##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-Q
 (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2005ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)406 West Main Street, Abingdon, Virginia
    
    24210(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code:
(276) 619-4410 Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ Indicate by check mark whether the registrant is an accelerated filer (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 were 62,212,580 shares of Alpha Natural Resources, Inc. common stock
outstanding on June 1, 2005. There were 100 shares of Alpha NR Holding, Inc. common stock
outstanding on June 1, 2005 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 H(1)(a) and (b) of Form
10-Q and is therefore filing this form with the reduced disclosure format.




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TABLE OF CONTENTS PagePART IItem 1.
    
    Financial Statements
    
    
    3Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    33Item 4.
    
    Controls and Procedures
    
    
    33PART II
    
    
    35Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    35Item 6.
    
    Exhibits
    
    
    35EX-31.A: CERTIFICATIONEX-31.B: CERTIFICATIONEX-32.A: CERTIFICATIONEX-32.B: CERTIFICATION
  2




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##### Table of Contents






PART I




Item 1.Financial Statements

ALPHA NR HOLDING, INC. AND SUBSIDIARIES





CONDENSED CONSOLIDATED BALANCE SHEETS


|                                                               |                                                                                                |                                                   |                                                                      |                      |              |         |         |        |        |         |         | 
|-------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------------------------------- | -------------------------------------------------------------------- | -------------------- | ------------ | ------- | ------- | ------ | ------ | ------- | ------- | 
|                                                               |                                                                                                | March 31,                                         |                                                                      |                      | December 31, |        
|                                                               |                                                                                                | 2005                                              |                                                                      |                      | 2004         |        
|                                                               |                                                                                                |                                                   |                                                                      |                      |              |        
|                                                               |                                                                                                | (Unaudited)                                       |                                                                     
|                                                               |                                                                                                | (In thousands,                                    |                                                                     
|                                                               |                                                                                                | except share and                                  |                                                                     
|                                                               |                                                                                                | per share amounts)                                |                                                                     
|ASSETS                                                        
|Current assets:                                                |                                                                                                |                                                   |                                                                      |                      |              |         |         |       
|                                                               | Cash and cash equivalents                                                                      |                                                   | $                                                                    | 214                  |              |         | $       | 7,391  |       
|                                                               | Trade accounts receivable, net                                                                 |                                                   |                                                                      | 111,806              |              |         |         | 95,828 |       
|                                                               | Notes and other receivables                                                                    |                                                   |                                                                      | 11,294               |              |         |         | 10,835 |       
|                                                               | Inventories                                                                                    |                                                   |                                                                      | 90,862               |              |         |         | 54,569 |       
|                                                               | Due from affiliate                                                                             |                                                   |                                                                      | 1,323                |              |         |         | 323    |       
|                                                               | Deferred income taxes                                                                          |                                                   |                                                                      | 909                  |              |         |         | 4,674  |       
|                                                               | Prepaid expenses and other current assets                                                      |                                                   |                                                                      | 22,402               |              |         |         | 28,915 |       
|                                                               |                                                                                                |                                                   |                                                                      |                      |              |        
|                                                               |                                                                                                |                                                   |                                                                      | Total current assets |              |         | 238,810 |        |        |         | 202,535 | 
|Property, plant, and equipment, net                            |                                                                                                |                                                   | 232,802                                                              |                      |              |         | 217,964 |       
|Goodwill                                                       |                                                                                                |                                                   | 18,641                                                               |                      |              |         | 18,641  |       
|Other intangibles, net                                         |                                                                                                |                                                   | 862                                                                  |                      |              |         | 1,155   |       
|Deferred income taxes                                          |                                                                                                |                                                   | 21,585                                                               |                      |              |         |        |       
|Other assets                                                   |                                                                                                |                                                   | 34,712                                                               |                      |              |         | 36,826  |       
|                                                               |                                                                                                |                                                   |                                                                      |                      |              |        
|                                                               |                                                                                                |                                                   |                                                                      | Total assets         |              | $       | 547,412 |        |        | $       | 477,121 | 
|                                                               |                                                                                                |                                                   |                                                                      |                      |              |        
|                                                              
|LIABILITIES AND STOCKHOLDERS EQUITY AND PARTNERS
    CAPITAL
|Current liabilities:                                           |                                                                                                |                                                   |                                                                      |                      |              |         |         |       
|                                                               | Current portion of long-term debt                                                              |                                                   | $                                                                    | 1,707                |              |         | $       | 1,693  |       
|                                                               | Note payable                                                                                   |                                                   |                                                                      | 11,136               |              |         |         | 15,228 |       
|                                                               | Bank overdraft                                                                                 |                                                   |                                                                      | 20,942               |              |         |         | 10,024 |       
|                                                               | Trade accounts payable                                                                         |                                                   |                                                                      | 70,987               |              |         |         | 51,050 |       
|                                                               | Accrued expenses and other current liabilities                                                 |                                                   |                                                                      | 62,541               |              |         |         | 68,283 |       
|                                                               |                                                                                                |                                                   |                                                                      |                      |              |        
|                                                               |                                                                                                |                                                   | Total current liabilities                                            |                      |              | 167,313 |         |        |        | 146,278 |        
|Long-term debt, net of current portion                         |                                                                                                |                                                   | 208,885                                                              |                      |              |         | 184,784 |       
|Workers compensation benefits                                 |                                                                                                |                                                   | 4,751                                                                |                      |              |         | 4,678   |       
|Postretirement medical benefits                                |                                                                                                |                                                   | 17,800                                                               |                      |              |         | 15,637  |       
|Asset retirement obligation                                    |                                                                                                |                                                   | 33,978                                                               |                      |              |         | 32,888  |       
|Deferred gains on sale of property interests                   |                                                                                                |                                                   | 5,312                                                                |                      |              |         | 5,516   |       
|Deferred income taxes                                          |                                                                                                |                                                   |                                                                     |                      |              |         | 7,718   |       
|Other liabilities                                              |                                                                                                |                                                   | 5,369                                                                |                      |              |         | 4,911   |       
|                                                               |                                                                                                |                                                   |                                                                      |                      |              |        
|                                                               |                                                                                                |                                                   | Total liabilities                                                    |                      |              | 443,408 |         |        |        | 402,410 |        
|                                                               |                                                                                                |                                                   |                                                                      |                      |              |        
|Minority interest                                              |                                                                                                |                                                   |                                                                     |                      |              |         | 28,778  |       
|                                                               |                                                                                                |                                                   |                                                                      |                      |              |        
|Stockholders equity and partners capital:                    |                                                                                                |                                                   |                                                                      |                      |              |         |         |       
|Alpha NR Holding, Inc.:                                        |                                                                                                |                                                   |                                                                      |                      |              |         |         |       
|                                                               | Preferred stock  par value $0.01, 1,000 shares
    authorized, none issued                    |                                                   |                                                                      |                     |              |         |         |       |       
|                                                               | Common stock  par value $0.01, 1,000 shares
    authorized, 100 shares issued and outstanding |                                                   |                                                                      |                     |              |         |         |       |       
|                                                               | Additional paid-in capital                                                                     |                                                   |                                                                      | 132,133              |              |         |         | 22,153 |       
|                                                               | Retained earnings (accumulated deficit)                                                        |                                                   |                                                                      | (28,129              | )            |         |         | 18,828 |       
|                                                               |                                                                                                |                                                   |                                                                      |                      |              |        
|                                                               |                                                                                                | Total Alpha NR Holding, Inc. stockholders equity |                                                                      |                      | 104,004      |         |         |        | 40,981 |        
|ANR Fund IX Holdings, L.P.:                                    |                                                                                                |                                                   |                                                                      |                      |              |         |         |       
|                                                               | Partners capital                                                                              |                                                   |                                                                      |                     |              |         |         | 4,952  |       
|                                                               |                                                                                                |                                                   |                                                                      |                      |              |        
|                                                               |                                                                                                |                                                   | Total stockholders equity and partners capital                     |                      |              | 104,004 |         |        |        | 45,933  |        
|                                                               |                                                                                                |                                                   |                                                                      |                      |              |        
|                                                               |                                                                                                |                                                   | Total liabilities and stockholders equity and
    partners capital |                      | $            | 547,412 |         |        | $      | 477,121 |        
|                                                               |                                                                                                |                                                   |                                                                      |                      |              |        



