha
      Natural Resources, Inc. was completed in which an aggregate of
      14,163,527 shares of its common stock were sold by First
      Reserve Fund IX, L.P., ANR Fund IX Holdings, L.P. and Madison Capital Funding,
      LLC. The Company received no proceeds from the secondary offering.





**(3)**
            **Summary
                of Significant Accounting Policies and
                Practices**





***(a)***
            ***Cash
                and Cash Equivalents***





Cash
      and cash equivalents consist of cash and highly liquid, short-term investments.
      Cash and cash equivalents are stated at cost, which approximates fair market
      value. The Company considers all highly liquid debt instruments with original
      maturities of three months or less to be cash equivalents.




***(b)***
            ***Trade
                Accounts Receivable and Allowance for Doubtful
                Accounts***





Trade
      accounts receivable are recorded at the invoiced amount and do not bear
      interest. The allowance for doubtful accounts is the Company’s best estimate of
      the amount of probable credit losses in the Company’s existing accounts
      receivable. The Company establishes provisions for losses on accounts receivable
      when it is probable that all or part of the outstanding balance will not be
      collected. The Company regularly reviews collectibility and establishes or
      adjusts the allowance as necessary using the specific identification method.
      Account balances are charged off against the allowance after all means of
      collection have been exhausted and the potential for recovery is considered
      remote. The allowance for doubtful accounts was $323 and $25 at
      December 31, 2006 and 2005, respectively. Credit losses were insignificant
      in the three-year period ending December 31, 2006. The Company does not
      have off-balance-sheet credit exposure related to its customers.




***(c)***
            ***Inventories***





Coal
      inventories are stated at the lower of cost or market. The cost of coal
      inventories is determined based on average cost of production, which includes
      all costs incurred to extract, transport and process the coal. Coal is
      classified as inventory at the point in time the coal is extracted from the
      mine
      and weighed at a loading facility.





Material
      and supplies inventories are valued at average cost, less an allowance for
      obsolete and surplus items.




-79-
 Table
            of Contents




**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




***(d)***
            ***Property,
                Plant, and Equipment***





Costs
      for mineral properties, mineral rights, and mine development incurred to expand
      capacity of operating mines or to develop new mines are capitalized and charged
      to operations on the units-of-production method over the estimated proven and
      probable reserve tons. Mine development costs include costs incurred for site
      preparation and development of the mines during the development stage. Mobile
      mining equipment and other fixed assets are stated at cost and depreciated
      on a
      straight-line basis over estimated useful lives ranging from 2
      to
      20 years. Leasehold improvements are amortized, using the straight-line
      method, over their estimated useful lives or the term of the lease, whichever
      is
      shorter. Major repairs and betterments that significantly extend original useful
      lives or improve productivity are capitalized and depreciated over the period
      benefited. Maintenance and repairs are expensed as incurred.




***(e)***
            ***Impairment
                of Long-Lived Assets***





In
      accordance with SFAS No. 144, *Accounting for the Impairment or Disposal of Long-lived Assets* ,
      long-lived assets, such as property, plant, equipment, and purchased intangibles
      subject to amortization, are reviewed for impairment whenever events or changes
      in circumstances indicate that the carrying amount of an asset may not be
      recoverable. Recoverability of assets to be held and used is measured by a
      comparison of the carrying amount of an asset to estimated undiscounted future
      cash flows expected to be generated by the asset. If the carrying amount of
      an
      asset exceeds its estimated future cash flows, an impairment charge is
      recognized by the amount by which the carrying amount of the asset exceeds
      the
      fair value of the asset. Assets to be disposed of would be separately presented
      in the balance sheet and reported at the lower of the carrying amount or fair
      value less costs to sell, and would no longer be depreciated. The assets and
      liabilities of a disposal group classified as held for sale would be presented
      separately in the appropriate asset and liability sections of the balance
      sheet.




***(f)***
            ***Goodwill***





Goodwill
      represents the excess of costs over fair value of net assets of businesses
      acquired. Pursuant to SFAS No. 142, *Goodwill and Other Intangible Assets* ,
      goodwill and intangible assets acquired in a purchase business combination
      and
      determined to have an indefinite useful life are not amortized, but instead
      tested for impairment at least annually (as of August 31) in accordance with
      the
      provisions of SFAS No. 142. The impairment review in 2006 supported
      the carrying value of goodwill.




***(g)***
            ***Health
                Insurance Programs***





The
      Company is principally self-insured for costs of health and medical claims.
      The
      Company utilizes commercial insurance to cover specific claims in excess of
      $ 500
      ($250
      prior to January 1, 2005). Estimated liabilities for health and medical
      claims are recorded based on the Company’s historical experience and includes a
      component for incurred but not reported claims.





***(h)***
            ***Income
                Taxes***





The
      Company accounts for income taxes in accordance with SFAS No. 109,
“ *Accounting
      for Income Taxes* ”,
      which
      requires the recognition of deferred tax assets and liabilities using enacted
      tax rates for the effect of temporary differences between the book and tax
      bases
      of recorded assets and liabilities. SFAS No. 109 also requires that
      deferred tax assets be reduced by a valuation allowance if it is more likely
      than not that some portion or all of the deferred tax asset will not be
      realized. In evaluating the need for a valuation allowance, the Company takes
      into account various factors, including objective evidence obtained from
      historical earnings, future sales commitments, the expected level of future
      taxable income and available tax planning strategies, and the impact the
      alternative minimum tax has on utilization of deferred tax assets. If future
      taxable income is lower than expected or if expected tax planning strategies
      are
      not available as anticipated, we may record a change to the valuation allowance
      through income tax expense in the period the determination is made.




-80-
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            of Contents




**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




***(i)***
            ***Asset
                Retirement Obligation***





Minimum
      standards for mine reclamation have been established by various regulatory
      agencies and dictate the reclamation requirements at the Company’s operations.
      The Company records these reclamation obligations under the provisions of
      SFAS No. 143, *Accounting for Asset Retirement Obligations.* SFAS No. 143 requires the fair value of a liability for an asset
      retirement obligation to be recognized in the period in which the legal
      obligation associated with the retirement of the long-lived asset is incurred.
      When the liability is initially recorded, the offset is capitalized by
      increasing the carrying amount of the related long-lived asset. Over time,
      the
      liability is accreted to its present value each period, and the capitalized
      cost
      is depreciated over the useful life of the related asset. To settle the
      liability, the obligation is paid, and to the extent there is a difference
      between the liability and the amount of cash paid, a gain or loss upon
      settlement is recorded. The Company annually reviews its estimated future cash
      flows for its asset retirement obligations.





In
      connection with the business acquisitions described in Note 21,
      the Company recorded the fair value of the reclamation liabilities assumed
      as
      part of the acquisitions in accordance with SFAS No. 143.




***(j)***
            ***Royalties***





Lease
      rights to coal lands are often acquired in exchange for royalty payments.
      Advance mining royalties are advance payments made to lessors under terms of
      mineral lease agreements that are recoupable against future production. These
      advance payments are deferred and charged to operations as the coal reserves
      are
      mined. The Company regularly reviews recoverability of advance mining royalties
      and establishes or adjusts the allowance for advance mining royalties as
      necessary using the specific identification method. In instances where advance
      payments are not expected to be offset against future production royalties,
      the
      Company establishes a provision for losses on the advance payments that have
      been paid and the scheduled future minimum payments are expensed and recognized
      as liabilities. Advance royalty balances are charged off against the allowance
      when the lease rights are either terminated or expire.





The
      changes in the allowance for advance mining royalties were as
      follows:





Balance
                at December 31, 2003
            
            $
            4,694Provision
                for non-recoupable advance mining royalties
            
            
            758Write-offs
                of advance mining royalties
            
            
            (11
            )Balance
                at December 31, 2004
            
            
            5,441Provision
                for non-recoupable advance mining royalties
            
            
            580Write-offs
                of advance mining royalties
            
            
            (1,191
            )Balance
                at December 31, 2005
            
            
            4,830Provision
                for non-recoupable advance mining royalties
            
            
            2,215Write-offs
                of advance mining royalties
            
            
            (766
            )Balance
                at December 31, 2006
            
            $
            6,279




***(k)***
            ***Revenue
                Recognition***





The
      Company recognizes revenue on coal sales when title passes to the customer
      in
      accordance with the terms of the sales agreement. Revenue from domestic coal
      sales is recorded at the time of shipment or delivery to the customer, and
      the
      customer takes ownership and assumes risk of loss based on shipping terms.
      Revenue from international coal sales is recorded at the time coal is loaded
      onto the shipping vessel, when the customer takes ownership and assumes risk
      of
      loss. In the event that new contracts are negotiated with a customer and
      shipments commence before the old contract is complete, the Company recognizes
      as revenue the lower of the cumulative amount billed or an amount based on
      the
      weighted average price of the new and old contracts applied to the tons
      sold.




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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**





Freight
      and handling costs paid to third-party carriers and invoiced to coal customers
      are recorded as freight and handling costs and freight and handling revenues,
      respectively.





Other
      revenues generally consist of equipment and parts sales, equipment rebuild
      and
      maintenance services, coal handling and processing, trucking services for
      unrelated parties, royalties and rental income. These revenues are recognized
      in
      the period earned or when the service is completed. Beginning on October 26,
      2005, the Company began earning revenues from the operation of a road
      construction business which was acquired as part of the acquisition of the
      Nicewonder Coal Group (Note 21). Revenue from road construction contracts
      is recognized under the percentage of completion method of accounting for
      long-term contracts in accordance with Accounting Research Bulletin No. 45 *Long-Term
      Construction Contracts* (ARB
      45)
      and the American Institute of Certified Public Accountants Statement of Position
      81-1, *Accounting
      for Performance of Construction-Type and Certain Production-Type
      Contracts* .




***(l)***
            ***Deferred
                Financing Costs***





In
      connection with obtaining financing, the Company incurred deferred financing
      costs totaling $8,201
      during the years ended December 31, 2005. These deferred financing costs
      are being amortized to interest expense over the life of the related
      indebtedness or credit facility using the straight-line method which
      approximates the effective interest method. Unamortized deferred financing
      costs
      are included in other assets in the accompanying balance sheets. Amortization
      expense for the years ended December 31, 2006, 2005 and 2004 totaled
      $2,282, $3,357 and $4,474, respectively. Amortization for the years ended
      December 31, 2005 and 2004 included $1,503 and $2,819, respectively, for
      deferred financing costs written off in connection with refinancing
      transactions. See Note 12.




***(m)***
            ***Virginia
                Coalfield Employment Enhancement Tax
                Credit***





For
      tax years 1996 through 2014, Virginia companies with an economic interest in
      coal earn tax credits based upon tons sold, seam thickness, and employment
      levels. The maximum credit earned equals $0.40 per ton for surface mined
      coal and $1.00 or $2.00 per ton for deep mined coal depending on seam
      thickness. Credits allowable are reduced from the maximum amounts if employment
      levels are not maintained from the previous year, and no credit is allowed
      for
      coal sold to Virginia utilities. Currently, the cash benefit of the credit
      is realized
      three years after being earned and either offsets taxes imposed by Virginia
      at
      100% or is refundable by the state at 85% of the face value to the extent taxes
      are not owed. The Company records the present value of the portion of the credit
      that is refundable as a reduction of operating costs as it is earned. Prior
      to
      the Internal Restructuring, the portion of the credits allocated to ANR
      Fund IX Holdings, L.P. and minority interest owners were recorded as
      noncash distributions.




***(n)***
            ***Workers’
                Compensation and Pneumoconiosis (Black Lung)
                Benefits***




*Workers’
      Compensation*





The
      Company is self-insured for workers’ compensation claims at certain of its
      operations in West Virginia. Workers’ compensation at all other locations in
      West Virginia is insured through a third party insurance provider. Workers’
compensation claims at locations in all other states where the Company operates
      are covered by a third-party insurance provider.





The
      liabilities for workers’ compensation claims that are self-insured are estimates
      of the ultimate losses incurred based on the Company’s experience, and include a
      provision for incurred but not reported losses. Adjustments to the probable
      ultimate liabilities are made annually based on an actuarial study and
      adjustments to the liability are recorded based on the results of this
      study.




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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




*Black
      Lung Benefits*





The
      Company is required by federal and state statutes to provide benefits to
      employees for awards related to black lung disease. These claims are covered
      by
      a third-party insurance provider in all locations where the Company operates
      with the exception of West Virginia. The Company is self-insured for state
      black
      lung related claims at certain locations in West Virginia. The Company accounts
      for black lung benefits under the provisions of SFAS No. 106, *Employers’
      Accounting for Postretirement Benefit Other than Pension* ,
      and
      SFAS No. 158, *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement
      Plans.*





Charges
      are made to operations for state black lung claims in West Virginia, as
      determined by an independent actuary at the present value of the actuarially
      computed liability for such benefits over the employee’s applicable term of
      service. The Company did not assume any responsibility for workers’ compensation
      or black lung claims incurred by any of its subsidiaries prior to their
      acquisition. Effective December 31, 2006, the Company adopted Statement of
      Financial Accounting Standards No. 158 (“FASB 158”), *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement
      Plans* ,
      which
      requires that the Company recognize on its balance sheet the amount of the
      Company’s unfunded Accumulated Benefit Obligation (“ABO”) at the end of the
      year. The initial effect of the adoption of FASB No. 158 is recorded in
      accumulated other comprehensive loss, net of tax. Amounts recognized in
      accumulated other comprehensive loss will be adjusted out of accumulated other
      comprehensive loss when they are subsequently recognized as components of net
      periodic benefit cost.




***(o)***
            ***Postretirement
                Benefits Other Than
                Pensions***





The
      Company accounts for health care and life insurance benefits provided for
      current and certain retired employees and their dependents by accruing the
      cost
      of such benefits over the service lives of employees. Unrecognized actuarial
      gains and losses are amort ized
      over
      the estimated average remaining service period for active employees and over
      the
      estimated average remaining life for retirees. Effective December 31, 2006,
      the
      Company adopted Statement of Financial Accounting Standards No. 158 (“FASB
      158”), *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement
      Plans* ,
      which
      requires that the Company recognize on its balance sheet the amount of the
      Company’s unfunded Accumulated Postretirement Benefit Obligation (“APBO”) at the
      end of the year. The initial effect of the adoption of FASB No. 158 is recorded
      in accumulated other comprehensive loss, net of tax. Amounts recognized in
      accumulated other comprehensive loss will be adjusted out of accumulated other
      comprehensive loss when they are subsequently recognized as components of net
      periodic benefit cost.




***(p)***
            ***Equity
                Investments***





The
      accompanying consolidated financial statements include the accounts of the
      Company and its majority owned subsidiaries. Investments in unconsolidated
      subsidiaries representing ownership of at least 20% but less than 50% are
      accounted for under the equity method. Under the equity method of accounting,
      the Company’s proportionate share of the investment company’s income or loss is
      included in the Company’s net income or loss with a corresponding increase or
      decrease in the carrying value of the investment.





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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




***(q)***
            ***Share-Based
                Compensation***





Effective
      January 1, 2006, the Company ’s
      parent
      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 the estimated fair value of the awards
      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 ’s
      parent
      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 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 is allocated to us by our parent and is measured in
      accordance with SFAS 123R totaled $ 20,382
      ($15,559 on a net-of-tax basis) for the year ended December 31, 2006. The
      adoption of SFAS 123R resulted in increased expense of approximately $1,869
      ($1,399 on a net-of-tax basis) for the year ended December 31, 2006 as compared
      to the stock-based compensation expense that would have been recorded pursuant
      to APB 25.





Approximately 90%
      of
      stock-based compensation expense is reported as selling, general and
      administrative expenses and approximately 10% of the stock-based compensation
      expense was recorded as a component of cost of sales and both are included
      in
      the Corporate and Eliminations category for segment reporting purposes (Note
      23). At December 31, 2006, approximately $135 of stock-based compensation costs
      were capitalized as a component of inventories. Under SFAS 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 year ended December 31, 2006.





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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**





The
      following table illustrates the effect on net income, as adjusted, as if the
      Company had applied the fair value recognition provisions of
      SFAS No. 123 to share-based compensation using the Black-Scholes
      option-pricing model for the years ended December 31, 2005 and
      2004:





**Year
                Ended December 31,****2005**
            
            **2004**Net
                income, as adjusted
            
            $
            21,124
            
            $
            19,015Add:
                stock option expense included in net income, as adjusted, net of
                income
                taxes and minority interest
            
            
            484
            
            
            50Deduct:
                stock option expense determined under fair-value method, net of income
                taxes and minority interest
            
            
            (1,322
            )
            
            (72
            )Pro
                forma net income, adjusted for effect of fair value of stock
                options
            
            $
            20,286
            
            $
            18,993





In
      addition to the stock option expense reflected above, the Company recorded
      $45,875 in expense in 2005 for stock-based compensation other than stock
      options, the expense for which would have been the same under
      SFAS No. 123. Such amount includes $7,475, representing a cash distribution
      to certain officers and employees of a portion of the net proceeds from the
      Company’s initial public offering attributable to the underwriters’ exercise of
      their over-allotment option. Substantially all of the remainder is non-cash
      expense attributable to shares issued in connection with the Internal
      Restructuring to certain officers and employees. See Note 2.