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ALPHA NR HOLDING, INC. AND SUBSIDIARIES





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


|                        |                                                                                                                                                                                    |                                                         |                |         |         |         |       |         |         |         | 
|----------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | -------------- | ------- | ------- | ------- | ----- | ------- | ------- | ------- | 
|                        |                                                                                                                                                                                    | Three Months Ended                                      |               
|                        |                                                                                                                                                                                    | March 31,                                               |               
|                        |                                                                                                                                                                                    |                                                         |               
|                        |                                                                                                                                                                                    | 2005                                                    |                |         | 2004    |        
|                        |                                                                                                                                                                                    |                                                         |                |         |         |        
|                        |                                                                                                                                                                                    | (Unaudited)                                             |               
|                        |                                                                                                                                                                                    | (In thousands)                                          |               
|Revenues:               |                                                                                                                                                                                    |                                                         |                |         |         |         |       |        
|                        | Coal revenues                                                                                                                                                                      |                                                         | $              | 275,333 |         |         | $     | 214,373 |        
|                        | Freight and handling revenues                                                                                                                                                      |                                                         |                | 33,165  |         |         |       | 25,604  |        
|                        | Other revenues                                                                                                                                                                     |                                                         |                | 7,275   |         |         |       | 6,761   |        
|                        |                                                                                                                                                                                    |                                                         |                |         |         |        
|                        |                                                                                                                                                                                    |                                                         | Total revenues |         |         | 315,773 |       |         |         | 246,738 | 
|                        |                                                                                                                                                                                    |                                                         |                |         |         |        
|Costs and expenses:     |                                                                                                                                                                                    |                                                         |                |         |         |         |       |        
|                        | Cost of coal sales (exclusive of items shown separately below)                                                                                                                     |                                                         |                | 228,845 |         |         |       | 187,593 |        
|                        | Freight and handling costs                                                                                                                                                         |                                                         |                | 33,165  |         |         |       | 25,604  |        
|                        | Cost of other revenues                                                                                                                                                             |                                                         |                | 6,138   |         |         |       | 5,161   |        
|                        | Depreciation, depletion and amortization                                                                                                                                           |                                                         |                | 14,480  |         |         |       | 11,929  |        
|                        | Selling, general and administrative expenses (exclusive of
    depreciation and amortization shown separately above and
    including stock-based compensation of $36,407 in 2005) |                                                         |                | 47,697  |         |         |       | 11,805  |        
|                        |                                                                                                                                                                                    |                                                         |                |         |         |        
|                        |                                                                                                                                                                                    | Total costs and expenses                                |                |         | 330,325 |         |       |         | 242,092 |        
|                        |                                                                                                                                                                                    |                                                         |                |         |         |        
|                        |                                                                                                                                                                                    | Income (loss) from operations                           |                |         | (14,552 | )       |       |         | 4,646   |        
|                        |                                                                                                                                                                                    |                                                         |                |         |         |        
|Other income (expense): |                                                                                                                                                                                    |                                                         |                |         |         |         |       |        
|                        | Interest expense                                                                                                                                                                   |                                                         |                | (5,827  | )       |         |       | (2,051  | )      
|                        | Interest income                                                                                                                                                                    |                                                         |                | 294     |         |         |       | 21      |        
|                        | Miscellaneous income (expense), net                                                                                                                                                |                                                         |                | (42     | )       |         |       | 213     |        
|                        |                                                                                                                                                                                    |                                                         |                |         |         |        
|                        |                                                                                                                                                                                    | Total other income (expense), net                       |                |         | (5,575  | )       |       |         | (1,817  | )      
|                        |                                                                                                                                                                                    |                                                         |                |         |         |        
|                        |                                                                                                                                                                                    | Income (loss) before income taxes and minority interest |                |         | (20,127 | )       |       |         | 2,829   |        
|Income tax expense      |                                                                                                                                                                                    |                                                         | 2,457          |         |         |         | 310   |        
|                        |                                                                                                                                                                                    |                                                         |                |         |         |        
|                        |                                                                                                                                                                                    | Income (loss) before minority interest                  |                |         | (22,584 | )       |       |         | 2,519   |        
|Minority interest       |                                                                                                                                                                                    |                                                         | 2,846          |         |         |         | 1,282 |        
|                        |                                                                                                                                                                                    |                                                         |                |         |         |        
|                        |                                                                                                                                                                                    | Net income (loss)                                       |                | $       | (25,430 | )       |       | $       | 1,237   |        
|                        |                                                                                                                                                                                    |                                                         |                |         |         |        



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ALPHA NR HOLDING, INC. AND SUBSIDIARIES





Condensed Consolidated Statement of Stockholders
Equity


Three months ended March 31, 2005


|                                                                                                                    |  |                        |   |             |                |   |              |       |               |               |         |   |           |   |            |           |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | - | ----------- | -------------- | - | ------------ | ----- | ------------- | ------------- | ------- | - | --------- | - | ---------- | --------- |  | - | ------ | - |  | - | ------- | -
|                                                                                                                    |  |                        |   | ANR Fund IX |                |   |             
|                                                                                                                    |  | Alpha NR Holding, Inc. |   |             | Holdings, L.P. |   |              |      
|                                                                                                                    |  |                        |   |             |                |   |              | Total |              
|                                                                                                                    |  |                        |   | Retained    |                |   |              |       | Stockholders |              
|                                                                                                                    |  |                        |   | Additional  |                |   | Earnings     |       |               | Total         |         |   |           |   | Equity and |          
|                                                                                                                    |  | Common                 |   | Paid-In     |                |   | (Accumulated |       |               | Stockholders |         |   | Partners |   |            | Partners | 
|                                                                                                                    |  | Stock                  |   | Capital     |                |   | Deficit)     |       |               | Equity        |         |   | Capital   |   |            | Capital   | 
|                                                                                                                    |  |                        |   |             |                |   |              |       |               |               |         |   |           |   |            |           | 
|                                                                                                                    |  | (Unaudited)            |  
|                                                                                                                    |  | (In thousands)         |  
|Balances, December 31, 2003                                                                                         |  | $                      |  |             |                | $ | 75,710       |       |               | $             | 1,442   |   |           | $ | 77,152     |           |  | $ | 9,215  |   |  | $ | 86,367  |  
|Net income                                                                                                          |  |                        |  |             |                |   |             |       |               |               | 17,386  |   |           |   | 17,386     |           |  |   | 2,629  |   |  |   | 20,015  |  
|Noncash 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  |   |  |   | 45,933  |  
|Noncash distribution of Virginia Tax Credit                                                                         |  |                        |  |             |                |   |             |       |               |               |        |   |           |   |           |           |  |   | (40    | ) |  |   | (40     | )
|Net income prior to Internal Restructuring                                                                          |  |                        |  |             |                |   |             |       |               |               | 2,320   |   |           |   | 2,320      |           |  |   | 379    |   |  |   | 2,699   |  
|Distribution to First Reserve Fund IX, L. P. and ANR
    Fund IX Holdings, L.P. prior to the Internal Restructuring |  |                        |  |             |                |   |             |       |               |               | (8,160  | ) |           |   | (8,160     | )         |  |   | (1,243 | ) |  |   | (9,403  | )
|Adjustments to give effect to the Internal Restructuring (note 1)                                                   |  |                        |  |             |                |   | 47,928       |       |               |               | (12,988 | ) |           |   | 34,940     |           |  |   | (4,048 | ) |  |   | 30,892  |  
|Change in net deferred income taxes recognized upon the
    completion of the Internal Restructuring                |  |                        |  |             |                |   | 25,729       |       |               |               |        |   |           |   | 25,729     |           |  |   |       |   |  |   | 25,729  |  
|Recognition of stock-based compensation earned                                                                      |  |                        |  |             |                |   | 36,323       |       |               |               |        |   |           |   | 36,323     |           |  |   |       |   |  |   | 36,323  |  
|Net loss subsequent to Internal Restructuring                                                                       |  |                        |  |             |                |   |             |       |               |               | (28,129 | ) |           |   | (28,129    | )         |  |   |       |   |  |   | (28,129 | )
|                                                                                                                    |  |                        |   |             |                |   |              |       |               |               |         |   |           |   |            |           |  |  
|Balances, March 31, 2005                                                                                            |  | $                      |  |             |                | $ | 132,133      |       |               | $             | (28,129 | ) |           | $ | 104,004    |           |  | $ |       |   |  | $ | 104,004 |  
|                                                                                                                    |  |                        |   |             |                |   |              |       |               |               |         |   |           |   |            |           |  |  



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ALPHA NR HOLDING, INC. AND SUBSIDIARIES