The
      Company had not granted equity-based awards prior to November 2004. For purposes
      of the above, the weighted average fair value of stock options granted in the
      years ended December 31, 2005 and 2004 was estimated to be $6.42 and $9.04,
      respectively. The fair values of stock options granted in both years were
      estimated on the date of each grant using the Black-Scholes option pricing
      model
      with the following assumptions:





Expected
                life (years)
            
            
            4.0Expected
                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 the
      Company.





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, or $.08 and
      $.12
      per year. A mid-range was chosen to be included in the assumption above,
      however, the Company does not currently pay a dividend.





No
      stock
      options were granted during the year ended December 31, 2006.





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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**





***(r)***
            ***Derivative
                Financial Instruments***





Derivative
      financial instruments are accounted for in accordance with SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* .
      SFAS
      No. 133 requires all derivative financial instruments to be reported on the
      balance sheet at fair value. Changes in fair value are recognized either in
      earnings or equity, depending on whether the transaction qualifies for hedge
      accounting, and if so, the nature of the underlying exposure being hedged and
      how effective the derivatives are at offsetting price movements in the
      underlying exposure.





The
      Company accounts for certain forward purchase and forward sale contracts that
      do
      not qualify under the “normal purchase and normal sale” exception of SFAS No.
      133, as derivatives and records these contracts as assets or liabilities at
      fair
      value. These contracts do not currently qualify for hedge accounting.
      Accordingly, changes in fair value for forward sales and forward purchase
      contracts have been recorded in revenue and cost of sales, respectively. At
      December 31, 2006, the Company had unrealized gains (losses) on open sales
      and
      purchase contracts of $6,119 and ($5,940) million, respectively. These amounts
      are recorded in prepaid expenses and other current assets and accrued expenses
      and other current liabilities, respectively.





The
      Company has utilized interest rate swap agreements to modify the interest
      characteristics of a portion of the Company’s outstanding debt. The swap
      agreements essentially convert variable-rate debt to fixed-rate debt and have
      been designated as cash flow hedges.





The
      Company is also exposed to the risk of fluctuations in cash flows related to
      its
      purchase of diesel fuel. The Company has entered into a forward physical
      purchase contract and diesel fuel swap agreement to reduce the volatility in
      the
      price of diesel fuel for its operations. The diesel fuel swap agreement is
      not
      designated as a hedge and therefore the changes in the fair value for this
      derivative instrument have been recorded in cost of sales. The unrealized
      loss is recorded in other current liabilities.





As
      of
      December 31, 2006 approximately 11.0 million gallons or 40 percent of the
      Company’s anticipated 2007 fuel usage has been fixed with the physical and swap
      agreements.  Included
      in the 11.0 million gallons is the physical purchase of 9.0 million gallons
      at
      $1.79 per gallon for the first six months of 2007 and the notional amount of
      2.0
      million gallons at $1.87 for the last six months of 2007.





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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




***(s)***
            ***Accounting
                Pronouncements with Delayed Effective
                Dates***





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 the Company’s 2007 fiscal year, with the cumulative effect of the
      change in accounting principle recorded as an adjustment to beginning retained
      earnings. The Company does not expect the adoption of FIN 48 to have a material
      effect on its financial statements.




In
      September 2006, the FASB issued SFAS No. 157, “ *Fair
      Value Measures* ”
(“SFAS
      157”). SFAS 157 defines fair value, establishes a framework for measuring fair
      value and enhances disclosures about fair value measures required under other
      accounting pronouncements, but does not change existing guidance as to whether
      or not an instrument is carried at fair value. SFAS No. 157 is effective for
      fiscal years beginning after November 15, 2007. The Company is currently
      reviewing the provisions of SFAS 157 to determine the impact of this standard,
      in any, on the Company’s financial statements.




***(t)***
            ***Adoption
                of SAB 108***





On
      September 13, 2006, the Securities and Exchange Commission issued Staff
      Accounting Bulletin No. 108, “ *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* ”
(“SAB
      108”), which provides interpretive guidance on the consideration of effects of
      prior year misstatements in quantifying current year misstatements for the
      purpose of assessing materiality. SAB 108 is effective for the Company for
      the
      year ended December 31, 2006 and provides for a one time transitional cumulative
      effect adjustment to retained earnings as of January 1, 2006 for errors which
      were not previously deemed to be material, but which are material under the
      guidance of SAB 108. As a result of the adoption of SAB 108, the Company changed
      its method of accounting for costs related to acid mine drainage and also for
      certain materials and supplies inventories which are used in mining operations.
      The Company recorded a cumulative effect adjustment to increase beginning
      retained earnings by $717 (net of income tax effect of $238) for the effect
      of
      these accounting changes. The Company considered the impact of these errors
      to
      be immaterial prior to the adoption of SAB 108.





*Acid
      Mine Drainage*





The
      Company is legally obligated to treat runoff and effluence for its mines and
      preparation plants, including for closed sites, and has historically expensed
      these costs as paid. The Company believes these costs should be accrued when
      incurred pursuant to SFAS No. 143, *Asset
      Retirement Obligations* .
      Substantially all of these obligations existed upon formation of the Company
      and
      were assumed as a result of acquisitions prior to formation. Upon adoption
      of
      SAB 108, the Company recorded an increase to property, plant and equipment,
      net
      of $1,877, an increase to goodwill of $1,906, an increase to deferred tax assets
      of $678, an increase to other long-term assets of $82, a reduction of deferred
      gain on sales of property interest of $1,115, an increase to asset retirement
      obligation of $7,700 and a decrease in beginning retained earnings of $2,042.





*Mine
      Supplies Inventory*





Since
      its formation, the Company has not recorded as inventory certain mine supplies,
      including tires, explosives and fuel, that are maintained at some of its mines
      and used in mine operations. The Company’s policy was to expense these costs
      when the supplies were purchased. Since the inventory balances remained
      consistent from period to period, the impact of this policy was considered
      immaterial prior to the adoption of SAB 108. Upon adoption of SAB 108, the
      Company changed its policy to record these amounts in inventory when purchased
      and to expense the items when used in mining operations. The Company recorded
      an
      increase to inventory of $3,675, a decrease in deferred tax assets of $916
      and
      an increase in beginning retained earnings of $2,759.




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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




***(u)***
            ***Use
                of Estimates***





The
      preparation of financial statements in conformity with U.S. generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. Significant items subject to such estimates and assumptions
      include the allowance for doubtful accounts; inventories; mineral reserves;
      allowance for non-recoupable advance mining royalties; asset retirement
      obligations; employee benefit liabilities; future cash flows associated with
      assets; useful lives for depreciation, depletion, and amortization; workers’
compensation and black lung claims; postretirement benefits other than pensions;
      income taxes; revenue recognized using the percentage of completion method;
      and
      fair value of financial instruments. Due to the subjective nature of these
      estimates, actual results could differ from those estimates.




***(v)***
            ***Reclassifications***





Certain
      prior period amounts have been reclassified to conform to the current year
      presentation.




**(4)**
            **Inventories**





Inventories
      consisted of the following:





**December
                31,****2006**
            
            **2005**Raw
                coal
            
            $
            8,868
            
            $
            6,401Saleable
                coal
            
            
            53,428
            
            
            57,221Materials
                and supplies
            
            
            14,548
            
            
            13,166Total
                inventories
            
            $
            76,844
            
            $
            76,788




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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




**(5)**
            **Prepaid
                Expenses and Other Current
                Assets**





Prepaid
      expenses and other current assets consisted of the following:





**December
                31,****2006**
            
            **2005**Prepaid
                insurance
            
            $
            23,167
            
            $
            20,306Advance
                mining royalties
            
            
            4,511
            
            
            3,435Refundable
                income taxes
            
            
            3,334
            
            
            6,012Fair
                value of forward coal purchase and sale contracts
            
            
            6,119
            
            
            —Prepaid
                freight
            
            
            11,299
            
            
            8,097Other
                prepaid expenses
            
            
            2,461
            
            
            6,222Total
                prepaid expenses and other current assets
            
            $
            50,891
            
            $
            44,072




**(6)**
            **Property,
                Plant, and Equipment**





Property,
      plant, and equipment consisted of the following:





**December31,****2006**
            
            **2005**Land
            
            $
            14,065
            
            $
            11,986Mineral
                rights
            
            
            324,703
            
            
            297,573Plant
                and mining equipment
            
            
            505,056
            
            
            372,189Vehicles
            
            
            4,816
            
            
            3,351Mine
                development
            
            
            54,350
            
            
            39,017Office
                equipment and software
            
            
            9,304
            
            
            8,170Construction
                in progress
            
            
            14,564
            
            
            5,419926,858
            
            
            737,705Less
                accumulated depreciation, depletion, and amortization
            
            
            289,722
            
            
            154,955Property,
                plant, and equipment, net
            
            $
            637,136
            
            $
            582,750





As
      of December 31, 2006, the Company had commitments to purchase approximately
      $38,264 of new equipment, expected to be acquired at various dates in
      2007.





Depreciation
      and amortization expense associated with property, plant and equipment was
      $100,732, $60,502
      and $50,679, and depletion expense was $40,716, $11,698 and $3,541, for the
      years ended December 31, 2006, 2005 and 2004, respectively.




**(7)**
            **Goodwill**





The
      changes in the carrying amount of goodwill were as follows:





Balance
                as of December 31, 2005
            
            $
            18,6412006
                Adjustments
            
            
            1,906Balance
                as of December 31, 2006
            
            $
            20,547





The
      carrying amount of goodwill was increased by $1,906 during the year ended
      December 31, 2006 as a result of a change in the method of accounting for
      acid mine drainage costs upon the adoption of SAB No. 108 (note
      3(t)).





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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




**(8)**
            **Other
                Intangibles**





Other
      intangible assets consisted of the following:





**December
                31, 2006**
            
            **December
                31, 2005****Gross
                Carrying Amount**
            
            **Accumulated
                Amortization**
            
            **Gross
                Carrying Amount**
            
            **Accumulated
                Amortization**Sales
                contracts
            
            $
            7,546
            
            $
            3,960
            
            $
            7,227
            
            $
            1,757Customer
                relationships
            
            
            8,678
            
            
            1,111
            
            
            4,762
            
            
            159Noncompete
                agreements
            
            
            1,177
            
            
            610
            
            
            1,177
            
            
            236$
            17,401
            
            $
            5,681
            
            $
            13,166
            
            $
            2,152





Total
      amortization expense for the above intangible assets was $3,210, $1,205 and
      $1,792 for the years ended December 31, 2006, 2005 and 2004, respectively,
      and is expected to be approximately $2,379, $2,509, $2,254, $4,581 for the
      years
      ended December 31, 2007, 2008, 2009, and thereafter, respectively.




**(9)**
            **Other
                Assets**





Other
      assets consisted of the following:





**December
                31,****2006**
            
            **2005**Advance
                mining royalties, net
            
            $
            10,374
            
            $
            11,557Deferred
                loan costs, net of accumulated amortization of $3,927 and $1,645
                in 2006
                and 2005, respectively
            
            
            12,901
            
            
            15,081Notes
                receivable
            
            
            —
            
            
            102Investment
                in terminaling facility
            
            
            1,087
            
            
            1,005Investment
                in Excelven Pty Ltd
            
            
            5,921
            
            
            5,735Virginia
                tax credit receivable
            
            
            12,105
            
            
            9,418Other
            
            
            451
            
            
            473Total
                other assets
            
            $
            42,839
            
            $
            43,371




**(10)**
            **Notes Payable**





At
      December 31, 2006, notes payable included $20,941 that was incurred to
      finance various insurance premiums. Interest, which accrues at the rate of
      6.15 %,
      and
      principal are due in monthly installments, with the final payment due in
      September 2007. At December 31, 2005, notes payable included $39,955 in
      promissory installment note that were issued in connection with the Nicewonder
      Acquisition (Note 21). The notes bore interest at 3.82% and were repaid on
      January 13, 2006. Also at December 31, 2005, notes payable included
      $19,059 incurred to finance various insurance premiums. Interest, which accrued
      at the rate of 5.50%, and principal were paid in monthly installments, with
      the
      final payment paid in November 2006.





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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




**(11)**
            **Accrued
                Expenses and Other Current
                Liabilities**





Accrued
      expenses and other current liabilities consisted of the following:





**December
                31,****2006**
            
            **2005**Wages
                and employee benefits
            
            $
            25,176
            
            $
            24,874Current
                portion of asset retirement obligation
            
            
            7,797
            
            
            7,190Taxes
                other than income taxes
            
            
            12,415
            
            
            10,697Freight
            
            
            10,669
            
            
            9,717Contractor
                escrow
            
            
            1,087
            
            
            771Deferred
                gains on sales of property interests
            
            
            389
            
            
            941Deferred
                revenues
            
            
            1,000
            
            
            4,589Current
                portion of self-insured workers’ compensation benefits
            
            
            1,175
            
            
            1,019Workers’
                compensation insurance premium payable
            
            
            4,091
            
            
            4,320Interest
                payable
            
            
            2,289
            
            
            3,944Additional
                consideration for acquisition
            
            
            549
            
            
            13,738Fair
                value of forward coal purchase and sale contracts
            
            
            5,940
            
            
            —Unamortized
                portion of unfavorable coal sales contract
            
            
            6,763
            
            
            —Construction
                billings in excess of costs
            
            
            2,943
            
            
            —Other
            
            
            6,176
            
            
            9,331Total
                accrued expenses and other current liabilities
            
            $
            88,459
            
            $
            91,131




**(12)**
            **Long-Term
                Debt**





Long-term
      debt consisted of the following:





**December
                31,****2006**
            
            **2005**Term
                loan
            
            $
            247,500
            
            $
            250,00010%Senior
                notes due 2012
            
            
            175,000
            
            
            175,000Capital
                lease obligation
            
            
            1,510
            
            
            1,496Other
            
            
            700
            
            
            293Total
                long-term debt
            
            
            424,710
            
            
            426,789Less
                current portion
            
            
            3,254
            
            
            3,242Long-term
                debt, net of current portion
            
            $
            421,456
            
            $
            423,547




***Debt
      Refinancing***





On
      October 26, 2005, in connection with the Nicewonder Acquisition, the Company and its wholly-owned
      subsidiary, Alpha Natural Resources, Inc. entered into a senior secured credit
      facility with a group of lending institutions led by Citicorp North America,
      Inc., as administrative agent (the “New Citicorp Credit Facility”). The New
      Citicorp Credit Facility consists of a $250,000 term loan facility and a
      $275,000 revolving credit facility. The revolving credit facility includes
      borrowing capacity available for letters of credit. Proceeds from the New
      Citicorp Credit Facility were used to fund the cash portion of the Nicewonder
      Acquisition, including the payment of the first installment on the promissory
      notes on November 2, 2005, to refinance the then existing Citicorp Credit
      Facility and to pay certain expenses related to the Nicewonder acquisition
      and
      debt refinancing. As of December 31, 2006 and 2005 there were $247,500 and
      $250,000 in borrowings, respectively, under the term loan facility and no
      borrowings under the revolving credit facility. In addition, there were $81,094
      and $65,487 in letters of credit outstanding for December 31, 2006 and 2005
      respectively. At December 31, 2006, $193,906 was available for borrowing.





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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**





Borrowings
      under the New Citicorp Credit Facility bear interest at variable rates based
      upon, at the Company’s option, either the prime rate or a London Interbank
      Offered Rate (LIBOR), in each case plus a spread that is generally dependent
      on
      a leverage ratio. The Company is required to pay a commitment fee on the unused
      portion of the revolving credit facility, as well as customary letter of credit
      fees. The commitment fee was 0.50% per annum in 2005 but was reduced to
      0.375% on August 21, 2006. As of December 31, 2006 and 2005, the weighted
      average interest rate applicable to borrowings under the term loan facility
      was
      7.11% and 6.32%, respectively.





Under
      the term loan facility, quarterly principal payments of $625 are required,
      through September 30,
      2012. The remaining unpaid principal, which is projected to be $233,125, is
      due
      and payable on October 26, 2012. Any outstanding principal amounts under
      the revolving credit facility are due and payable on October 26,
      2010.





All
      obligations under the New Citicorp Credit Facility are unconditionally
      guaranteed by the Company and each of its existing and future direct and
      indirect domestic subsidiaries (other than the borrower, Alpha Natural
      Resources, LLC), and are secured by substantially all of the assets of the
      Company and its subsidiaries. The New Citicorp Credit Facility contains various
      affirmative and negative covenants which, among other things, require the
      Company to maintain certain leverage and interest coverage ratios, and restrict
      certain payments and transactions, including dividends, payments for the
      repurchase of capital stock and mergers or consolidations.