Condensed Consolidated Statements of Cash Flows


|                                                 |                                                                                              |                                                                                         |                                                |                                                     |         |         |         |       |         |        |         |  
|------------------------------------------------ | -------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ---------------------------------------------- | --------------------------------------------------- | ------- | ------- | ------- | ----- | ------- | ------ | ------- | -
|                                                 |                                                                                              | Three Months Ended                                                                      |                                               
|                                                 |                                                                                              | March 31,                                                                               |                                               
|                                                 |                                                                                              |                                                                                         |                                               
|                                                 |                                                                                              | 2005                                                                                    |                                                |                                                     | 2004    |        
|                                                 |                                                                                              |                                                                                         |                                                |                                                     |         |        
|                                                 |                                                                                              | (Unaudited)                                                                             |                                               
|                                                 |                                                                                              | (In thousands)                                                                          |                                               
|Operating activities:                            |                                                                                              |                                                                                         |                                                |                                                     |         |         |         |      
|                                                 | Net income (loss)                                                                            |                                                                                         | $                                              | (25,430                                             | )       |         | $       | 1,237 |        
|                                                 | Adjustments to reconcile net income (loss) to net cash provided
    by operating activities: |                                                                                         |                                                |                                                     |         |         |         |       |        
|                                                 |                                                                                              | Depreciation, depletion and amortization                                                |                                                |                                                     | 14,480  |         |         |       | 11,929  |       
|                                                 |                                                                                              | Amortization of debt issuance costs                                                     |                                                |                                                     | 435     |         |         |       | 384     |       
|                                                 |                                                                                              | Minority interest                                                                       |                                                |                                                     | 2,846   |         |         |       | 1,282   |       
|                                                 |                                                                                              | Accretion of asset retirement obligation                                                |                                                |                                                     | 808     |         |         |       | 976     |       
|                                                 |                                                                                              | Virginia tax credit                                                                     |                                                |                                                     | (343    | )       |         |       | (637    | )     
|                                                 |                                                                                              | Stock-based compensation                                                                |                                                |                                                     | 36,407  |         |         |       |        |       
|                                                 |                                                                                              | Bad debt provision                                                                      |                                                |                                                     |        |         |         |       | 15      |       
|                                                 |                                                                                              | Amortization of deferred gains on sales of property interests                           |                                                |                                                     | (204    | )       |         |       | (238    | )     
|                                                 |                                                                                              | Gain on sale of fixed assets, net                                                       |                                                |                                                     | (363    | )       |         |       | (196    | )     
|                                                 |                                                                                              | Deferred income taxes                                                                   |                                                |                                                     | 191     |         |         |       | 160     |       
|                                                 |                                                                                              | Changes in operating assets and liabilities:                                            |                                                |                                                     |         |         |         |       |         |       
|                                                 |                                                                                              |                                                                                         | Trade accounts receivable                      |                                                     |         | (15,903 | )       |       |         | (5,724 | )      
|                                                 |                                                                                              |                                                                                         | Notes and other receivables                    |                                                     |         | (384    | )       |       |         | (1,865 | )      
|                                                 |                                                                                              |                                                                                         | Inventories                                    |                                                     |         | (36,293 | )       |       |         | (6,221 | )      
|                                                 |                                                                                              |                                                                                         | Due from affiliate                             |                                                     |         | (1,323  | )       |       |         |       |        
|                                                 |                                                                                              |                                                                                         | Prepaid expenses and other current assets      |                                                     |         | 6,333   |         |       |         | 3,384  |        
|                                                 |                                                                                              |                                                                                         | Other assets                                   |                                                     |         | (2,739  | )       |       |         | (23    | )      
|                                                 |                                                                                              |                                                                                         | Trade accounts payable                         |                                                     |         | 21,209  |         |       |         | 2,302  |        
|                                                 |                                                                                              |                                                                                         | Accrued expenses and other current liabilities |                                                     |         | 1,268   |         |       |         | 7,576  |        
|                                                 |                                                                                              |                                                                                         | Workers compensation benefits                 |                                                     |         | (295    | )       |       |         | 1,608  |        
|                                                 |                                                                                              |                                                                                         | Postretirement medical benefits                |                                                     |         | 2,163   |         |       |         | 348    |        
|                                                 |                                                                                              |                                                                                         | Asset retirement obligation                    |                                                     |         | (874    | )       |       |         | (492   | )      
|                                                 |                                                                                              |                                                                                         | Other liabilities                              |                                                     |         | 458     |         |       |         | 219    |        
|                                                 |                                                                                              |                                                                                         |                                                |                                                     |         |        
|                                                 |                                                                                              |                                                                                         |                                                | Net cash provided by operating activities           |         |         | 2,447   |       |         |        | 16,024  |  
|                                                 |                                                                                              |                                                                                         |                                                |                                                     |         |        
|Investing activities:                            |                                                                                              |                                                                                         |                                                |                                                     |         |         |         |      
|                                                 |                                                                                              | Capital expenditures                                                                    |                                                | $                                                   | (30,268 | )       |         | $     | (16,269 | )     
|                                                 |                                                                                              | Proceeds from disposition of property, plant, and equipment                             |                                                |                                                     | 501     |         |         |       | 214     |       
|                                                 |                                                                                              | Purchase of net assets of acquired companies                                            |                                                |                                                     | (389    | )       |         |       |        |       
|                                                 |                                                                                              | Purchase of equity investment                                                           |                                                |                                                     | (500    | )       |         |       |        |       
|                                                 |                                                                                              | Collections on note receivable from coal supplier                                       |                                                |                                                     | 1,223   |         |         |       |        |       
|                                                 |                                                                                              | Payment of additional consideration on prior acquisition                                |                                                |                                                     | (5,000  | )       |         |       |        |       
|                                                 |                                                                                              |                                                                                         |                                                |                                                     |         |        
|                                                 |                                                                                              |                                                                                         |                                                | Net cash used in investing activities               |         |         | (34,433 | )     |         |        | (16,055 | )
|                                                 |                                                                                              |                                                                                         |                                                |                                                     |         |        
|Financing activities:                            |                                                                                              |                                                                                         |                                                |                                                     |         |         |         |      
|                                                 |                                                                                              | Repayments of notes payable                                                             |                                                |                                                     | (4,092  | )       |         |       | (5,230  | )     
|                                                 |                                                                                              | Proceeds from issuance of long-term debt                                                |                                                |                                                     | 24,500  |         |         |       |        |       
|                                                 |                                                                                              | Repayments on long-term debt                                                            |                                                |                                                     | (440    | )       |         |       | (3,435  | )     
|                                                 |                                                                                              | Increase in bank overdraft                                                              |                                                |                                                     | 10,918  |         |         |       | 6,635   |       
|                                                 |                                                                                              | Distributions to prior members of ANR Holdings, LLC prior to
    Internal Restructuring |                                                |                                                     | (7,732  | )       |         |       | (24     | )     
|                                                 |                                                                                              | Reimbursement of deferred common stock offering costs by parent                         |                                                |                                                     | 1,655   |         |         |       |        |       
|                                                 |                                                                                              | Debt issuance costs                                                                     |                                                |                                                     |        |         |         |       | (647    | )     
|                                                 |                                                                                              |                                                                                         |                                                |                                                     |         |        
|                                                 |                                                                                              |                                                                                         |                                                | Net cash provided by (used in) financing activities |         |         | 24,809  |       |         |        | (2,701  | )
|                                                 |                                                                                              |                                                                                         |                                                |                                                     |         |        
|Net decrease in cash and cash equivalents        |                                                                                              |                                                                                         | (7,177                                         | )                                                   |         |         | (2,732  | )    
|Cash and cash equivalents at beginning of period |                                                                                              |                                                                                         | 7,391                                          |                                                     |         |         | 11,246  |      
|                                                 |                                                                                              |                                                                                         |                                                |                                                     |         |        
|Cash and cash equivalents at end of period       |                                                                                              | $                                                                                       | 214                                            |                                                     |         | $       | 8,514   |      
|                                                 |                                                                                              |                                                                                         |                                                |                                                     |         |        



6



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##### Table of Contents



ALPHA NR HOLDING, INC. AND SUBSIDIARIES





CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


March 31, 2005


(In thousands, except percentages and share data)




|    |                                   
|--- | ----------------------------------
|(1) | Business and Basis of Presentation



| |                          
| | -------------------------
| | Organization and Business









| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 to
    596,985 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 Tax Distributions). The Tax
    Distributions to affiliates of AMCI are payable 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 Tax 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 Tax
    Distributions will be payable in

7



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##### Table of Contents



ALPHA NR HOLDING, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Unaudited)


March 31, 2005


(In thousands, except percentages and share data)




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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 Tax
    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. prior to the Internal Restructuring, 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.                                                                                                                                                                              
|
| |  | 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 of $78,610 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.                                    
|
| |  | Alpha NR Holding, Inc. recorded a change of $25,729 in net
    deferred income taxes (an estimated increase of $132,637 in
    gross deferred tax assets, less an estimated increase of
    $106,908 in the valuation allowance for deferred tax assets)
    recognized upon the completion of the Internal Restructuring.                                                                                         
|
| |  | Alpha Natural Resources, Inc. and certain of its subsidiaries,
    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 the U.S. coal production and
    marketing operations of AMCI (U.S. AMCI) that was completed
    on March 11, 2003.                                                           
|
| |  | Alpha Natural Resources, Inc. contributed the membership
    interests in ANR Holdings received in the Internal Restructuring
    to Alpha NR Holding, Inc. and Alpha NR Ventures, Inc., another
    indirect wholly-owned subsidiary of Alpha Natural Resources, Inc.                                                                                                                                             



8



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##### Table of Contents



ALPHA NR HOLDING, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Unaudited)


March 31, 2005


(In thousands, except percentages and share data)






| |                      
| | ---------------------
| | Basis of Presentation







|    |                                
|--- | -------------------------------
|(2) | Pro Forma Financial Information



|                   |  |                    |         |   |      |   |         |  
|------------------ |  | ------------------ | ------- | - | ---- | - | ------- | -
|                   |  | Three Months Ended |        
|                   |  | March 31           |        
|                   |  |                    |        
|                   |  | 2005               |         |   | 2004 |  
|                   |  |                    |         |   |      |  
|Pro forma revenues |  | $                  | 315,773 |   |      | $ | 246,738 |  
|Pro forma net loss |  |                    | (23,343 | ) |      |   | (403    | )

9



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##### Table of Contents



ALPHA NR HOLDING, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Unaudited)


March 31, 2005


(In thousands, except percentages and share data)




|                                                                                                    |  |      |         |   |      |   |        |  
|--------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | -
|                                                                                                    |  | 2005 |         |   | 2004 |  
|                                                                                                    |  |      |         |   |      |  
|Reported net income (loss)                                                                          |  | $    | (25,430 | ) |      | $ | 1,237  |  
|Deduct: Pro forma effects of the 2004 Financings, net of income
    taxes and minority interest     |  |      |        |   |      |   | (1,334 | )
|Deduct: Income tax effects of ANR Fund IX Holdings, L.P. income
    prior to Internal Restructuring |  |      | (89     | ) |      |   | (65    | )
|Add: Elimination of minority interest, net of income tax effects                                    |  |      | 2,176   |   |      |   | (241   | )
|                                                                                                    |  |      |         |   |      |  
|Pro forma net loss                                                                                  |  | $    | (23,343 | ) |      | $ | (403   | )
|                                                                                                    |  |      |         |   |      |  

Accounting for Stock
Issued to Employees,


Accounting for Stock-Based
Compensation


|                                                                                                                 |  |              |         |  
|---------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | -
|                                                                                                                 |  | Three Months |        
|                                                                                                                 |  | Ended        |        
|                                                                                                                 |  | March 31,    |        
|                                                                                                                 |  | 2005         |        
|                                                                                                                 |  |              |        
|Pro forma net loss                                                                                               |  | $            | (23,343 | )
|Add: Stock-based compensation expense included in pro forma net
    loss, net of income taxes                    |  |              | 135     |  
|Deduct: Total stock-based compensation expense determined under
    fair value based method, net of income taxes |  |              | (279    | )
|                                                                                                                 |  |              |        
|Pro forma net loss, adjusted for effect of fair value of stock
    options                                       |  | $            | (23,487 | )
|                                                                                                                 |  |              |        





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



10



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##### Table of Contents



ALPHA NR HOLDING, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Unaudited)


March 31, 2005


(In thousands, except percentages and share data)






|    |            
|--- | -----------
|(3) | Inventories



|                       |  |           |        |  |              |   |        | 
|---------------------- |  | --------- | ------ |  | ------------ | - | ------ | 
|                       |  | March 31, |        |  | December 31, |  
|                       |  | 2005      |        |  | 2004         |  
|                       |  |           |        |  |              |  
|Raw coal               |  | $         | 2,510  |  |              | $ | 3,888  | 
|Saleable coal          |  |           | 82,156 |  |              |   | 42,899 | 
|Materials and supplies |  |           | 6,196  |  |              |   | 7,782  | 
|                       |  |           |        |  |              |  
|Total inventories      |  | $         | 90,862 |  |              | $ | 54,569 | 
|                       |  |           |        |  |              |  



|    |                               
|--- | ------------------------------
|(4) | Property, Plant, and Equipment



|                                                           |  |           |         |  |              |   |         | 
|---------------------------------------------------------- |  | --------- | ------- |  | ------------ | - | ------- | 
|                                                           |  | March 31, |         |  | December 31, |  
|                                                           |  | 2005      |         |  | 2004         |  
|                                                           |  |           |         |  |              |  
|Land                                                       |  | $         | 5,424   |  |              | $ | 5,380   | 
|Mineral rights                                             |  |           | 85,245  |  |              |   | 85,245  | 
|Plant and mining equipment                                 |  |           | 211,821 |  |              |   | 188,891 | 
|Vehicles                                                   |  |           | 2,602   |  |              |   | 2,058   | 
|Mine development                                           |  |           | 18,827  |  |              |   | 11,205  | 
|Office equipment and software                              |  |           | 7,410   |  |              |   | 7,264   | 
|Construction in progress                                   |  |           | 1,096   |  |              |   | 1,769   | 
|                                                           |  |           |         |  |              |  
|                                                           |  |           | 332,425 |  |              |   | 301,812 | 
|Less accumulated depreciation, depletion, and amortization |  |           | 99,623  |  |              |   | 83,848  | 
|                                                           |  |           |         |  |              |  
|Property, plant, and equipment, net                        |  | $         | 232,802 |  |              | $ | 217,964 | 
|                                                           |  |           |         |  |              |  