All
      of
      the Company borrowings under our New Citicorp Credit Facility are at a variable
      rate, so the Company is exposed to the effect of rising interest rates in the
      United States. As of December 31, 2006, the Company has a $247,500 term loan
      outstanding with a variable interest rate based upon the 3-month London
      Interbank Offered Rate (“LIBOR”) (5.36% at December 31, 2006) plus the
      applicable margin. To reduce the Company’s exposure to rising interest rates,
      effective May 22, 2006 the Company entered into a pay-fixed, receive variable
      interest rate swap on the notional amount of $233,125 for a period of
      approximately six and one-half years. In effect, this swap converted the
      variable interest rates based on the LIBOR to a fixed interest rate of 5.59%
      plus the applicable margin defined in the debt agreement (1.75%, at December
      31,
      2006) for a portion of our term loan. The Company accounts for the interest
      rate
      swap as a cash flow hedge and changes in fair value of the swap are recorded
      to
      other comprehensive income (loss). Because the critical terms of the swap and
      the underlying debt instrument that it hedges coincide, resulting in no hedge
      ineffectiveness being recognized in the income statement during the year ended
      December 31, 2006. The fair value of the swap at December 31, 2006 is $7,224
      ($5,437 net of tax) and is reflected in other liabilities in the consolidated
      balance sheet. As interest expense is accrued on the debt obligation, amounts
      in
      accumulated other comprehensive loss related to the derivative hedging
      instrument are reclassified into earnings to obtain a net cost on the debt
      obligation of 5.59% plus the applicable margin.





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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




***10% Senior
      Notes Due June 2012***





On
      May 18, 2004, Alpha Natural Resources, LLC and its wholly-owned subsidiary,
      Alpha Natural Resources Capital Corp., issued $175,000 of 10% senior notes
      due June 2012 in a private placement offering under Rule 144A of the
      Securities Act of 1933, as amended, resulting in net proceeds of approximately
      $171,500 after fees and other offering costs. The senior notes are unsecured
      but
      are guaranteed fully and unconditionally on a joint and several basis by all
      of Alpha
      NR
      Holding, Inc. restricted subsidiaries other than the issuers of the notes.
      The
      senior notes are the Company’s senior unsecured obligations and rank equally in
      right of payment to any existing and future unsecured indebtedness and rank
      senior in right of payment to any future subordinated or senior subordinated
      indebtedness. The senior notes are effectively subordinated in right of payment
      to the Company’s secured indebtedness, including borrowings under the New
      Citicorp Credit Facility. Interest on the senior notes is payable semi-annually
      in June and December.





The
      $175,000 of 10% senior notes issued by our subsidiary, Alpha Natural Resources,
      LLC and its wholly-owned subsidiary, Alpha Natural Resources Capital Corp.,
      are
      unsecured but are guaranteed fully and unconditionally on a joint and several
      basis by the Company and all of its subsidiaries other than the issuers of
      the
      notes. Alpha NR Holding, Inc., Inc., ANR Holdings, LLC, Alpha Natural Resources,
      LLC and Alpha Natural Resources Capital Corp. do not have independent operations
      or assets and thus disclosure of condensed historical financial information
      for
      guarantor/non-guarantor parent or subsidiary companies is not meaningful. The
      10% senior notes and our New Citicorp Credit Facility described above place
      restrictions on the ability of Alpha Natural Resources, LLC to make
      distributions or loans to the parent guarantors. At December 31, 2006,
      Alpha Natural Resources, LLC had net assets of $324,718 and, except for
      allowable distributions for the payment of income taxes, administrative expenses
      and, in certain circumstances, dividends on the common stock of Alpha Natural
      Resources, Inc., the net assets of Alpha Natural Resources, LLC are
      restricted.





The
      senior notes may be redeemed in whole or in part on or after June 1, 2008
      at the prices described in the governing indenture. In addition, the indenture
      provides for the redemption of up to 35% of the aggregate principal amount
      of
      senior notes for 110% of the principal amount of the senior notes with the
      net
      proceeds of certain underwritten equity offerings. Any of the senior notes
      may
      be redeemed at any time before June 1, 2008 in cash at 100% of the
      principal amount plus accrued and unpaid interest and a make-whole
      premium.





The
      indenture governing the senior notes contains covenants that, among other
      things, limit the ability of the Company to incur additional indebtedness,
      make
      certain payments, including dividends, make certain investments, and sell
      certain assets or merge with or into other companies.




***Other
      Indebtedness***





The
      Company entered into a capital lease for equipment in conjunction with the
      purchase of substantially all of the assets of Moravian Run Reclamation Co.,
      Inc. on April 1, 2004. The lease has a term of sixty months with monthly
      payments ranging from $ 20
      to $60
      with a final balloon payment of $180 in March 2009. The effective interest
      rate
      on the capital lease is approximately 12.15%. The capitalized cost of the leased
      property was $1,874 at December 31, 2006. Accumulated amortization was
      $1,378 and $881 at December 31, 2006 and 2005, respectively. Amortization
      expense on capital leases is included with depreciation expense.





In
      the
      Company’s acquisition of Progress in 2006, it assumed a capital lease obligation
      through Caterpillar Financial Services. The remaining lease term was 29 months
      with monthly payments of $23 starting in May of 2006. The effective interest
      rate on the capital lease is approximately 4.26%. The capitalized cost of the
      leased property was $512 at December 31, 2006. Accumulated amortization was
      $68
      at December 31, 2006. Amortization expense on capital leases is included with
      depreciation expense.





The
      Company entered into a Credit agreement with Nedbank on December 28, 2006 to
      provide phase one project financing for the construction of assets for Gallatin
      Materials, LLC in the amount of $20,600 at an interest rate based upon the
      3-month London Interbank Offered Rate (“LIBOR”) plus an applicable margin on a
      non-recourse senior loan. The final maturity date is April 30, 2016. There
      is no
      balance outstanding under this credit agreement at December 31,
      2006.




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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**





Future
      maturities of long-term debt, including capital lease obligations, are as
      follows as of December 31, 2006:





Year
                ending December31:2007
            
            $
            3,2542008
            
            
            3,7252009
            
            
            2,7312010
            
            
            2,5002011
            
            
            2,500Thereafter
            
            
            410,000Total
                long-term debt
            
            $
            424,710





Following
      is a schedule of future minimum lease payments under capital lease obligations
      together with the present value of the net minimum lease payments as of
      December 31, 2006:


Year
                  ending December31:2007
              
              $
              8752008
              
              
              5662009
              
              
              240Total
                  future minimum lease payments
              
              
              1,681Less
                  amount representing interest
              
              
              (171
              )Present
                  value of future minimum lease payments
              
              
              1,510Less
                  current portion
              
              
              (754
              )Long-term
                  capital lease obligation
              
              $
              756


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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




**(13)**
            **Asset
                Retirement Obligation**





At
      December 31, 2006 and 2005, the Company has recorded asset retirement
      obligation accruals for mine reclamation and closure costs (including acid
      mine
      drainage in connection with the adoption of SAB 108 in the current year)
      totaling $77,292 and $53,487,
      respectively. The portion of the costs expected to be incurred within a year
      in
      the amount of $7,797 and $7,190, at December 31, 2006 and 2005,
      respectively, is included in accrued expenses and other current liabilities.
      These regulatory obligations are secured by surety bonds in the amount of
      $138,013 at December 31, 2006 and $116,680 at December 31, 2005.
      Changes in the reclamation obligation were as follows:




Total
                  asset retirement obligation at December 31, 2003
              
              $
              40,427Accretion
                  for 2004
              
              
              3,3012004
                  acquisitions
              
              
              1,189Sites
                  added in 2004
              
              
              3,657Revisions
                  in estimated cash flows
              
              
              (5,689
              )Expenditures
                  in 2004
              
              
              (3,306
              )Total
                  asset retirement obligation at December 31, 2004
              
              
              39,579Accretion
                  for 2005
              
              
              3,5142005
                  acquisitions
              
              
              7,883Sites
                  added in 2005
              
              
              3,977Revisions
                  in estimated cash flows
              
              
              2,676Expenditures
                  in 2005
              
              
              (4,142
              )Total
                  asset retirement obligation at December 31, 2005
              
              
              53,487Accretion
                  for 2006
              
              
              4,8742006
                  acquisitions
              
              
              7,968Sites
                  added in 2006
              
              
              6,070Revisions
                  in estimated cash flows
              
              
              1,347Expenditures
                  in 2006
              
              
              (4,154
              )Increase
                  in recorded liability for acid mine drainage (see note
                  3(t))
              
              
              7,700Total
                  asset retirement obligation at December 31, 2006
              
              $
              77,292




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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




**(14)**
            **Other
                Liabilities**





Other
      liabilities consisted of the following:


**December
                    31,****2006**
                
                **2005**Fair
                    value of interest rate swap
                
                $
                7,224
                
                $
                —Unamortized
                    portion of unfavorable coal sales contract
                
                
                9,430
                
                
                —Employee
                    benefits
                
                
                1,840
                
                
                366Advance
                    royalties payable
                
                
                1,100
                
                
                1,513Contractor
                    escrow
                
                
                1,127
                
                
                957Long-term
                    deferred revenue
                
                
                1,000
                
                
                298Deferred
                    purchase price obligation
                
                
                701
                
                
                845Other
                    long-term liabilities
                
                
                2,017
                
                
                2,606Total
                    other liabilities
                
                $
                24,439
                
                $
                6,585





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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




**(15)**
            **Deferred
                Gains on Sales of Property
                Interests**





In
      February 2003, the Company sold an overriding royalty interest in certain mining
      properties for $11,850. The gain on this transaction in the amount of $850
      was
      deferred and is being amortized over the associated remaining term of the
      mineral lease. This property interest was acquired from El Paso CGP Company
      in the acquisition of the Coastal Coal properties.





In
      April 2003, the Company sold mineral properties for $53,625 in a sale/leaseback
      transaction. These properties had originally been acquired from Pittston Coal
      Company. The gain on this transaction in the amount of $7,057 was deferred
      and
      is being amortized over the ten-year term of the lease.





The
      Company recognized $1,001, $790
      and
      $959 of the above deferred gains for the years ended December 31, 2006,
      2005 and 2004, respectively. During the year ended December 31, 2004, the
      deferred gain was increased by $3,514 for revisions in estimated cash flows
      underlying the asset retirement obligation relating to the mineral properties
      which had been sold, increased by $1,480 for revisions in the estimated contract
      reclamation liability assumed in conjunction with the acquisition of the
      Virginia coal operations of Pittston Coal Company, and decreased by $5,000
      relating to the accrual of additional consideration for the acquisition of
      the
      Virginia coal operations of Pittston Coal Company. In 2005 the deferred gain
      was
      increased by an additional $1,169 for revisions in estimated cash flows
      underlying assets retirement obligations relating to the properties which had
      been sold. In 2006 the deferred gain was increased by $140 for a change in
      the
      estimated reclamation liabilities and decreased by $1,115 upon the adoption
      of
      SAB 108 (see note3 (t)).




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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




**(16)**
            **Fair
                Value of Financial
                Instruments**





The
      estimated fair values of financial instruments under
      SFAS No. 107, *Disclosures About Fair Value of Financial Instruments* ,
      are
      determined based on relevant market information. These estimates involve
      uncertainty and cannot be determined with precision. The following methods
      and
      assumptions are used to estimate the fair value of each class of financial
      instrument.





*Cash
      and Cash Equivalents, Trade Accounts Receivables, Note Payable, Bank
      Overdraft, Trade Accounts Payable, and Other Current
      Liabilities:* The
      carrying amounts approximate fair value due to the short maturity of these
      instruments.





*Notes Receivable:* The fair
      value approximates the carrying value as the rates associated with the
      receivables are comparable to current market rates.





*Long-term
      Debt:* The fair
      value of the 10% Senior notes is based on the trading price of the notes.
      The fair value of debt with variable interest rates is equal to the principal
      amount of the notes since the interest rates are reset periodically. The fair
      value of other long-term debt is based on the current market rate of interest
      offered to the Company for debt of similar maturities.





In
      connection with the long-term debt the Company entered into an interest rate
      swap on May 22, 2006 which is designed to reduce the volatility of the interest
      being paid on a portion of the long-term debt which bears interest at a variable
      rate. This interest rate swap is recorded at fair value at December 31, 2006
      based on quoted market prices.





The
      estimated fair values of long-term debt were as follows:





**December
                31,****2006**
            
            **2005**10%
                Senior notes due 2012
            
            $
            189,875
            
            $
            193,375Term
                loan
            
            
            247,500
            
            
            250,000Capital
                lease obligation
            
            
            1,510
            
            
            1,496Other
            
            
            700
            
            
            293Total
                long-term debt
            
            $
            439,585
            
            $
            445,164







**(17)**
            **Employee
                Benefit Plans**







***(a)***
            ***Postretirement
                Benefits Other Than
                Pensions***





Three
      of the Company’s subsidiaries assumed collective bargaining agreements as part
      of two acquisitions that require these subsidiaries to provide postretirement
      medical benefits to certain employees who retire after the acquisition closing
      dates. In each case, however, the sellers, have retained the obligation to
      provide postretirement medical benefits to employees who retired prior to the
      acquisition closing dates (December 13, 2002 and March 11, 2003,
      respectively) and to employees who were not retained by these subsidiaries.
      In
      addition, the sellers retained the obligation to provide postretirement medical
      benefits to a significant number of the employees who have worked for the
      Company after the acquisition closing, namely, those employees who met the
      eligibility criteria by December 31, 2003, even if the employees will not
      retire until sometime in the future. These plans are unfunded and the
      measurement date is December 31 of each year.





Effective
      July 1, 2004, the Company adopted a plan offering postretirement medical
      benefits to active union-free employees that will provide a credit of
      $20 per month per year of service for pre-65 year old and $9 per
      month per year of service for post-65 year old retirees toward the purchase
      of medical benefits (as defined) from the Company. The adoption of this plan
      resulted in prior service cost of $27,122. Effective April 1,
      2005 and October 3, 2005, the plan was amended to replace two union retiree
      medical plans with a defined dollar benefit similar to the union-free plan,
      which resulted in a prior service credit of approximately $6,167. In addition,
      on October 26, 2005 upon the acquisition of the Nicewonder Coal Group, the
      Company granted the acquired employees up to ten years of credited service
      under
      the plan resulting in an additional $2,020 of prior service cost. The Company
      also granted the acquired employees of Progress prior service credit under
      the
      plan resulting in an additional $1,040 of prior service cost.




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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




The
      Company adopted SFAS No. 158 effective December 31, 2006. The effect of adoption
      resulted in an increase in the liability for postretirement medical benefits
      of
      $17,534, and increase in deferred income tax asset of $4,337 and an increase
      in
      accumulated other comprehensive loss of $13,197. Other comprehensive income
      (loss) will be adjusted in subsequent years as these amounts are later
      recognized into income as components of net period benefit costs. The adoption
      of this pronouncement did not effect the Company’s comprehensive income for the
      year ended December 31, 2006.





The
      components of the change in accumulated benefit obligations of the plans for
      postretirement benefits other than pensions were as follows:





**December
                31,****2006**
            
            **2005**Change
                in benefit obligation:Accumulated
                benefit obligation-beginning of period:
            
            $
            49,485
            
            $
            43,783Service
                cost
            
            
            3,734
            
            
            3,906Interest
                cost
            
            
            2,782
            
            
            2,489Actuarial
                (gain) or loss
            
            
            (6,145
            )
            
            3,514Benefits
                paid
            
            
            (49
            )
            
            (60
            )Plan
                amendments
            
            
            1,040
            
            
            (4,147
            )Accumulated
                benefit obligation-end of period
            
            $
            50,847
            
            $
            49,485Funded
                status
            
            $
            (50,847
            )
            $
            (49,485
            )Unrecognized
                prior service cost
            
            
            17,959
            
            
            19,114Unrecognized
                net actuarial (gain) loss
            
            
            (425
            )
            
            5,910Accumulated
                other comprehensive loss
            
            
            (17,534
            )
            
            —Accrued
                postretirement medical benefits
            
            $
            (50,847
            )
            $
            (24,461
            )





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





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Service
                cost
            
            $
            3,734
            
            $
            3,906
            
            $
            2,266Interest
                cost
            
            
            2,782
            
            
            2,489
            
            
            1,375Amortization
                of net (gain)or loss
            
            
            186
            
            
            27
            
            
            (24)
            )Amortization
                of prior service cost
            
            
            2,219
            
            
            2,463
            
            
            1,396Net
                periodic benefit cost
            
            $
            8,921
            
            $
            8,885
            
            $
            5,013




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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




The
      following details the amounts expected to be recognized as components of net
      periodic benefit cost in 2007:





Net
                actuarial gain
            
            $
            (61
            )Prior
                service cost
            
            
            2,292$
            2,231





The
      discount rates used in determining the benefit obligations as of
      December 31, 2006, 2005 and 2004 were 5.92%, 5.50% and 5.75%, respectively.
      The discount rates used in determining net periodic postretirement benefit
      cost
      were 5.50%,
      5.75% and 6.25% for the years ended December 31, 2006, 2005 and 2004,
      respectively.





The
      weighted average annual rate of increase in the per capita cost of covered
      benefits (i.e., health care trend rate) for medical benefits assumed is 9%
      for
      2007, decreasing to 5% in 2011 and thereafter.




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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




Assumed
      health care trend rates have a significant effect on the amounts reported for
      the health care plans. A one-percentage-point change in assumed health care
      trend rates would have the following effects as of and for the year ended
      December 31, 2006:




**One**
              
              **One****Percentage**
              
              **Percentage****Point**
              
              **Point****Increase**
              
              **Decrease**Effect
                  on accumulated postretirement benefit obligation
              
              $
              692
              
              $
              (562
              )Effect
                  on total service and interest cost components
              
              
              83
              
              
              (65
              )





Employer
      contributions for benefits paid for the years ended December 31, 2006 and
      2005 were $49 and $60,
      respectively. Employee contributions are not expected to be made and the plan
      is
      unfunded.





Estimated
      future benefit payments for the fiscal years ending after December 31, 2006
      are as follows:





Year
                ending December 31:2007
            
            $
            1352008
            
            
            4362009
            
            
            9592010
            
            
            1,4902011
            
            
            2,0752012-2016
            
            
            19,557





The
      Company also adopted SFAS No. 158 for its black lung benefit obligation and
      the
      effect of adoption resulted in an increase in the liability (which is reflected
      in workers’ compensation benefits in the consolidated balance sheet) of $512, an
      increase in deferred tax assets of $127, and an increase in accumulated other
      comprehensive loss of $385. The adoption of this pronouncement did not affect
      the Company’s comprehensive income for the year ended December 31, 2006. At
      December 31, 2006 and 2005, the Company’s unfunded accumulated black lung
      benefit obligation was $1,034 and $468, respectively. The net periodic benefit
      cost was $152 and $105 for the years ended December 31, 2006 and 2005,
      respectively. The discount rate used in determining the benefit obligation
      at
      December 31, 2006 and 2005 was 5.6% and 4.0%, respectively. The discount
      rate used in determining net periodic benefit cost was 5.3% and 4.0% for the
      year ended December 31, 2006 and 2005, respectively. The estimated future cash
      payments by the Company for each of the next five years and thereafter are:
      $120
      in 2007, $107 in 2008, $112 in 2009, $119 in 2010, $131 in 2011, and $588 from
      2012 through 2016.





On
      December 8, 2003, the President of the United States signed into law the
      Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“the
      Act”). The Act introduces a prescription drug benefit under Medicare (“Medicare
      Part D”) as well as a federal subsidy to sponsors of retiree heath care
      benefit plans that provide a benefit that is at least actuarially equivalent
      to
      Medicare Part D. In May 2004, the FASB issued further guidance with the
      release of FASB Staff Position No. FAS 106-2, *Accounting and Disclosure Requirements related to the Medicare Prescription
      Drug, Improvement and Modernization Act of 2003* (“FSP
      106-2”). The Company has reflected the estimated impact of the Act as a $629
      reduction in the present value of the accumulated postretirement benefit
      obligation as of January 1, 2004 and a $113 reduction in the net periodic
      service cost for the year ended December 31, 2004.




***(b)***
            ***Savings
                Plan***





The
      Company sponsors a 401(k) Savings-Investment Plan to assist its eligible
      employees in providing for retirement. The Company contributes 3% of
      compensation, as defined, for every employee who is eligible to participate
      in
      the plan. Participants also receive a 50%
      matching contribution from the Company on their contributions of up to 4% of
      their total compensation, as defined. The effective date of the plan was
      February 1, 2003. Total Company contributions for the years ended
      December 31, 2006, 2005 and 2004, were $9,183, $6,418, and $5,086,
      respectively.




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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




***(c)***
            ***Self-Insured
                Medical Plan***





The
      Company is self-insured for health insurance coverage provided for all of its
      employees. During the years ended December 31, 2006, 2005 and 2004, total
      claims expense of $25,125,
      $20,714 and $18,094, respectively, was incurred, which represents claims
      processed and an estimate for claims incurred but not reported.




***(d)***
            ***Multi-Employer
                Pension Plan***





Three
      of the Company’s subsidiaries assumed collective bargaining agreements as part
      of two acquisitions that require them to participate in the United Mine Workers
      of America (UMWA) 1950 and 1974 pension plans. These plans are
      multi-employer pension plans whereby the expense is based upon defined
      contribution rates. There was no expense under these plans for the years ended
      December 31, 2006, 2005 and 2004.





Some
      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 years ended December 31, 2006,
      2005 and 2004 were $28, $ 32
      and
      $31, respectively.




***(e)***
            ***Share*****-Based
                Compensation Awards**





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 our parent’s common stock at an exercise price of $12.73 per
      share. No additional options or awards will be granted under this 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 Natural
      Resources, Inc. in exchange for 2,772,157 shares of Alpha Natural Resources,
      Inc. common stock. Pursuant to the stockholder agreement, an aggregate of
      1,344,930 shares of common stock held by the Company’s executives were unvested
      on the grant date. These options were vested by December 31, 2006.





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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**





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 Internal
      Revenue Code of 1986, as amended), stock appreciation rights, non-vested 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. Our parent currently uses authorized and unissued shares
      to
      satisfy share award exercises.





On
      February 11, 2005 our
      parent granted certain of its executive officers, directors and key employee’s
      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 non-vested 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 non-vested shares of stock vest over a three-year
      period. In the year ended December 31, 2006, all awards granted pursuant to
      the
      Long-Term Incentive Plan consisted of non-vested shares and performance shares.





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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




Stock
      option activity for the year ended December 31, 2006 is summarized in the
      following table:





**Number
                of**
              **Shares**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            **Weighted-**
              **Average**
              **Remaining**
              **Contract
                Life**Outstanding
                at December 31, 2005
            
            
            1,253,593
            
            $
            16.71Exercised
            
            
            (60,195
            )
            $
            15.86Forfeited/Canceled
            
            
            (56,000
            )
            $
            19.00Outstanding
                at December 31, 2006
            
            
            1,137,398
            
            $
            16.64
            
            
            8.03Exercisable
                at December 31, 2006
            
            
            268,979
            
            $
            15.48
            
            
            7.99





The
      aggregate intrinsic value of options outstanding at December
      31, 2006 was $2,741 and the aggregate intrinsic value of exercisable options
      was
      $336. Cash received from the exercise of stock options during the years ended
      December 31, 2006 and 2005 was $954 and $199, respectively. As of December
      31,
      2006, $5,523 of unrecognized compensation cost related to stock options is
      expected to be recognized as expense over a weighted-average period of
      3.01 years.





The
      weighted average grant date fair value of options granted during the year 2006
      and 2005 was $15.48 and $16.71, respectively. The total intrinsic value of
      options exercised during the year ended December 31, 2006 and 2005 was $479
      and
      $169.





Non-vested
      share award activity for the year ended December 31, 2006 is summarized in
      the
      following table:





**Number
                of**
              **Shares**
            
            **Weighted
                Average**
              **Grant
                Date**
              **Fair
                Value**Non-vested
                shares outstanding at December 31, 2005
            
            
            684,465
            
            $
            19.15Granted
            
            
            524,277
            
            
            21.21Vested
            
            
            (696,802
            )
            
            19.10Forfeited
            
            
            (40,599
            )
            
            21.22Non-vested
                shares outstanding at December 31, 2006
            
            
            471,341
            
            
            21.34




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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




The
      fair value of non-vested
      share awards is estimated based on the average of the high and low market 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 December
      31, 2006, there was $7,292 of unamortized compensation cost related to
      non-vested shares which is expected to be recognized as expense over a
      weighted-average period of 2.08 years.




In
      addition to the above, our
      parent granted 148,268 performance share awards in March 2006, of which 133,411
      remain outstanding as of December 31, 2006. Recipients of these awards can
      receive shares of Alpha common stock at the end of a three-year performance
      period which ends on December 31, 2008, based on our parent’s actual performance
      against pre-established operating income and return on invested capital targets.
      In order to receive the shares, the recipient 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 average of the high and low market
      price of our parent’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. At December 31, 2006, the Company has determined that achievement
      of the performance targets was improbable and therefore, no shares are probable
      of vesting. Accordingly, the Company has ceased recording compensation expense
      and has reversed previously recognized compensation expense for these shares.




**(18)**
            **Workers’
                Compensation Benefits**





The
      Company’s operations generally are fully insured for workers’ compensation and
      black lung claims. Insurance premium expense for the years ended
      December 31, 2006, 2005 and 2004 was $18,698, $14,108
      and $16,192, respectively. A portion of the West Virginia operations of the
      Company are self-insured for workers’ compensation and state black lung claims.
      The liability for workers’ compensation claims is an estimate of the ultimate
      losses to be incurred on such claims based on the Company’s experience and
      published industry data. Adjustments to the probable ultimate liability are
      made
      annually based on an actuarial valuation and are included in operations as
      they
      are determined. The liability for black lung benefits ** is
      an
      estimate of such benefit as determined by an independent actuary at the present
      value of the actuarially computed liability over the employee’s applicable term
      of service. The obligations incurred prior to January 31, 2003 are
      currently secured by surety bonds of El Paso Corporation, an unrelated
      entity. Also see Note 24.





The
      liability for self-insured workers compensation
      claims and black lung benefits at December 31, 2006 and 2005 was $8,344 and
      $6,920, respectively, including a current portion of $1,175 and $1,019,
      respectively. Workers’ compensation and black lung expense for the years ended
      December 31, 2006, 2005 and 2004 was $6,507, $6,940 and $7,697,
      respectively, including fees paid to the State of West Virginia to be
      self-insured. The Company is required to post bonds in the amount of $2,288
      with
      the state of West Virginia to secure estimated self-insured liabilities for
      claims incurred during the period from February 1, 2003 through
      June 30, 2004.




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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




**(19)**
            **Related
                Party Transactions**





In
      conjunction with the purchase of U.S. AMCI, the Company paid $35,000 for
      the working capital of U.S. AMCI, as defined in the contribution agreement,
      subject to an audit. As of December 31, 2003, the net working capital
      acquired was estimated to be $31,569 and the difference of $3,431 was recorded
      as a receivable. In September 2004, ANR Holdings, First Reserve and the former
      owners of AMCI (the “AMCI Parties”) agreed that the net working capital actually
      acquired was $34,070, and the AMCI Parties paid the difference of $930 to the
      Company. The parties further agreed that the AMCI Parties would be entitled
      to
      any refund of, and obligated to make any payment of, all federal black lung
      excise taxes of the companies contributed by the AMCI Parties to ANR Holdings,
      but only insofar as the taxes related to pre-closing or straddle periods ending
      on or prior to the closing date of the U.S. AMCI acquisition. As a result,
      $981 of the previously recorded receivable from AMCI was reclassified to offset
      a federal black lung excise tax accrued liability included in the net working
      capital acquired. The remaining $1,520 was recorded as an increase to
      goodwill.





The
      Company leases its Latrobe, Pennsylvania operating facility from a company
      controlled by the AMCI Parties and one of the Company’s former Executive Vice
      Presidents. Total rent expense was $186, $263 and $144 for the years ended
      December 31, 2006, 2005 and 2004, respectively.





In
      conjunction with the acquisition of U.S. AMCI, ANR Holdings entered into an
      agreement with entities affiliated with AMCI that requires the AMCI parties
      to
      pay reclamation and other obligations of one of the former U.S. AMCI
      entities acquired by the Company (Solomons Mining Company). In April 2004,
      the
      Company entered into an arrangement with the AMCI Parties to purchase 350
      tons of coal from a third-party at a price of $54.50 per ton at various
      times from April 2004 through November 2005, of which $34.50 was paid to the
      producer of that coal, $12.00 per ton was payable to the AMCI Parties and
      $8.00 per ton was retained by the Company to fund the remaining reclamation
      obligation of Solomons Mining Company. By an agreement dated January 25,
      2006, the AMCI Parties made a final settlement of all reclamation and other
      obligations associated with Solomons Mining Company by a payment of $4,104
      to
      the Company. The payment repaid advances in the amount of $2,495 made by the
      Company in excess of the amount received under the coal purchase agreement
      and
      the estimated remaining reclamation obligation in the amount of $1,034. In
      addition, the payment provided funds to pay an amount owed by Solomons Mining
      Company to a third party.





In
      connection with the acquisition of Coastal Coal Company, the Company acquired
      an
      overriding royalty interest in certain properties located in Virginia and West
      Virginia owned by El Paso CPG Company for $11,000 in cash. Effective
      February 1, 2003, the Company sold the overriding royalty interest to
      affiliates of Natural Resource Partners, L.P. (NRP) for $11,850 in cash.
      Effective April 1, 2003, the Company also sold substantially all of its
      fee-owned Virginia mineral properties to NRP for $53,625 in cash in a
      sale/leaseback transaction. Based on the aggregate of $25,966, $21,689 and
      $20,219 that the Company paid to NRP in lease, royalty and property tax
      reimbursement payments for the years ended December 31, 2006, 2005 and
      2004, respectively, NRP is the Company’s largest landlord. As of
      December 31, 2006 and 2005, the Company had $897 and $1,522, respectively,
      in accounts payable to NRP. In an unrelated transaction in December 2003, a
      former member of the ANR Holdings and Alpha Natural Resources, Inc. board of
      directors was appointed as a member of the board of directors of GP Natural
      Resource Partners, LLC, the general partner of NRP, and First Reserve became
      a
      substantial equity owner of NRP. The Company believes the production and minimum
      royalty rates contained in leases with NRP are consistent with other current
      market royalty rates.




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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**





One
      of the Company’s former
      Executive Vice Presidents is a 50% owner of Robindale Energy Services, Inc.
      (and
      its subsidiary) (“Robindale”). Robindale is engaged in the business of waste
      coal sales and related businesses in Pennsylvania. From time to time, Robindale
      has sold and purchased coal and related products to the operations of the
      Company’s AMFIRE regional business unit in Pennsylvania. For the years ended
      December 31, 2006, 2005 and 2004 the Company’s subsidiaries Alpha Coal
      Sales and AMFIRE Mining Company, LLC made purchases of $359, $581 and $799,
      respectively, from Robindale for trucking services and waste coal. For the
      years
      ended December 31, 2006 and 2005, the Company had sales of$206 and $463,
      respectively, to Robindale. The Company has agreed that its former Executive
      Vice President’s continued relationship with Robindale will not cause a breach
      of his employment agreement with Alpha, and he has agreed that he will not
      participate in any decisions to enter into any transactions that might be
      proposed between Robindale and Alpha.





Since
      April 2004, the Company has entered into various coal sales arrangements with
      AMCI International AG, formerly, AMCI Metall & Kohle AG. Two of the ANR
      Holdings and Alpha Natural Resources, Inc. former board members hold ownership
      in AMCI International AG. For the years ended December 31, 2006, 2005 and
      2004, total sales of $13,308, $72,121 and $46,315, respectively, have been
      made
      pursuant to these arrangements. The Company also had total sales of $51,693,
      $49,165 and $14,872for the years ended December 31, 2006, 2005 and 2004,
      respectively, to AMCI Australia Pty Ltd., an entity owned by these former board
      members. Accounts receivable due from AMCI Australia Pty Ltd. were $5,097 at
      December 31, 2006. In addition, American Metals and Coal International,
      Inc., an entity owned by these board members, facilitated coal transactions
      for
      an international buyer of $13,865, $9,427 and $5,202 for the years ended
      December 31, 2006, 2005 and 2004, respectively. The Company made coal
      purchases totaling $1,030, $13,931 and $1,658 during the years ended
      December 31, 2006, 2005 and 2004, respectively, from XCoal Energy and
      Resources, an entity in which each of the former aforementioned board members
      each own more than a 10% equity interest. The Company had outstanding payables
      due to XCoal Energy and Resources of $11,335 as of December 31, 2005. The
      Company had revenue of $1,119 from XCoal Energy and Reserve with no outstanding
      receivable as of December 31, 2006.




During
        2005 and early 2006 one or more of our directors was also a director of
        Foundation Coal Holdings, Inc. (“Foundation”). First Reserve Fund IX, L.P.
        and an entity affiliated with AMCI previously beneficially owned in excess
        of 5%
        of the outstanding shares of Foundation’s common stock. One of the Company’s
        subsidiaries made coal purchases totaling $23,533, $34,790 and $4,799 in
        the
        ordinary course of business during the years ended December 31, 2006, 2005
        and 2004, respectively, from subsidiaries of Foundation. The Company had
        outstanding payables due to Foundation of $675 and $2,605 as of
        December 31, 2006 and 2005, respectively.


**(20)**
            **Commitments**




***Operating
      Leases***





The
      Company leases coal mining and other equipment under long-term operating leases
      with varying terms. In addition, the Company leases mineral interests and
      surface rights from land owners under various terms and royalty
      rates.