11



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##### Table of Contents



ALPHA NR HOLDING, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Unaudited)


March 31, 2005


(In thousands, except percentages and share data)




|    |               
|--- | --------------
|(5) | Long-Term Debt



|                                       |  |           |         |  |              |   |         | 
|-------------------------------------- |  | --------- | ------- |  | ------------ | - | ------- | 
|                                       |  | March 31, |         |  | December 31, |  
|                                       |  | 2005      |         |  | 2004         |  
|                                       |  |           |         |  |              |  
|10% Senior notes due 2012              |  | $         | 175,000 |  |              | $ | 175,000 | 
|Revolving credit facility              |  |           | 32,500  |  |              |   | 8,000   | 
|Variable rate term notes               |  |           | 1,173   |  |              |   | 1,466   | 
|Capital lease obligation               |  |           | 1,875   |  |              |   | 1,995   | 
|Other                                  |  |           | 44      |  |              |   | 16      | 
|                                       |  |           |         |  |              |  
|Total long-term debt                   |  |           | 210,592 |  |              |   | 186,477 | 
|Less current portion                   |  |           | 1,707   |  |              |   | 1,693   | 
|                                       |  |           |         |  |              |  
|Long-term debt, net of current portion |  | $         | 208,885 |  |              | $ | 184,784 | 
|                                       |  |           |         |  |              |  





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##### Table of Contents



ALPHA NR HOLDING, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Unaudited)


March 31, 2005


(In thousands, except percentages and share data)










|    |                            
|--- | ---------------------------
|(6) | Asset Retirement Obligation



|                                                       |  |   |        |  
|------------------------------------------------------ |  | - | ------ | -
|Total asset retirement obligation at December 31, 2004 |  | $ | 39,579 |  
|Accretion for the quarter ended March 31, 2005         |  |   | 808    |  
|Sites added in first quarter of 2005                   |  |   | 1,156  |  
|Expenditures for the quarter ended March 31, 2005      |  |   | (874   | )
|                                                       |  |   |       
|Total asset retirement obligation at March 31, 2005    |  | $ | 40,669 |  
|                                                       |  |   |       



|    |                                
|--- | -------------------------------
|(7) | Stock-Based Compensation Awards

Accounting for Stock


13



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##### Table of Contents



ALPHA NR HOLDING, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Unaudited)


March 31, 2005


(In thousands, except percentages and share data)


Issued to Employees,








|                                   |  |           |           |  |          |                  |       |                |  |  |     | 
|---------------------------------- |  | --------- | --------- |  | -------- | ---------------- | ----- | -------------- |  |  | --- | 
|                                   |  |           |           |  |          | Weighted Average |      
|                                   |  |           |           |  |          | Remaining Life   |      
|                                   |  | Number of |           |  | Exercise |                  |       | (in Years) at  | 
|                                   |  | Shares    |           |  | Price    |                  |       | March 31, 2005 | 
|                                   |  |           |           |  |          |                  |       |                | 
|Outstanding at January 1, 2005     |  |           | 596,985   |  |          | $                | 12.73 |                |  |  | 4.6 | 
|Granted at initial public offering |  |           | 692,905   |  |          |                  | 19.00 |                |  |  | 4.9 | 
|Exercised                          |  |           |          |  |          |                  |      |                |  |  |    | 
|Forfeited                          |  |           |          |  |          |                  |      |                |  |  |    | 
|                                   |  |           |           |  |          |                  |       |                | 
|Outstanding at March 31, 2005      |  |           | 1,289,890 |  |          | $                | 16.10 |                |  |  | 4.7 | 
|                                   |  |           |           |  |          |                  |       |                | 



14



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##### Table of Contents



ALPHA NR HOLDING, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Unaudited)


March 31, 2005


(In thousands, except percentages and share data)








|    |                       
|--- | ----------------------
|(8) | Employee Benefit Plans



| |                                            
| | -------------------------------------------
| | Postretirement Benefits Other Than Pensions



|                                   |  |                 |       |   |      |   |     |  
|---------------------------------- |  | --------------- | ----- | - | ---- | - | --- | -
|                                   |  | Three Months    |      
|                                   |  | Ended March 31, |      
|                                   |  |                 |      
|                                   |  | 2005            |       |   | 2004 |  
|                                   |  |                 |       |   |      |  
|Service cost                       |  | $               | 944   |   |      | $ | 199 |  
|Interest cost                      |  |                 | 538   |   |      |   | 156 |  
|Amortization of net (gain) or loss |  |                 | (6    | ) |      |   | (6  | )
|Amortization of prior service cost |  |                 | 698   |   |      |   |    |  
|                                   |  |                 |       |   |      |  
|Net periodic benefit cost          |  | $               | 2,174 |   |      | $ | 349 |  
|                                   |  |                 |       |   |      |  









|    |                               
|--- | ------------------------------
|(9) | Workers Compensation Benefits





15



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##### Table of Contents



ALPHA NR HOLDING, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Unaudited)


March 31, 2005


(In thousands, except percentages and share data)






|     |                           
|---- | --------------------------
|(10) | Related Party Transactions







|     |            
|---- | -----------
|(11) | Acquisition



| |                           
| | --------------------------
| | Black Dog Coal Corporation





|     |                    
|---- | -------------------
|(12) | Segment Information



16



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##### Table of Contents



ALPHA NR HOLDING, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Unaudited)


March 31, 2005


(In thousands, except percentages and share data)






|                                          |  |            |         |  |           |           |        |              |  |   |              |   |  |   |         |  
|----------------------------------------- |  | ---------- | ------- |  | --------- | --------- | ------ | ------------ |  | - | ------------ | - |  | - | ------- | -
|                                          |  |            |         |  |           | Corporate |        |              | 
|                                          |  | Coal       |         |  |           |           | and    |              |  |  
|                                          |  | Operations |         |  | All Other |           |        | Eliminations |  |   | Consolidated |  
|                                          |  |            |         |  |           |           |        |              |  |   |              |  
|Revenues                                  |  | $          | 311,066 |  |           | $         | 9,718  |              |  | $ | (5,011       | ) |  | $ | 315,773 |  
|Depreciation, depletion, and amortization |  |            | 13,452  |  |           |           | 427    |              |  |   | 601          |   |  |   | 14,480  |  
|EBITDA, as adjusted                       |  |            | 45,545  |  |           |           | 1,129  |              |  |   | (46,788      | ) |  |   | (114    | )
|Capital expenditures                      |  |            | 29,790  |  |           |           | 282    |              |  |   | 196          |   |  |   | 30,268  |  
|Total assets                              |  |            | 465,047 |  |           |           | 70,752 |              |  |   | 11,613       |   |  |   | 547,412 |  



|                                          |  |            |         |  |           |           |        |              |  |   |              |   |  |   |         | 
|----------------------------------------- |  | ---------- | ------- |  | --------- | --------- | ------ | ------------ |  | - | ------------ | - |  | - | ------- | 
|                                          |  |            |         |  |           | Corporate |        |              | 
|                                          |  | Coal       |         |  |           |           | and    |              |  |  
|                                          |  | Operations |         |  | All Other |           |        | Eliminations |  |   | Consolidated |  
|                                          |  |            |         |  |           |           |        |              |  |   |              |  
|Revenues                                  |  | $          | 241,981 |  |           | $         | 7,709  |              |  | $ | (2,952       | ) |  | $ | 246,738 | 
|Depreciation, depletion, and amortization |  |            | 11,160  |  |           |           | 259    |              |  |   | 510          |   |  |   | 11,929  | 
|EBITDA, as adjusted                       |  |            | 27,977  |  |           |           | 581    |              |  |   | (11,770      | ) |  |   | 16,788  | 
|Capital expenditures                      |  |            | 15,863  |  |           |           | 104    |              |  |   | 302          |   |  |   | 16,269  | 
|Total assets                              |  |            | 356,749 |  |           |           | 69,604 |              |  |   | (36,601      | ) |  |   | 389,752 | 



|                                         |  |                    |         |   |      |   |         |  
|---------------------------------------- |  | ------------------ | ------- | - | ---- | - | ------- | -
|                                         |  | Three Months Ended |        
|                                         |  | March 31,          |        
|                                         |  |                    |        
|                                         |  | 2005               |         |   | 2004 |  
|                                         |  |                    |         |   |      |  
|Total segment EBITDA, as adjusted(1)     |  | $                  | (114    | ) |      | $ | 16,788  |  
|Interest expense                         |  |                    | (5,827  | ) |      |   | (2,051  | )
|Interest income                          |  |                    | 294     |   |      |   | 21      |  
|Income tax expense                       |  |                    | (2,457  | ) |      |   | (310    | )
|Depreciation, depletion and amortization |  |                    | (14,480 | ) |      |   | (11,929 | )
|Minority interest                        |  |                    | (2,846  | ) |      |   | (1,282  | )
|                                         |  |                    |         |   |      |  
|Net income (loss)                        |  | $                  | (25,430 | ) |      | $ | 1,237   |  
|                                         |  |                    |         |   |      |  






|    |                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | EBITDA, as adjusted, is defined as net income (loss) plus
    interest expense, income tax expense (benefit), depreciation,
    depletion and amortization, less interest income, and adjusted
    for minority interest.



17



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##### Table of Contents



ALPHA NR HOLDING, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Unaudited)


March 31, 2005


(In thousands, except percentages and share data)






|     |              
|---- | -------------
|(13) | Contingencies



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





|    |           
|--- | ----------
|(b) | Litigation





|    |                    
|--- | -------------------
|(c) | Other Contingencies





|     |                                   
|---- | ----------------------------------
|(14) | Supplemental Cash Flow Disclosures









| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increase of $18,011 in deferred tax assets, decrease of $7,718
    in deferred tax liabilities, and an increase in
    stockholders equity of $25,729 as a result of the Internal
    Restructuring.
|
| |  | Distribution to FR Affiliates of $2,184 for refundable income
    taxes and receivables from affiliates.                                                                                             

18



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##### Table of Contents



ALPHA NR HOLDING, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Unaudited)


March 31, 2005


(In thousands, except percentages and share data)




|     |             
|---- | ------------
|(15) | Income Taxes







19



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##### Table of Contents



ALPHA NR HOLDING, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Unaudited)


March 31, 2005


(In thousands, except percentages and share data)




|                          |  |                 |       |  |      |   |     | 
|------------------------- |  | --------------- | ----- |  | ---- | - | --- | 
|                          |  | Three Months    |      
|                          |  | Ended March 31, |      
|                          |  |                 |      
|                          |  | 2005            |       |  | 2004 |  
|                          |  |                 |       |  |      |  
|Current tax expense:      |  |                 |       |  |      |   |     | 
|Federal                   |  | $               | 1,906 |  |      | $ | 146 | 
|State                     |  |                 | 360   |  |      |   | 4   | 
|                          |  |                 |       |  |      |  
|                          |  |                 | 2,266 |  |      |   | 150 | 
|                          |  |                 |       |  |      |  
|Deferred tax expense:     |  |                 |       |  |      |   |     | 
|Federal                   |  |                 | 180   |  |      |   | 117 | 
|State                     |  |                 | 11    |  |      |   | 43  | 
|                          |  |                 |       |  |      |  
|                          |  |                 | 191   |  |      |   | 160 | 
|                          |  |                 |       |  |      |  
|Total income tax expense: |  |                 |       |  |      |   |     | 
|Federal                   |  |                 | 2,086 |  |      |   | 263 | 
|State                     |  |                 | 371   |  |      |   | 47  | 
|                          |  |                 |       |  |      |  
|                          |  | $               | 2,457 |  |      | $ | 310 | 
|                          |  |                 |       |  |      |  