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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**





As
      of December 31, 2006, aggregate future minimum lease payments under
      operating leases and minimum royalties under coal leases were as
      follows:


**Equipment**
              
              **Coal****Facility**
              
              **and
                  Other**
              
              **Royalties**
              
              **Total**Year
                  ending December31:2007
              
              $
              1,389
              
              
              5,065
              
              
              12,475
              
              
              18,9292008
              
              
              1,340
              
              
              1,360
              
              
              10,936
              
              
              13,6362009
              
              
              1,252
              
              
              -
              
              
              13,707
              
              
              14,9592010
              
              
              1,233
              
              
              -
              
              
              10,768
              
              
              12,0012011
              
              
              1,157
              
              
              -
              
              
              12,361
              
              
              13,518Thereafter
              
              
              8,652
              
              
              -
              
              
              34,791
              
              
              43,443Total
              
              $
              15,023
              
              
              6,425
              
              
              95,038
              
              
              116,486





The
      above table includes amounts due under noncancelable leases with initial or
      remaining lease terms in excess of one year.





For
      years ended December 31, 2006, 2005 and 2004, n et
      rent
      expense amounted to $8,029, $6,972 and $6,290, respectively. Coal royalties
      expense amounted to $75,128, $57,952 and $43,858 for the years ended
      December 31, 2006, 2005 and 2004, respectively.




***Other
      Commitments***





As
      of December 31, 2006, the Company had commitments to
      purchase 2,400 tons of coal at a cost of $118,797 during 2007.
      As
      part of a coal supply tonnage buyout agreement, at December 31, 2006, the
      Company had commitments to pay the customer $680 each year from 2007 to 2009,
      and $567 in 2010.





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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




**(21)**
            **Mergers
                and Acquisitions**





***2006
      Acquisition***





*Progress
      Energy*





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, 795,
      including an adjustment for working capital. The Progress acquisition consisted
      of the purchase of the outstanding capital stock of Diamond May Coal Co. and
      Progress Land Corp. and the assets of Kentucky May Coal Co., Inc. The operations
      acquired are adjacent to the Company’s Enterprise business unit and have been
      integrated into Enterprise.





The
      following table summarizes the estimated fair values, of the assets acquired
      and
      liabilities assumed at the date of acquisition:





Current
                assets
            
            $
            5,261Property,
                plant, and equipment
            
            
            46,983Deferred
                tax asset
            
            
            4,838Total
                assets acquired
            
            
            57,082Current
                liabilities
            
            
            (474
            )Asset
                retirement obligation
            
            
            (7,204
            )Other
                noncurrent liabilities
            
            
            (20,609
            )Total
                liabilities assumed
            
            
            (28,287
            )Net
                assets acquired
            
            $
            28,795





Included in
      liabilities assumed is $20,000 allocated to a coal sales agreement which was
      below market, and is being amortized over the remaining life of the contract.





*Gallatin
      LLC*





On
      December 28, 2006, the Company paid $3,300 and is obligated to make an
      additional contribution of $7,000 in 2007 for a 94% ownership interest in
      Gallatin Materials LLC (Gallatin), a lime manufacturing venture near Cincinnati,
      Ohio. Gallatin plans to construct two rotary pre-heater lime kilns to
      produce lime to be sold to coal-burning utilities as a scrubbing agent for
      removing sulfur dioxide from flue gas. The lime will also be sold to steel
      producers for use as flux in electric arc and basic oxygen furnaces. The
      minority owners were granted restricted member interest which vest based on
      performance criteria over a period of approximately three years from the closing
      date and which, if earned in their entirety would reduce the Company’s ownership
      to 77.5%. The Company is committed to provide financing through a $3,800 loan
      and a $2,600 letter of credit.





The
      Company acquired intangible assets which include a limestone supply agreement,
      land lease, an air permit and two lime sales contracts. The Company has made
      a
      preliminary estimate of fair value for the acquired intangibles assets which
      are
      subject to adjustments based upon the completion of an independent third-party
      valuation.





At
      December 31, 2006, long-term debt included $700 for a promissory
      installment note that was issued immediately subsequent to the Gallatin
      Acquisition ( Note 12).




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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




***2005
      Acquisition***




*Nicewonder
      Coal Group*





On
      October 26, 2005, the Company completed the acquisition of certain
      privately held coal reserves and operations of the Nicewonder Coal Group in
      southern West Virginia and southwestern Virginia (the “Nicewonder Acquisition”)
      for an aggregate purchase price of $328,200, consisting of cash at closing
      in
      the amount of $35,162, a cash payment of $1,896 made to the sellers in April
      2006, transaction costs of $4,701, $221,000 principal amount of promissory
      installment notes of an indirect, wholly owned subsidiary, of which $181,045
      was
      paid on November 2, 2005 and $39,955 was paid on January 13, 2006, a
      payment on February 6, 2006 in the amount of $12,256 for working capital in
      excess of the original agreed upon amount, and 2,180,233 shares of Alpha
      Natural Resources, Inc. common stock valued at $53,184 for accounting purposes.
      For this purpose, the value of the common stock issued was based on the average
      closing prices of our common stock for the five trading days surrounding
      October 20, 2005, the date the number of shares to be issued under the
      terms of the acquisition agreement became fixed without subsequent revision.
      In
      connection with the Nicewonder Acquisition, the Company also agreed to make
      royalty payments to the former owners of the acquired companies in the amount
      of
      $0.10 per ton of coal mined and sold from White Flame Energy’s Surface Mine
      No. 10. The Nicewonder Acquisition consisted of the purchase of the
      outstanding capital stock of White Flame Energy, Inc., Twin Star Mining, Inc.
      and Nicewonder Contracting, Inc., the equity interests of Powers Shop, LLC
      and
      Buchanan Energy, LLC and substantially all of the assets of Mate Creek Energy
      of
      W. Va., Inc. and Virginia Energy Company, and the acquisition of Premium Energy,
      Inc. by merger (together referred to as the “Nicewonder Coal Group.”). The
      operating results of the Nicewonder Coal Group have been included in the
      Company’s consolidated results of operations from the date of
      acquisition.





The
      following table summarizes the estimated fair values, as determined by an
      independent third-party valuation, of the assets acquired and liabilities
      assumed at the date of acquisition:


Current
                  assets
              
              $
              22,937Property,
                  plant, and equipment
              
              
              311,315Intangibles
              
              
              11,064Other
                  noncurrent assets
              
              
              1,704Total
                  assets acquired
              
              
              347,020Current
                  liabilities
              
              
              (10,236
              )Asset
                  retirement obligation
              
              
              (7,229
              )Other
                  noncurrent liabilities
              
              
              (1,355
              )Total
                  liabilities assumed
              
              
              (18,820
              )Net
                  assets acquired
              
              $
              328,200


The
      intangible assets reflected above includes: sales contracts of $5,375, which
      are
      being amortized on average over five years; customer relationships of $4,762,
      which are being amortized over five years; and noncompete agreements of $927,
      which are being amortized over three years.





Under
      the tax laws, the historical tax bases of the Premium Energy, Inc. assets
      carried over to the Company. The tax bases of the assets were less than the
      values assigned for financial reporting purposes, resulting in a deferred tax
      liability of $20,105 being recorded. An adjustment to reduce the previously
      recorded valuation allowance by $20,105 due to changes in the estimate of the
      future realizability of existing deferred tax assets was also recorded at the
      time of the acquisition, and was included in the purchase price allocation.
      In
      addition, in connection with the Nicewonder Acquisition, the Company recorded
      $3,047 in deferred tax assets, primarily related to state income taxes, which
      were fully offset with a corresponding increase in the valuation allowance
      against deferred tax assets.





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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**





The following
      unaudited pro forma statement of income data for the years ended
      December 31, 2005 and 2004 gives effect to the following transactions as if
      each of these transactions had occurred on January 1, 2004; the Nicewonder
      Acquisition and related debt refinancing in October 2005 (Note 12), the
      Internal Restructuring and initial public offering in February 2005
      (Note 2), the issuance in May 2004 of $175,000 principal amount of
      10% senior notes due 2012 (Note 12), and the entry into a $175,000
      revolving credit facility in May 2004 (Note 12):




**Year
                  Ended December 31,****2005**
              
              **2004**Revenues
              
              $
              1,799,129
              
              
              1,397,315Income
                  from continuing operations
              
              $
              22,315
              
              
              15,676Loss
                  from discontinued operations
              
              
              (266
              )
              
              (4,054
              )Net
                  income
              
              $
              22,049
              
              
              11,622




***2004
      Acquisitions***




*Moravian
      Run Reclamation Co.*





On
      April 1, 2004, the Company acquired substantially all of the assets of
      Moravian Run Reclamation Co., Inc. (Moravian Run) for $5 in cash. The Company
      agreed to pay Moravian Run monthly overriding royalty payments for four years
      in
      an aggregate amount of $1,000 and monthly payments for five years in respect
      of
      leased equipment in an aggregate amount of $3,100 structured as a capital lease
      with a present value of $2,360. The Company also assumed $1,086 of reclamation
      obligations. The Moravian Run assets included, as of March 31, 2004, four
      active surface mines and two additional surface mines under development,
      operating in close proximity to and serving many of the same customers as the
      Company’s AMFIRE business unit located in Pennsylvania.




*Cooney
      Bros. Coal Company*





On
      May 10, 2004, the Company acquired a coal preparation plant and railroad
      loading facility located in Portage, Pennsylvania and related equipment and
      coal
      inventory from Cooney Bros. Coal Company for $2,500 in cash and an adjacent
      coal
      refuse disposal site from a Cooney family trust for $300 in cash. The Company
      also assumed approximately $102 of reclamation obligations in connection with
      this acquisition.





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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




**(22)**
            **Concentrations
                and Major Customers**





The
      Company markets its coal principally to electric utilities in the United States
      and international and domestic steel producers. As of December 31, 2006 and
      2005, trade accounts receivable from electric utilities totaled approximately
      $55,816 and $52,400, respectively. Credit is extended based on an evaluation
      of
      the customer’s financial condition and collateral is generally not required.
      Credit losses are provided for in the consolidated financial statements and
      historically have been minimal. The Company is committed under long-term
      contracts to supply coal that meets certain quality requirements at specified
      prices. The prices for some multi-year contracts are adjusted based on economic
      indices or the contract may include year-to-year specified price changes.
      Quantities sold under some contracts may vary from year to year within certain
      limits at the option of the customer. Sales to the Company’s largest customer
      accounted for less than 10% of total sales for each of the years ended
      December 31, 2006, 2005 and 2004.




**(23)**
            **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 February 1, 2007,
      consisted of 38 active underground mines and 27 active 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 repairs operations, and 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 revenues from the operation of a road construction
      business which the Company acquired on October 26, 2005 as part of the
      Nicewonder Acquisition. 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 and 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.





Segment
      operating results and capital expenditures for the year ended December 31,
      2006, and segment assets as of December 31, 2006 were as follows:-Needs
      Updating





**Corporate****Coal**
            
            
            
            **and****Operations**
            
            **All
                Other**
            
            **Eliminations**
            
            **Combined**Revenues
            
            $
            1,881,657
            
            
            69,018
            
            
            (40,013
            )
            
            1,910,662Depreciation,
                depletion, and amortization
            
            
            133,043
            
            
            5,962
            
            
            1,846
            
            
            140,851EBITDA
            
            
            337,803
            
            
            9,599
            
            
            (67,967
            )
            
            279,
                435Capital
                expenditures
            
            
            124,554
            
            
            6,208
            
            
            1,181
            
            
            131,943Total
                assets
            
            
            1,167,010
            
            
            98,418
            
            
            (115,056
            )
            
            1,150,372




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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**





Segment operating results and capital expenditures for the year ended
      December 31, 2005, and segment assets as of December 31, 2005 were as
      follows:





**Corporate****Coal**
            
            
            
            **and****Operations**
            
            **All
                Other**
            
            **Eliminations**
            
            **Combined**Revenues
            
            $
            1,609,262
            
            $
            42,335
            
            $
            (24,942
            )
            $
            1,626,655Depreciation,
                depletion, and amortization
            
            
            70,832
            
            
            2,171
            
            
            119
            
            
            73,122EBITDA,
                as adjusted
            
            
            229,476
            
            
            4,601
            
            
            (88,785
            )
            
            145,292Capital
                expenditures
            
            
            118,379
            
            
            296
            
            
            3,357
            
            
            122,032Total
                assets
            
            
            948,431
            
            
            85,329
            
            
            (16,821
            )
            
            1,016,939





Segment
      operating results and capital expenditures for the year ended December 31,
      2004, and segment assets as of December 31, 2004 were as follows:





**Corporate****Coal**
            
            
            
            **and****Operations**
            
            **All
                Other**
            
            **Eliminations**
            
            **Combined**Revenues
            
            $
            1,231,366
            
            $
            28,571
            
            $
            (10,509
            )
            $
            1,249,428Depreciation,
                depletion, and amortization
            
            
            51,732
            
            
            1,435
            
            
            2,094
            
            
            55,261EBITDA,
                as adjusted
            
            
            166,159
            
            
            2,808
            
            
            (43,877
            )
            
            125,090Capital
                expenditures
            
            
            68,940
            
            
            332
            
            
            1,167
            
            
            70,439Total
                assets
            
            
            396,935
            
            
            105,727
            
            
            (25,541
            )
            
            477,121





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





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Total
                segment EBITDA, as adjusted for 2005 and 2004, from continuing
                operations
            
            $
            279,435
            
            $
            145,002
            
            $
            125,090Interest
                expense
            
            
            (41,774
            )
            
            (29,647
            )
            
            (20,041
            )Interest
                income
            
            
            839
            
            
            1,064
            
            
            531Income
                tax (expense) benefit
            
            
            30,519
            
            
            (18,953
            )
            
            (5,150
            )Depreciation,
                depletion and amortization
            
            
            (140,851
            )
            
            (73,122
            )
            
            (55,261
            )Minority
                interest
            
            
            —
            
            
            (2,918
            )
            
            (22,781
            )Income
                from continuing operations
            
            $
            128,168
            
            $
            21,426
            
            $
            22,388





The
      Company markets produced, processed and purchased coal to customers in the
      United States and in international markets, primarily
      Canada, Japan, Brazil and various European countries. Export revenues totaled:
      $668,830 or approximately 35% of total revenues for the year ended
      December 31, 2006; $737,097 or approximately 45% of total revenues for the
      year ended December 31, 2005; and, $597,902 or approximately 48% of total
      revenues for the year ended December 31, 2004. Included in total export
      revenues were: sales totaling $111,756 to customers located in Canada during
      the
      year ended December 31, 2006; sales totaling $108,037 to customers located
      in Japan during the year ended December 31, 2005; and, sales totaling
      $137,395 to customers located in Canada during the year ended December 31,
      2004.




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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




**(24)**
            **Contingencies**




***(a)***
            ***Guarantees
                and Financial Instruments with Off-balance Sheet
                Risk***





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 consolidated 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 December 31, 2006 was $81,094. The amount of surety bonds
      outstanding at December 31, 2006 was $148,399, including $138,013 related
      to the Company’s reclamation obligations (Note 13). The Company has
      provided guarantees for equipment financing obtained by certain of its contract
      mining operators totaling approximately $1,589 as of December 31, 2006. 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 consolidated financial condition, results of
      operations and/or cash flows of the Company.




***(c)***
            ***Other
                Contingencies***





In
      connection with the Company’s acquisition of Coastal Coal Company, the seller,
      El Paso CGP Company, has agreed to retain and indemnify the Company for all
      workers’ compensation and black lung claims incurred prior to the acquisition
      date of January 31, 2003. The majority of this liability relates to claims
      in the state of West Virginia. If El Paso CGP Company fails to honor its
      agreement with the Company, then the Company would be liable for the payment
      of
      those claims, which were estimated in April 2004 by the West Virginia Workers’
Compensation Commission to be approximately $ 5,369
      on
      an undiscounted basis using claims data through June 30, 2003. El Paso
      has posted a bond with the state of West Virginia for the required discounted
      amount of $3,722 for claims incurred prior to the acquisition.




***(25)***
            ***Discontinued
                Operations***





In
      the third quarter of 2004, the Company recorded an impairment charge of $5,100
      to reduce the carrying value of the assets of its Colorado mining subsidiary,
      National King Coal LLC, and related trucking subsidiary, Gallup Transportation
      and Transloading Company, LLC (collectively, “NKC”) to their estimated fair
      values. On April 14, 2005, the Company sold the assets of 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 in the second quarter of 2005. The results of operations of
      NKC
      for the current and prior periods have been reported as discontinued operations.
      National King Coal LLC was previously reported in the Coal Operations segment
      and Gallup Transportation and Transloading Company, LLC was previously reported
      in the All Other segment.




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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**





The following statement of operations data reflects the activity for the
      discontinued operation for the years ended December 31, 2005 and
      2004:





**Year
                Ended December 31,****2005**
            
            **2004**Total
                revenues
            
            $
            4,523
            
            $
            17,016Total
                costs and expenses (excluding impairment charge)
            
            
            (5,607
            )
            
            (18,442
            )Impairment
                charge
            
            
            —
            
            
            (5,100
            )Gain
                on sale of discontinued operations
            
            
            704
            
            
            —Loss
                from operations
            
            
            (380
            )
            
            (6,526
            )Miscellaneous
                income
            
            
            2
            
            
            12Income
                tax benefit from discontinued operations
            
            
            (93
            )
            
            (1,190
            )Minority
                interest in loss from discontinued operations
            
            
            (72
            )
            
            (2,951
            )Loss
                from discontinued operations
            
            $
            (213
            )
            $
            (2,373
            )




**(26)**
            **Supplemental
                Cash Flow Disclosures**





Cash
      paid for interest (net of amounts capitalized) for the years ended
      December 31, 2006, 2005 and 2004 was $40,392, $23,979
      and $14,293, respectively. Income taxes paid, net of refunds, by the Company
      for
      the years ended December 31, 2006, 2005 and 2004 were $15,524, $19,960 and
      $4,047, respectively.





Non-cash
      investing and financing activities are excluded from the consolidated statements
      of cash flows.





Significant
      non-cash activity for the year ended December 31, 2006
      includes:





•
            The
                short-term financing of prepaid insurance premiums in the amount
                of
                $20,941





Significant
      non-cash activity for the year ended December 31, 2005
      includes:




•
            Capital
                contributions by Alpha for equity issued by Alpha in connection with
                the Nicewonder Acquisition of
                $53,184.





•
            The
                short-term financing of prepaid insurance premiums in the amount
                of
                $19,059.





•
            Increase
                in deferred gains on sales of property interests and decrease in
                other
                liabilities of $1,169 for revisions in estimated cash flows underlying
                asset retirement obligations relating to properties which had been
                sold.





•
            Various
                transactions in connection with the Internal Restructuring. See
                Note 2.




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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**





Significant
      non-cash activity for the year ended December 31, 2004
      includes:




•
            Increase
                in other assets of $2,372 for the Virginia Coalfield Employment
                Enhancement Tax Credit receivable. This represents the portion of
                the tax
                credit allocated to Alpha NR Holding,
                Inc.





•
            The
                short-term financing of prepaid insurance premiums in the amount
                of
                $15,228.





•
            Settlement
                of the net working capital acquired in conjunction with the acquisition
                of
                U.S. AMCI recorded as an increase in goodwill of $1,520, a decrease
                in due from affiliate of $2,501 and a decrease in accrued expenses
                of
                $981.





•
            Increase
                in deferred gains on sales of property interests and decrease in
                other
                liabilities of $1,480 for revisions in estimated contract reclamation
                liability assumed in conjunction with the acquisition of the Virginia
                coal
                operations of Pittston Coal
                Company.





•
            Decrease
                in deferred gains on sales of property interests of $5,000 as a result
                of
                additional consideration payable for the acquisition of the Virginia
                coal
                operations of Pittston Coal
                Company.




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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**





**(27)**
            **Minority
                Interest**





In
      connection with the Internal Restructuring on February 11, 2005
      ( Note 2),
      the minority interest holders contributed their interests in ANR Holdings to
      Alpha Natural Resources, Inc. in exchange for shares of Alpha Natural Resources,
      Inc. common stock, thereby eliminating the minority interest.




**(28)**
            **Investments**




***Dominion
      Terminal Associates***





As
      part of the Company’s acquisition of its predecessor in 2003, the Company
      acquired a 32.5%
      interest in Dominion Terminal Associates (DTA). DTA is a partnership with three
      other companies that operates a leased coal port terminal in Newport News,
      Virginia (the Terminal). The Company accounts for this investment under the
      equity method. The Company did not ascribe any value to this partnership
      interest when it was acquired. The Company has the right to use 32.5% of the
      throughput and ground storage capacity of the Terminal and pay for this right
      based upon an allocation of costs as determined by DTA.





For
      the
      years ended December 31, 2006, 2005 and 2004, the Company made advances to
      DTA equal to its share of allocated costs of $4,923, $4,056 and $3,266,
      respectively, offset by outside revenues of $1,677, $1,869 and $1,763,
      respectively.




***Excelven
      Pty Ltd***





In
      September 2004, the
      Company, together with AMCI, entered into a subscription deed with Excelven
      Pty
      Ltd, pursuant to which each party agreed to acquire a 24.5% interest in Excelven
      for a purchase price of $6,500 in cash. Excelven, through its subsidiaries,
      owns
      the rights to the Las Carmelitas mining venture in Venezuela and the related
      Palmarejo export port facility on Lake Maracaibo in Venezuela. The Company
      made
      additional investments in Excelven totaling $261 and $1,235 during the years
      ended December 31, 2006 and 2005, respectively. The investment is accounted
      for under the equity method, and is included in other assets at
      December 31, 2006 and 2005. The Company has recognized its share of
      Excelven losses in 2006 of $174.





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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**





**(29)**
            **Income
                Taxes**





The
      total income tax expense (benefit) provided on pretax income was allocated
      as
      follows:





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Continuing
                operations
            
            $
            (30,519
            )
            $
            18,953
            
            $
            5,150Discontinued
                operations
            
            
            —
            
            
            (93
            )
            
            (1,190
            )$
            (30,519
            )
            $
            18,860
            
            $
            3,960




Significant
      components of income tax expense (benefit)
      from continuing operations were as follows:


**Year
                  Ended December 31,****2006**
              
              **2005**
              
              **2004**Current
                  tax expense:Federal
              
              $
              15,671
              
              $
              13,841
              
              $
              1,625State
              
              
              2,530
              
              
              1,364
              
              
              —18,201
              
              
              15,205
              
              
              1,625Deferred
                  tax expense (benefit):Federal
              
              
              (40,461
              )
              
              3,740
              
              
              2,918State
              
              
              (8,259
              )
              
              8
              
              
              607(48,720
              )
              
              3,748
              
              
              3,525Total
                  income tax expense (benefit):Federal
              
              
              (24,790
              )
              
              17,581
              
              
              4,543State
              
              
              (5,729
              )
              
              1,372
              
              
              607$
              (30,519
              )
              $
              18,953
              
              $
              5,150898




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


**Year
                  Ended December 31,****2006**
              
              **2005**
              
              **2004**Federal
                  statutory income tax expense
              
              $
              34,177
              
              $
              15,154
              
              $
              17,612Increases
                  (reductions)in taxes due to:Nondeductible
                  stock-based compensation
              
              
              4,472
              
              
              16,056
              
              
              —Percentage
                  depletion allowance
              
              
              (6,345
              )
              
              (4,625
              )
              
              (3,376
              )Extraterritorial
                  income exclusion
              
              
              (1,678
              )
              
              (2,381
              )
              
              (1,225State
                  taxes, net of federal tax impact
              
              
              3,859
              
              
              2,016
              
              
              395Change
                  in valuation allowance
              
              
              (67,629
              )
              
              (6,077
              )
              
              559Taxes
                  not provided for minority interest
              
              
              —
              
              
              (1,021
              )
              
              (8,189
              )Taxes
                  not provided for pass-through entity
              
              
              —
              
              
              (142
              )
              
              (779
              )Other,
                  net
              
              
              2,625
              
              
              (27
              )
              
              153Actual
                  income tax expense (benefit)
              
              $
              (30,519
              )
              $
              18,953
              
              $
              5,150


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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**





Deferred
      income taxes result from temporary differences between the reporting of amounts
      for financial statement purposes and income tax purposes. The net deferred
      tax
      assets and liabilities included in the consolidated financial statements include
      the following amounts:


**December
                  31,****2006**
              
              **2005**Deferred
                  tax assets:Property,
                  plant and equipment
              
              $
              56,437
              
              $
              78,526Asset
                  retirement obligation
              
              
              29,990
              
              
              20,855Goodwill
              
              
              15,627
              
              
              18,214Postretirement
                  medical benefits
              
              
              19,756
              
              
              9,538Workers’
                  compensation benefits
              
              
              4,832
              
              
              4,730Deferred
                  gains on sales of property interests
              
              
              1,898
              
              
              2,614Minimum
                  tax credit carryforwards
              
              
              12,126
              
              
              8,989Other
              
              
              15,885
              
              
              4,074Gross
                  deferred tax assets
              
              
              156,551
              
              
              147,540Less
                  valuation allowance
              
              
              (39,732
              )
              
              (93,525
              )Total
                  net deferred tax assets
              
              
              116,819
              
              
              54,015Deferred
                  tax liabilities:Prepaid
                  insurance and other prepaid expenses
              
              
              (15,258
              )
              
              (12,882
              )Advance
                  mining royalties
              
              
              (5,296
              )
              
              (5,174
              )Virginia
                  tax credit
              
              
              (5,701
              )
              
              (3,672
              )Other
              
              
              (3,268
              )
              
              (4,563
              )Total
                  deferred tax liabilities
              
              
              (29,523
              )
              
              (26,291
              )Net
                  deferred tax asset
              
              $
              87,296
              
              $
              27,724


The
      breakdown of the net deferred tax asset as recorded in the accompanying
      consolidated balance sheets is as follows:




**December
                  31,****2006**
              
              **2005**Current
                  liability
              
              
              (7,601
              )
              
              (11,243
              )Noncurrent
                  asset
              
              
              94,897
              
              
              38,967Total
                  net deferred tax asset
              
              $
              87,296
              
              $
              27,724




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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**





Changes
      in the valuation allowance during the year ended December 31, 2006 were as
      follows:





Valuation
                allowance at December 31, 2005
            
            $
            93,525Increase
                in valuation allowance not affecting income tax expense
            
            
            13,836Reduction
                of valuation allowance recorded as a reduction to income tax
                expense
            
            
            (67,629
            )Valuation
                allowance at December 31, 2006
            
            $
            39,732





Since
      its formation and through the third quarter of 2006, the Company did not weigh
      significantly its forecast of future taxable income (subjective evidence) as
      it
      had not yet established an adequate earnings history (defined by the Company
      as
      at least three years) to provide objective evidence of the ability to generate
      future income. Accordingly, the Company had recorded a valuation allowance
      against a substantial portion of its deferred tax asset. As of December 31,
      2006, the Company has a three year history of cumulative earnings. As a result,
      management believes it is able to place a higher degree of reliance on its
      projections of future taxable income. Based on the results of a comprehensive
      analysis completed in the fourth quarter of 2006, the Company has concluded
      that
      it was more likely than not that a portion of its deferred tax asset previously
      reserved through a valuation allowance will be realized. As a result, the
      Company recorded a tax benefit in the fourth quarter 2006 of $55,614.  The
      Company’s remaining valuation allowance of $39,732 as of December 31, 2006
      includes a full valuation allowance against the $12,126 minimum tax credit
      carry-forward, which is available for an unlimited carry-forward period to
      offset regular federal income tax in excess of the alternative minimum tax.
      In
      addition, the remaining valuation allowance is being maintained primarily to
      account for the expectation that the Company will be a perpetual AMT taxpayer.





The
      increase in the valuation allowance not affecting income tax expense relates
      to
      items recorded directly on the consolidated balance sheet and other
      comprehensive income and
      includes primarily the effects of the Progress acquisition ($10,406), the
      adoption of SFAS No. 158 ($2,548) and the interest rate swap ($1,020).





The
      Company monitors the valuation allowance each quarter and makes adjustments
      to
      the allowance as appropriate.





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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




**(30)**
            **Quarterly
                Financial Information
                (Unaudited)**





**Year
                Ended December 31, 2006****First**
              **Quarter**
            
            **Second**
              **Quarter**
            
            **Third**
              **Quarter**
            
            **Fourth**
              **Quarter**Total
                revenues
            
            $
            482,310
            
            $
            495,681
            
            $
            474,718
            
            $
            457,953Income
                from operations
            
            
            46,639
            
            
            41,006
            
            
            29,440
            
            
            20,976Net
                income
            
            
            27,212
            
            
            23,128
            
            
            14,544
            
            
            63,284





Net
      income for the quarter ended December 31, 2006 included a charge to coal revenue
      of $7,000 for a contract buyout of a multi-year legacy coal supply agreement
      and
      an income tax benefit of $55,614 for a reversal of a deferred tax asset
      valuation allowance.





**Year
                Ended December 31, 2005****First**
              **Quarter**
            
            **Second**
              **Quarter**
            
            **Third**
              **Quarter**
            
            **Fourth**
              **Quarter**Total
                revenues
            
            $
            311,987
            
            $
            417,466
            
            $
            397,519
            
            $
            499,683Income
                (loss) from operations
            
            
            (14,022
            )
            
            41,640
            
            
            18,141
            
            
            26,320Income
                (loss) from continuing operations
            
            
            (25,323
            )
            
            26,127
            
            
            8,210
            
            
            12,412Income
                (loss) from discontinued operations
            
            
            (480
            )
            
            266
            
            
            —
            
            
            —Net
                income (loss)
            
            
            (25,801
            )
            
            26,393
            
            
            8,210
            
            
            12,412





Quarterly
      net income for the year ended December 31, 2005 included stock-based
      compensation expense, primarily relating to the Internal Restructuring and
      the
      Company’s initial public offering in February 2005 (Note 2) as follows: first
      quarter — $36,407 second quarter — $3,381; third quarter —
$3,381; and, fourth quarter — $3,350 (See Note 27).





The
      net loss for the first quarter of 2005 included an increase for minority
      interest of $2,990. Effective with the Internal Restructuring in
      February 2005, the minority interest no longer existed (See
      Note 2).





The
      results of operations from the Nicewonder Coal Group were included in the
      Company’s consolidated results of operations from the date of the acquisition, October 26,
      2005 (Note 21).





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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




**Item 9.**
            ***Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure***





None.




**Item 9A.**
            ***Controls
                and Procedures***


*Evaluation
        of disclosure controls and procedures.* Under
        the supervision and with the participation of our management, including our
        Chief Executive Officer and our Chief Financial Officer, we evaluated the
        effectiveness of our disclosure controls and procedures, as such term is
        defined
        under Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934,
        as amended. Based upon that evaluation, our Chief Executive Officer and Chief
        Financial Officer concluded that our disclosure controls and procedures were
        effective as of the end of the period covered by this annual report. There
        are
        inherent limitations to the effectiveness of any system of disclosure controls
        and procedures, including the possibility of human error and the circumvention
        or overriding of the controls and procedures. Accordingly, even effective
        disclosure controls and procedures can only provide reasonable assurance
        of
        achieving their control objectives.


*Changes
        in internal control over financial reporting.* Beginning with the year ending December 31, 2007, we will be required to
        include management’s report on our internal control over financial reporting in
        our Annual Report on Form 10-K under Section 404 of the Sarbanes-Oxley
        Act of 2002. The internal control report must contain (1) a statement of
        management’s responsibility for establishing and maintaining adequate internal
        control over our financial reporting, (2) a statement identifying the
        framework used by management to conduct the required evaluation of the
        effectiveness of our internal control over financial reporting,
        (3) management’s assessment of the effectiveness of our internal control
        over financial reporting as of the end of our most recent fiscal year, including
        a statement as to whether or not our internal control over financial reporting
        is effective. Beginning with the year ending December 31, 2008, we will be
        required to include an attestation report by our registered independent public
        accounting firm on management’s assessment of our internal control over
        financial reporting under Section 404 of the Sarbanes-Oxley Act of
        2002.
 
 In order to achieve compliance with Section 404 within the prescribed
        period, management has commenced a Section 404 compliance project under
        which management has formed a project team, assisted by outside consultants,
        and
        adopted a detailed project work plan to assess the adequacy of our internal
        control over financial reporting, remediate any control weaknesses that may
        be
        identified, validate through testing that controls are functioning as documented
        and implement a continuous reporting and improvement process for internal
        control over financial reporting. In connection with our Section 404
        compliance project, during the fourth quarter of fiscal 2006 we continued
        measures designed to improve our internal control over financial reporting
        in
        the following areas: documentation of controls and procedures; segregation
        of
        duties; establishing review procedures; developing consistent practices in
        applying accounting procedures; establishing procedures to verify and update
        accounting data; strengthening controls over information technology and
        inventory recording; and the level of experience in public company accounting
        and periodic reporting matters among our financial and accounting staff.
        We
        expect to continue to make changes in our internal control over financial
        reporting from time to time during the period prior to December 31, 2007 in
        connection with our Section 404 compliance project. Except as described
        above, during the fourth quarter of fiscal year 2006, there have been no
        changes
        in our internal control over financial reporting that have materially affected,
        or are reasonably likely to materially affect, our internal control over
        financial reporting.




**Changes
      in internal controls over financial reporting**





There
      were no changes that occurred during the fourth quarter of the fiscal year
      covered by this Annual Report on Form 10-K that have materially affected, or
      are
      reasonably likely to materially affect, the
      Company’s internal control over financial reporting.





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**ALPHA
      NR HOLDING, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS — (Continued)**




**Item 9B.**
            ***Other
                Information.***





None




**PART III**




**Item 10.**
            ***Directors, Executive
                Officers and Corporate
                Governance***





Omitted
      pursuant to General Instruction I(2)(c) of Form 10-K




**Item 11.**
            ***Executive
                Compensation***





Omitted
      pursuant to General Instruction I(2)(c) of Form 10-K




**Item12.**
            ***Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters***





Omitted
      pursuant to General Instruction I(2)(c) of Form 10-K




**Item 13.**
            ***Certain
                Relationships and Related Transactions, and Director
                Independence***





Omitted
      pursuant to General Instruction I(2)(c) of Form 10-K





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**Item14.**
            ***Principal
                Accountant Fees and
                Services***





The
      following table presents fees for professional audit services rendered by KPMG
      LLP for the audit of our annual financial statements and those of our parent
      for
      the years ended December 31, 2006 and 2005, and fees billed for other
      services rendered by KPMG LLP during those periods:




**2006**
                
                **2005**Audit
                    Fees
                
                $
                2,477,000
                
                $
                2,133,761Audit-Related
                    Fees(1)
                
                
                46,000
                
                
                437,054Tax
                    Fees
                
                
                —
                
                
                —All
                    Other Fees
                
                
                —
                
                
                —Total
                
                $
                2,523,000
                
                $
                2,570,815


(1)
            Audit-related
                fees consisted principally of fees for due diligence services related
                to
                acquisitions.





The
      policy of the audit committee of the board of directors of Alpha NR Holding,
      Inc. is to review in advance, and grant any appropriate pre-approvals of (1)
      all
      auditing services to be performed by the independent auditor and (2) all
      non-audit services to be provided by the independent auditor as permitted by
      Section 10A of the Securities Exchange Act of 1934, and, in connection
      therewith, to approve all fees and other terms of such engagement, provided
      that
      pre-approval of de minimus services shall not be required to the extent provided
      by, and subject to the requirements of, the Securities Exchange Act of 1934.
      The
      audit committee will consider annually for pre-approval a list of specific
      services and categories of services, including audit and audit-related services,
      for the upcoming or current fiscal year. All non-audit services are approved
      by
      the audit committee in advance in accordance with our policy on a case-by-case
      basis. Any service that is not included in the approved list of services or
      that
      does not fit within the definition of a pre-approved service is required to
      be
      presented separately to the audit committee for consideration at its next
      regular meeting or, if earlier consideration is required, by other means of
      communication.





**PART IV**




**Item 15.**
            ***Exhibits,
                Financial Statement
                Schedules***





Pursuant
      to the rules and regulations of the Securities and Exchange Commission, the
      Company has filed certain agreements as exhibits to this Annual Report on Form
      10-K. These agreements may contain representations and warranties by the
      parties. These warranties have been made solely for the benefit of the other
      party or parties to such agreements and (i) may been qualified by disclosure
      made to such other party or parties, (ii) were made only as of the date of
      such
      agreements or such other date(s) as may be specified in such agreements and
      are
      subject to more recent developments, which may not be fully reflected in such
      Company’s public disclosure, (iii) may reflect the allocation of risk among the
      parties to such agreements and (iv) may apply materiality standards different
      from what may be viewed as material to investors. Accordingly, these
      representations and warranties may not describe the Company’s actual state of
      affairs at the date hereof and should not be relied upon.





(a) Documents
      filed as part of this annual report:


(1):
      The following financial statements are filed as part of this annual report
      under
      Item 8:






**Alpha
      NR Holding, Inc. and Subsidiaries**


Report
      of Independent Registered Public Accounting Firm


Consolidated
      Balance Sheets, December 31, 2006 and 2005


Consolidated
      Statements of Income, years ended December 31, 2006, 2005 and
      2004


Consolidated
      Statements of Stockholder's Equity and Partners’ Capital and Comprehensive
      Income, years ended December 31, 2006, 2005 and 2004


Consolidated
      Statements of Cash Flows, years ended December 31, 2006, 2005 and
      2004


Notes
      to Consolidated Financial Statements




(2) Financial
      Statement Schedules. All schedules for which provision is made in the applicable
      accounting regulations of the SEC are not required under the related
      instructions, are inapplicable or not material, or the information called for
      thereby is otherwise included in the consolidated financial statements and
      therefore has been omitted.





(3) Listing
      of Exhibits. See Exhibit Index following the signature page of this annual
      report.




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**SIGNATURES**


Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act
      of 1934, the registrant has duly caused this report to be signed on its behalf
      by the undersigned, thereunto duly authorized.


**ALPHA
                  NR HOLDING, INC.**By:
              /s/
                  David C. StuebeName:
              David
                C. StuebeTitle:
              Vice
                  President and Chief Financial Officer




Date: March
      1, 2007


KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
      below constitutes and appoints David C. Stuebe and Vaughn. R. Groves, and each
      of them, his or her true and lawful attorneys-in-fact, each with full power
      of
      substitution, for him or her in any and all capacities, to sign any amendments
      to this report on Form 10-K and to file the same, with exhibits thereto and
      other documents in connection therewith, with the Securities and Exchange
      Commission, hereby ratifying and confirming all that each of said
      attorneys-in-fact or their substitute or substitutes may do or cause to be
      done
      by virtue hereof. Pursuant to the requirements of the Securities Exchange Act
      of
      1934, this report has been signed below by the following persons on behalf
      of
      the registrant and in the capacities and on the dates indicated.


**Signature**
              
              **Date**
              
              **Title**/s/
                  Michael J. Quillen
              
              March
                  1, 2007
              
              President, Chief
                  Executive Officer and Director
                (Principal
                  Executive Officer)Michael
                  J. Quillen/s/
                  David C. Stuebe
              
              March
                  1, 2007
              
              Vice
                  President, Chief Financial Officer and Treasurer
                (Principal
                  Financial Officer)David
                  C. Stuebe/s/
                  Eddie W. Neely
              
              March
                  1, 2007
              
              Vice
                  President, Assistant Secretaryand
                  Controller
                (Principal
                  Accounting Officer)Eddie
                  W. Neely




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**10-K
      EXHIBIT INDEX**





**Exhibit
                No.**
            
            **Description
                of Exhibit**2.1
            
            Asset
                Purchase Agreement by and between Pittston Coal Company and
                Dickenson-Russell Coal Company, LLC, dated as of October 29, 2002, as
                amended (Incorporated by reference to the Registration Statement
                on
                Form S-1 of Alpha Natural Resources, Inc. (File No. 333-121002)
                filed on December 6, 2004.)2.2
            
            Asset
                Purchase Agreement by and between Pittston Coal Company and Paramont
                Coal
                Company Virginia, LLC, dated as of October 29, 2002, as amended
                (Incorporated by reference to the Registration Statement on Form S-1
                of Alpha Natural Resources, Inc. (File No. 333-121002) filed on
                December 6, 2004.)2.3
            
            Asset
                Purchase Agreement by and between Pittston Coal Company and Alpha
                Land and
                Reserves, LLC, dated as of October 29, 2002, as amended (Incorporated
                by reference to the Registration Statement on Form S-1 of Alpha
                Natural Resources, Inc. (File No. 333-121002) filed on
                December 6, 2004.)2.4
            
            Asset
                Purchase Agreement by and between Pittston Coal Company and Alpha
                Coal
                Sales Co., LLC, dated as of October 29, 2002, as amended
                (Incorporated by reference to the Registration Statement on Form S-1
                of Alpha Natural Resources, Inc. (File No. 333-121002) filed on
                December 6, 2004.)2.5
            
            Asset
                Purchase Agreement by and between Pittston Coal Company and Alpha
                Terminal
                Company, LLC, dated as of October 29, 2002, as amended (Incorporated
                by reference to the Registration Statement on Form S-1 of Alpha
                Natural Resources, Inc. (File No. 333-121002) filed on
                December 6, 2004.)2.6
            
            Asset
                Purchase Agreement by and between Pittston Coal Company and Maxxim
                Rebuild
                Co., LLC, dated as of October 29, 2002, as amended (Incorporated by
                reference to the Registration Statement on Form S-1 of Alpha Natural
                Resources, Inc. (File No. 333-121002) filed on December 6,
                2004.)2.7
            
            Purchase
                and Sale Agreement by and among El Paso CGP Company and AMFIRE, LLC
                dated as of November 14, 2002, as amended (Incorporated by reference
                to the Registration Statement on Form S-1 of Alpha Natural Resources,
                Inc. (File No. 333-121002) filed on December 6,
                2004.)2.8
            
            Contribution
                Agreement among the FRC Parties, the AMCI Parties, ANR Holdings,
                LLC and
                the Additional Persons listed on the signature pages dated as of
                March 11, 2003, as amended (Incorporated by reference to the
                Registration Statement on Form S-1 of Alpha Natural Resources, Inc.
                (File No. 333-121002) filed on December 6,
                2004.)2.9
            
            Purchase
                and Sale Agreement made and entered into as of January 31, 2003 by
                and among Alpha Land and Reserves, LLC and CSTL, LLC (Incorporated
                by
                reference to the Registration Statement on Form S-1 of Alpha Natural
                Resources, Inc. (File No. 333-121002) filed on December 6,
                2004.)2.10
            
            Purchase
                and Sale Agreement dated as of April 9, 2003 by and between Alpha
                Land and Reserves, LLC and CSTL LLC (Incorporated by reference to
                the
                Registration Statement on Form S-1 of Alpha Natural Resources, Inc.
                (File No. 333-121002) filed on December 6,
                2004.)2.11
            
            Purchase
                and Sale Agreement dated as of April 9, 2003 by and between
                Dickenson-Russell Coal Company, LLC and WBRD LLC (Incorporated by
                reference to the Registration Statement on Form S-1 of Alpha Natural
                Resources, Inc. (File No. 333-121002) filed on December 6,
                2004.)2.12
            
            Letter
                agreement dated April 9, 2003 among Alpha Natural Resources, LLC,
                Dickenson-Russell Company, LLC, Alpha Land and Reserves, LLC, CSTL
                LLC,
                WBRD LLC, and Natural Resources Partners L.P. (Incorporated by reference
                to the Registration Statement on Form S-1 of Alpha Natural Resources,
                Inc. (File No. 333-121002) filed on December 6,
                2004.)2.13
            
            Asset
                Purchase Agreement by and among S&M Mining, S&M Mining, Inc. and
                AMFIRE Mining Company, LLC dated October 29, 2003, as amended
                (Incorporated by reference to the Registration Statement on Form S-1
                of Alpha Natural Resources, Inc. (File No. 333-121002) filed on
                December 6, 2004.)




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**Exhibit
                No.**
            
            **Description
                of Exhibit**2.14
            
            Asset
                Purchase Agreement by and among DLR Coal Co., DLR Mining, Inc. and
                AMFIRE
                Mining Company, LLC dated October 29, 2003, as amended (Incorporated
                by reference to the Registration Statement on Form S-1 of Alpha
                Natural Resources, Inc. (File No. 333-121002) filed on
                December 6, 2004.)2.15
            
            Asset
                Purchase Agreement by and between Mears Enterprises, Inc. and AMFIRE
                Mining Company, LLC dated October 29, 2003, as amended (Incorporated
                by reference to the Registration Statement on Form S-1 of Alpha
                Natural Resources, Inc. (File No. 333-121002) filed on
                December 6, 2004.)2.16
            
            Internal
                Restructuring Agreement dated as of February 11, 2005 by and among
                Alpha Natural Resources, Inc., Alpha NR Ventures, Inc., ANR Holdings,
                LLC,
                the FRC Parties named therein, the AMCI Parties named therein, Madison
                Capital Funding LLC, Alpha Coal Management, LLC and the Management
                Members
                named therein (Incorporated by reference to Exhibit 2.16 to the
                Annual Report on Form 10-K of Alpha Natural Resources, Inc. (File
                No. 1-32423) filed on March 30, 2005.)2.17
            
            Sixth
                Amendment to Contribution Agreement by and among the FRC Parties,
                the AMCI
                Parties, ANR Holdings, LLC and Alpha Natural Resources, Inc. (Incorporated
                by reference to Exhibit 2.17 to the Annual Report on Form 10-K
                of Alpha Natural Resources, Inc. (File No. 1-32423) filed on
                March 30, 2005.)2.18
            
            Asset
                Purchase Agreement dated April 14, 2005, by and among Gallup
                Transportation and Transloading Company, LLC, NATIONAL KING COAL
                LLC and
                NKC Acquisition, LLC (Incorporated by reference to Exhibit 2.1 to the
                Current Report on Form 8-K of Alpha Natural Resources, Inc. (File
                No. 1-32423) filed on April 15, 2005.)2.19
            
            Acquisition
                Agreement dated as of September 23, 2005 among Alpha Natural
                Resources, LLC, Mate Creek Energy of W. Va., Inc., Virginia Energy
                Company, the unitholders of Powers Shop, LLC, and the shareholders
                of
                White Flame Energy, Inc., Twin Star Mining, Inc. and Nicewonder
                Contracting, Inc. (the “Acquisition Agreement”) (Incorporated by reference
                to Exhibit 2.1 to the Current Report on Form 8-K of Alpha
                Natural Resources, Inc. (File No. 1-32423) filed on
                September 26, 2005.)2.20
            
            Membership
                Unit Purchase Agreement dated as of September 23, 2005 among Premium
                Energy, LLC and the unitholders of Buchanan Energy Company, LLC (the
                “Membership Unit Purchase Agreement”) (Incorporated by reference to
                Exhibit 2.2 to the Current Report on Form 8-K of Alpha Natural
                Resources, Inc. (File No. 1-32423) filed on September 26,
                2005.)2.21
            
            Agreement
                and Plan of Merger dated as of September 23, 2005 among Alpha Natural
                Resources, Inc., Alpha Natural Resources, LLC, Premium Energy, LLC,
                Premium Energy, Inc. and the shareholders of Premium Energy, Inc.
                (the
                “Premium Energy Shareholders”) (the “Merger Agreement”) (Incorporated by
                reference to Exhibit 2.3 to the Current Report on Form 8-K of
                Alpha Natural Resources, Inc. (File No. 1-32423) filed on
                September 26, 2005.)2.22
            
            Indemnification
                Agreement dated as of September 23, 2005 among Alpha Natural
                Resources, Inc., Alpha Natural Resources, LLC, Premium Energy, LLC,
                the
                other parties to the Acquisition Agreement, the Premium Energy
                Shareholders, and certain of the unitholders of Buchanan Energy Company,
                LLC (Incorporated by reference to Exhibit 2.4 to the Current Report
                on Form 8-K of Alpha Natural Resources, Inc. (File No. 1-32423)
                filed on September 26, 2005.)2.23
            
            Letter
                Agreement dated of as September 23, 2005 among Alpha Natural
                Resources, Inc., Alpha Natural Resources, LLC, Premium Energy, LLC
                and the
                other parties to the Acquisition Agreement, the Membership Unit Purchase
                Agreement and the Merger Agreement (Incorporated by reference to
                Exhibit 2.5 to the Current Report on Form 8-K of Alpha Natural
                Resources, Inc. (File No. 1-32423) filed on September 26,
                2005.)




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**Exhibit
                No.**
            
            **Description
                of Exhibit**2.24
            
            Letter
                Agreement dated October 26, 2005 (the “Letter Agreement”) among Alpha
                Natural Resources, Inc., Alpha Natural Resources, LLC, Premium Energy,
                LLC, Premium Energy, Inc. and the Sellers Representative named therein
                amending certain provisions of(i) the Acquisition Agreement dated
                September 23, 2005, among certain parties to the Letter Agreement and
                certain other parties named therein, (ii) the Agreement and Plan of
                Merger dated September 23, 2005, among the parties to the Letter
                Agreement and certain other parties named therein and (iii) the
                Indemnification Agreement dated September 23, 2005, among the parties
                to the Letter Agreement and certain other parties named therein.
                (Incorporated by reference to Exhibit 2.1 to the Current Report on
                Form 8-K of Alpha Natural Resources, Inc. (File No. 1-32423)
                filed on October 31, 2005.)2.25
            
            Assignment
                of Rights Under Certain Agreements executed as of October 26, 2005
                among Alpha Natural Resources, LLC, Mate Creek Energy, LLC, Callaway
                Natural Resources, Inc., Premium Energy, LLC and Virginia Energy
                Company,
                LLC (Incorporated by reference to Exhibit 2.2 to the Current Report
                on Form 8-K of Alpha Natural Resources, Inc. (File No. 1-32423)
                filed on October 31, 2005.)3.1
            
            Restated
                Certificate of Incorporation of Alpha NR Holding, Inc. (Incorporated
                by
                reference to Exhibit 3.11 to the Resistration Statement on Form S-4
                of Alpha NR Holding, Inc. (File No. 333-124319-17) filed
                on April 26, 2005.)3.2
            
            Bylaws
                of Alpha NR Holding, Inc. (Incorporated by reference to Exhibit 3.12
                to
                the Registration Statement on Form S-4 of Alpha NR Holding, Inc.
                (File No.
                333-124319-17) filed on April 26, 2005.)4.1
            
            Indenture
                dated as of May 18, 2004 among Alpha Natural Resources, LLC, Alpha
                Natural Resources Capital Corp., the Guarantors named therein and
                Wells
                Fargo Bank, N.A., as Trustee (Incorporated by reference to
                Exhibit 10.5 to the Registration Statement on Form S-1 of Alpha
                Natural Resources, Inc. (File No. 333-121002) filed on
                December 6, 2004.)4.2
            
            First
                Supplemental Indenture dated as of February 1, 2005 among Alpha
                Natural Resources, LLC, Alpha Natural Resources Capital Corp., the
                Guarantors party thereto and Wells Fargo Bank, N.A., as Trustee
                (Incorporated by reference to Exhibit 4.3 to the Annual Report on
                Form 10-K of Alpha Natural Resources, Inc. (File No. 1-32423)
                filed on March 30, 2005.)4.3
            
            Second
                Supplemental Indenture dated as of March 30, 2005 among Alpha Natural
                Resources, LLC, Alpha Natural Resources Capital Corp., Alpha NR Holding,
                Inc., Alpha NR Ventures, Inc., ANR Holdings, LLC, the Guarantors
                party
                thereto and Wells Fargo Bank, N.A., as Trustee (Incorporated by reference
                to Exhibit 4.4 to the Annual Report on Form 10-K of Alpha
                Natural Resources, Inc. (File No. 1-32423) filed on March 30,
                2005.)4.4
            
            Third
                Supplemental Indenture dated as of October 26, 2005 among Alpha
                Natural Resources, LLC, Alpha Natural Resources Capital Corp., Alpha
                NR
                Holding, Inc., ANR Holdings, LLC, the Guarantors party thereto, the
                Guaranteeing Subsidiaries party thereto and Wells Fargo Bank, N.A.,
                as
                Trustee (Incorporated by reference to Exhibit 10.3 to the Current
                Report on Form 8-K of Alpha Natural Resources, Inc. (File
                No. 1-32423) filed on October 31, 2005.)4.5
            
            Fourth
                Supplemental Indenture dated as of January 3, 2006 among Alpha
                Natural Resources, LLC, Alpha Natural Resources Capital Corp., Alpha
                NR
                Holding, Inc., the Guarantors party thereto, the Guaranteeing Subsidiaries
                party thereto and Wells Fargo Bank, N.A., as Trustee (Incorporated
                by
                reference to Exhibit 4.6 to the Registration Statement on
                Form S-1 of Alpha Natural Resources, Inc. (File No. 333-129030)
                filed on January 9, 2006.)




4.6
            
            Fifth
                Supplemental Indenture dated as of May 1, 2006 among Alpha Natural
                Resources, LLC, Alpha Natural Resources Capital Corp. , the existing
                Guarantors, Wells Fargo Bank, N.A., as Trustee, and Progress Land
                Corporation (Incorporated by reference to Exhibit 4.1 to the Quarterly
                Report on Form 10-Q of Alpha Natural Resources, Inc. (File No. 1-32423)
                filed on August 18, 2006.)4.7
            
            Sixth
                Supplemental Indenture dated as of January 10, 2007 among Alpha Natural
                Resources, LLC, Alpha Natural Resources Capital Corp., the existing
                Guarantors, Wells Fargo Bank, N.A., as Trustee, Palladian Holdings,
                LLC
                and Palladian Lime, LLC (Incorporated by reference to Exhibit 4.8 to
                the Annual Report on Form 10-K of Alpha Natural Resources, Inc. (File
                No. 1-32423) filed on March 1, 2007.)10.1
            
            Credit
                Agreement dated as of October 26, 2005, among Alpha NR Holding, Inc.,
                Alpha Natural Resources, LLC, the Lenders and Issuing Banks party
                thereto
                from time to time, Citicorp North America, Inc., as administrative
                agent
                and as collateral agent for the Lenders and Issuing Banks, UBS Securities
                LLC as syndication agent, the co-documentation agents party thereto,
                Citigroup Global Markets Inc. and UBS Securities LLC, as joint lead
                arrangers and joint book managers. (Incorporated by reference to
                Exhibit 10.1 to the Current Report on Form 8-K of Alpha Natural
                Resources, Inc. (File No. 1-32423) filed on October 31,
                2005.)




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**Exhibit
                No.**
            
            **Description
                of Exhibit**10.2
            
            Guarantee
                and Collateral Agreement, dated as of October 26, 2005, made by each
                of the Grantors as defined therein, in favor of Citicorp North America,
                Inc., as administrative agent and as collateral agent for the banks
                and
                other financial institutions or entities from time to time parties
                to the
                Credit Agreement and the other Secured Parties, as defined therein.
                (Incorporated by reference to Exhibit 10.2 to the Current Report on
                Form 8-K of Alpha Natural Resources, Inc. (File No. 1-32423)
                filed on October 31, 2005.)10.3
            
            Waiver
                and Consent dated as of August 14, 2006 to Credit Agreement among
                Alpha NR
                Holding, Inc., Alpha Natural Resources, LLC, the Lenders and Issuing
                Banks
                party thereto from time to time, and Citicorp North America, Inc.,
                as
                administrative agent and as collateral agent for the Lenders and
                Issuing
                Banks (Incorporated by reference to Exhibit 10.1 to the Current Report
                on
                Form 8-K of Alpha Natural Resources, Inc. (File No. 1-32423) filed
                on
                August 18, 2006.)10.4
            
            Amendment
                and Consent, dated as of December 22, 2006, to Credit Agreement,
                among
                Alpha NR Holding, Inc., Alpha Natural Resources, LLC, the Lenders
                and
                Issuing Banks party thereto from time to time, and Citicorp North
                America,
                Inc., as administrative agent and as collateral agent for the Lenders
                and
                Issuing Banks (Incorporated by reference to Exhibit 10.1 to the Current
                Report on Form 8-K of Alpha Natural Resources, Inc. (File No. 1-32423)
                filed on December 29, 2006.)10.5‡
            
            Third
                Amended and Restated Employment Agreement between Alpha Natural Resources
                Services, LLC and Michael J. Quillen dated March 22, 2006
                (Incorporated by reference to Exhibit 10.3 to the Annual Report on
                Form
                10-K of Alpha Natural Resources, Inc. (File No. 1-32423) filed on
                March
                28, 2006.)10.6‡
            
            First
                  Amendment to Third Amended and Restated Employment Agreement between
                  Alpha
                  Natural Resources Services, LLC and Michael J. Quillen dated February
                  26,
                  2007. (Incorporated by reference to Exhibit 10.6 to the Annual
                  Report on Form 10-K of Alpha Natural Resources, Inc. (File No.
                  1-32423)
                  filed on March 1, 2007.)10.7‡
            
            Employment
              Agreement between Alpha Natural Resources, LLC and D. Scott Kroh dated
              January 1, 2003, as amended (Incorporated by reference to
              Exhibit 10.7 to the Registration Statement on Form S-1 of Alpha
              Natural Resources, Inc. (File No. 333-121002) filed on
              December 6, 2004.)10.8‡
            
            Letter
                Agreement dated September 1, 2006 among Alpha Natural Resources,
                Inc. and
                D. Scott Kroh setting forth terms of employment with Alpha Natural
                Resources, Inc and its subsidiaries (Incorporated by reference to
                Exhibit
                10.1 to the Current Report on Form 8-K of Alpha Natural Resources,
                Inc.
                (File No. 1-32423) filed on September 1, 2006.)10.9‡
            
            First
              Amended and Restated Employment Agreement between Alpha Natural Resources
              Services, LLC and Kevin S. Crutchfield, dated February 26, 2007. 
              (Incorporated by reference to Exhibit 10.9 to the Annual Report
              on Form 10-K of Alpha Natural Resources, Inc. (File No. 1-32423) filed
              on
              March 1, 2007.)10.10
            
            Amended
                and Restated Stockholder Agreement dated as of October 26, 2005, by
                and among Alpha Natural Resources, Inc., the FRC Parties named therein,
                the AMCI Parties named therein, Madison Capital Funding LLC, the
                Nicewonder Parties named therein, and the other stockholders named
                therein. (Incorporated by reference to Exhibit 10.5 to the Current
                Report on Form 8-K of Alpha Natural Resources, Inc. (File
                No. 1-32423) filed on October 31, 2005.)10.11
            
            Letter
                agreement dated October 25, 2005, by the FRC Parties named therein
                and the AMCI Parties named therein, amending certain provisions of
                the
                Stockholder Agreement. (Incorporated by reference to Exhibit 10.4 to
                the Current Report on Form 8-K of Alpha Natural Resources, Inc. (File
                No. 1-32423) filed on October 31,
                2005.)





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**Exhibit
                No.**
            
            **Description
                of Exhibit**10.12
            
            Letter
                agreement dated December 8, 2005, by the FRC Parties named therein
                and the AMCI Parties named therein and Alpha Natural Resources, Inc.,
                amending certain provisions of the Stockholder Agreement (Incorporated
                by
                reference to Exhibit 10.1 to the Current Report on Form 8-K of
                Alpha Natural Resources, Inc. (File No. 1-32423) filed on
                December 12, 2005.)10.13
            
            Letter
                Agreement dated November 7, 2006, by the AMCI Parties named therein
                and
                Alpha Natural Resources, Inc., amending certain provisions of the
                Stockholder Agreement (Incorporated by reference to Exhibit 10.2
                to the
                Quarterly Report on Form 10-Q of Alpha Natural Resources, Inc. (File
                No.
                1-32423) filed November 9, 2006.)10.14‡
            
            Alpha
                  Natural Resources, Inc. Annual Incentive Bonus (AIB) Plan.
                  (Incorporated by reference to Exhibit 10.14 to the Annual Report
                  on Form 10-K of Alpha Natural Resources, Inc. (File No. 1-32423)
                  filed on
                  March 1, 2007.)10.15‡
            
            Amended
                and Restated Alpha Coal Management LLC 2004 Long-Term Incentive Plan
                (Incorporated by reference to Exhibit 10.10 to Amendment No. 2
                to the Registration Statement on Form S-1 of Alpha Natural Resources,
                Inc. (File No. 333-121002) filed on February 2,
                2005.)10.16‡
            
            Alpha
                  Natural Resources, Inc. 2005 Long-Term Incentive Plan. (Incorporated
                  by
                  reference to Exhibit 10.16 to the Annual Report on Form 10-K of
                  Alpha Natural Resources, Inc. (File No. 1-32423) filed on March
                  1,
                  2007.)10.17‡
            
            Form
                of Alpha Natural Resources, Inc. Grantee Stock Option Agreement for
                Alpha
                Natural Resources, Inc. 2005 Long-Term Incentive Plan (Incorporated
                by
                reference to Exhibit 10.15 to the Annual Report on Form 10-K of
                Alpha Natural Resources, Inc. (File No. 1-32423) filed on
                March 30, 2005.)10.18‡
            
            Form
                of Alpha Natural Resources, Inc. Restricted Stock Agreement for Alpha
                Natural Resources, Inc. 2005 Long-Term Incentive Plan (for grants
                on or
                prior to March 3, 2006) (Incorporated by reference to
                Exhibit 4.7 to the Registration Statement on Form S-8 of Alpha
                Natural Resources, Inc. (File No. 333-127528) filed on
                August 15, 2005.)10.19‡
            
            Form
                of Alpha Natural Resources, Inc. Restricted Stock Agreement for Alpha
                Natural Resources, Inc. 2005 Long-Term Incentive Plan (for grants
                after
                March 3, 2006) (Incorporated by reference to Exhibit 10.1 to the
                Current Report on Form 8-K of Alpha Natural Resources, Inc. (File
                No. 1-32423) filed on March 10, 2006.)10.20‡
            
            Form
                  of Alpha Natural Resources, Inc. Performance Share Award Agreement
                  for
                  Alpha Natural Resources, Inc. 2005 Long-Term Incentive Plan (for
                  grants
                  prior to February 26, 2007)10.21‡
            
            Form
              of Alpha Natural Resources, Inc. Performance Share Award Agreement
              for
              Alpha Natural Resources, Inc. 2005 Long-Term Incentive Plan (for grants
              on
              or after February 26, 2007) (Incorporated by reference to
              Exhibit 10.21 to the Annual Report on Form 10-K of Alpha Natural
              Resources, Inc. (File No. 1-32423) filed on March 1,
              2007.)




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**Exhibit
                No.**
            
            **Description
                of Exhibit**10.22†
            
            Coal
                Mining Lease dated April 9, 2003, effective as of April 1, 2003,
                by and between CSTL LLC (subsequently renamed ACIN LLC) and Alpha
                Land and
                Reserves, LLC, as amended (the “ACIN Lease”) (Incorporated by reference to
                Exhibit 10.12 to Amendment No. 1 to the Registration Statement
                on Form S-1 of Alpha Natural Resources, Inc. (File
                No. 333-121002) filed on January 12, 2005.)10.23
            
            Two
                Partial Surrender Agreements and Fourth Amendment to Coal Mining
                Lease,
                each dated September 1, 2005, by and between ACIN LLC and Alpha Land
                and Reserves, LLC, amending the ACIN Lease (Incorporated by reference
                to
                Exhibit 10.17 to the Annual Report on Form 10-K of Alpha Natural
                Resources, Inc. (File No. 1-32423) filed on March 28,
                2006.)10.24
            
            Partial
                Surrender Agreement dated November 1, 2005, by and between ACIN LLC
                and Alpha Land and Reserves, LLC, amending the ACIN Lease (Incorporated
                by
                reference to Exhibit 10.18 to the Annual Report on Form 10-K of Alpha
                Natural Resources, Inc. (File No. 1-32423) filed on March 28,
                2006.)10.25
            
            Amendment
                to Coal Mining Lease dated January 1, 2006, by and between ACIN LLC
                and
                Alpha Land and Reserves, LLC, amending the ACIN Lease (Incorporated
                by
                reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of
                Alpha
                Natural Resources, Inc. (File No. 1-32423) filed on May 12,
                2006.)10.26
            
            Agreement
                dated February 17, 2006, between ACIN LLC and Alpha Land and Reserves,
                LLC
                and Virginia Electric and Power Company for mutual interests as to
                parties’ rights and obligations with regard to certain land (Incorporated
                by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q
                of Alpha
                Natural Resources, Inc. (File No. 1-32423) filed on May 12,
                2006.)10.27‡
            
            Performance
                period and payout methodology for performance share award grants
                during
                2006 under the Alpha Natural Resources, Inc. 2005 Long-Term Incentive
                Plan
                as reported on Alpha Natural Resources, Inc.’s current report on
                Form 8-K filed on March 9, 2006 and incorporated by this
                reference10.28‡
            
            Amended
                and Restated Alpha Natural Resources, Inc. and Subsidiaries Deferred
                Compensation Plan (Incorporated by reference to Exhibit 10.1 to the
                Quarterly Report on Form 10-Q of Alpha Natural Resources, Inc. (File
                No. 1-32423) filed on August 15, 2005.)10.29‡
            
            Summary
                of Alpha Natural Resources, Inc. Director Compensation Policy
                (Incorporated by reference to Exhibit 10.21 to the Annual Report on
                Form 10-K of Alpha Natural Resources, Inc. (File No. 1-32423)
                filed on March 30, 2005.)





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**Exhibit
                No.**
            
            **Description
                of Exhibit**10.30‡
            
            Performance
                goals and target bonuses set for 2006 under the AIB Plan for Alpha
                Natural
                Resources, Inc.’s executive officers as reported on Alpha Natural
                Resources, Inc.’s Current Report on Form 8-K filed on
                January 31, 2006 and incorporated by this
                reference10.31‡
            
            Summary
                of Retention Compensation Plan approved for certain executive officers
                of
                Alpha Natural Resources, Inc. (Incorporated by reference to
                Exhibit 10.27 to the Registration Statement on Form S-1 of Alpha
                Natural Resources, Inc. (File No. 333-129030) filed on
                December 2, 2005.)10.32‡
            
            Plan
                Document and Summary Plan Description of the Alpha Natural Resources,
                Inc.
                Key Employee Separation Plan (Incorporated by reference to Exhibit
                10.24
                to the Annual Report on Form 10-K of Alpha Natural Resources, Inc.
                (File
                No. 1-32423) filed on March 28, 2006.)10.33‡
            
            Director
                Deferred Compensation Agreement of the Alpha Natural Resources, Inc.
                2005
                Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.1
                to the
                Current Report on Form 8-K of Alpha Natural Resources, Inc. (File
                No.
                333-124319-17) filed on August 3, 2006.)12
            
            Statement
              regarding
              computation of Ratio of Earnings to Fixed Charges21.1
            
            List
                of Subsidiaries (Incorporated by reference to Exhibit 21.1 to
                the Annual Report on Form 10-K of Alpha Natural Resources, Inc. (File
                No. 1-32423) filed on March 1, 2007.)31(a)*
            
            Certification
                Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934,
                as adopted pursuant to §302 of the Sarbanes-Oxley Act of
                200231(b)*
            
            Certification
                Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934,
                as adopted pursuant to §302 of the Sarbanes-Oxley Act of
                200232(a)*
            
            Certification
                Pursuant to 18 U.S.C. §1350, As Adopted Pursuant to §906 of the
                Sarbanes-Oxley Act of 200232(b)*
            
            Certification
                Pursuant to 18 U.S.C. §1350, As Adopted Pursuant to §906 of the
                Sarbanes-Oxley Act of 2002




*
            Filed
                herewith.


†
            Confidential
                treatment has been granted with respect to portions of the exhibit.
                Confidential portions have been omitted from this public filing and
                have
                been filed separately with the Securities and Exchange
                Commission.


‡
            Management
                contract or compensatory plan or
                arrangement.






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