|                                                                                              |  |                 |        |   |      |   |      |  
|--------------------------------------------------------------------------------------------- |  | --------------- | ------ | - | ---- | - | ---- | -
|                                                                                              |  | Three Months    |       
|                                                                                              |  | Ended March 31, |       
|                                                                                              |  |                 |       
|                                                                                              |  | 2005            |        |   | 2004 |  
|                                                                                              |  |                 |        |   |      |  
|Federal statutory income tax expense (benefit)                                                |  | $               | (7,044 | ) |      | $ | 990  |  
|Increases (reductions) in taxes due to:                                                       |  |                 |        |   |      |   |      |  
|Percentage depletion allowance                                                                |  |                 | (1,596 | ) |      |   | (197 | )
|Extraterritorial income exclusion                                                             |  |                 | (176   | ) |      |   |     |  
|Deduction for domestic production activities                                                  |  |                 | (74    | ) |      |   |     |  
|State taxes, net of federal tax impact                                                        |  |                 | 287    |   |      |   | 30   |  
|Stock-based compensation not deductible                                                       |  |                 | 12,054 |   |      |   |     |  
|Change in valuation allowance, excluding allowance recorded in
    the Internal Restructuring |  |                 | 125    |   |      |   | (13  | )
|Taxes not provided for minority interest                                                      |  |                 | (996   | ) |      |   | (462 | )
|Taxes not provided for pass-through entity                                                    |  |                 | (132   | ) |      |   | (47  | )
|Other, net                                                                                    |  |                 | 9      |   |      |   | 9    |  
|                                                                                              |  |                 |        |   |      |  
|Actual income tax expense                                                                     |  | $               | 2,457  |   |      | $ | 310  |  
|                                                                                              |  |                 |        |   |      |  

20



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##### Table of Contents



ALPHA NR HOLDING, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Unaudited)


March 31, 2005


(In thousands, except percentages and share data)




|                                                   |  |           |          |   |              |   |        |  
|-------------------------------------------------- |  | --------- | -------- | - | ------------ | - | ------ | -
|                                                   |  | March 31, |          |   | December 31, |  
|                                                   |  | 2005      |          |   | 2004         |  
|                                                   |  |           |          |   |              |  
|Deferred tax assets:                               |  |           |          |   |              |   |        |  
|Investment in limited liability company subsidiary |  | $         | 126,037  |   |              | $ |       |  
|Net operating loss carryforwards                   |  |           | 4,557    |   |              |   | 5,598  |  
|Charitable contribution carryforwards              |  |           | 197      |   |              |   | 207    |  
|Alternative minimum tax credit carryforward        |  |           | 2,416    |   |              |   | 1,249  |  
|                                                   |  |           |          |   |              |  
|Gross deferred tax assets                          |  |           | 133,207  |   |              |   | 7,054  |  
|Less valuation allowance                           |  |           | (108,524 | ) |              |   | (1,374 | )
|                                                   |  |           |          |   |              |  
|Total net deferred tax assets                      |  |           | 24,683   |   |              |   | 5,680  |  
|                                                   |  |           |          |   |              |  
|Deferred tax liabilities:                          |  |           |          |   |              |   |        |  
|Investment in limited liability company subsidiary |  |           |         |   |              |   | (6,869 | )
|Virginia tax credit                                |  |           | (2,189   | ) |              |   | (1,855 | )
|                                                   |  |           |          |   |              |  
|Total deferred tax liabilities                     |  |           | (2,189   | ) |              |   | (8,724 | )
|                                                   |  |           |          |   |              |  
|Net deferred tax asset (liability)                 |  | $         | 22,494   |   |              | $ | (3,044 | )
|                                                   |  |           |          |   |              |  



|                                                                                                                          |  |   |          |  
|------------------------------------------------------------------------------------------------------------------------- |  | - | -------- | -
|ANR Fund IX Holdings, L.P. and Alpha NR Holding, Inc. and
    Subsidiaries:                                               |  |   |          |  
|Deferred tax liability balance at December 31, 2004                                                                       |  | $ | (3,044   | )
|Deferred tax benefit recorded in period from January 1,
    2005 to February 11, 2005                                     |  |   | 192      |  
|                                                                                                                          |  |   |         
|Deferred tax liability balance at February 11, 2005                                                                       |  | $ | (2,852   | )
|                                                                                                                          |  |   |         
|Alpha NR Holding, Inc.:                                                                                                   |  |   |          |  
|Deferred tax liability balance acquired on February 12, 2005                                                              |  | $ | (2,852   | )
|                                                                                                                          |  |   |         
|Estimated deferred tax asset generated from the Internal
    Restructuring                                                |  |   | 132,637  |  
|Valuation allowance established at the time of the Internal
    Restructuring                                             |  |   | (106,908 | )
|                                                                                                                          |  |   |         
|Net deferred taxes recorded as part of Internal Restructuring,
    with offsetting increase to additional paid-in capital |  |   | 25,729   |  
|Deferred tax expense recorded in February 12, 2005 to
    March 31, 2005 period                                           |  |   | (383     | )
|                                                                                                                          |  |   |         
|Net deferred tax asset at March 31, 2005                                                                                  |  | $ | 22,494   |  
|                                                                                                                          |  |   |         



21



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##### Table of Contents



ALPHA NR HOLDING, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Unaudited)


March 31, 2005


(In thousands, except percentages and share data)






|                     |                                  |                                          |        |        |              |   |        |        |        |  
|-------------------- | -------------------------------- | ---------------------------------------- | ------ | ------ | ------------ | - | ------ | ------ | ------ | -
|                     |                                  | March 31,                                |        |        | December 31, |  
|                     |                                  | 2005                                     |        |        | 2004         |  
|                     |                                  |                                          |        |        |              |  
|Current asset        |                                  | $                                        | 909    |        |              | $ | 4,674  |       
|Current liability    |                                  |                                          |       |        |              |   |       |       
|                     |                                  |                                          |        |        |              |  
|                     |                                  | Net current asset                        |        |        | 909          |   |        |        | 4,674  |  
|                     |                                  |                                          |        |        |              |  
|Noncurrent asset     |                                  |                                          | 23,774 |        |              |   | 1,006  |       
|Noncurrent liability |                                  |                                          | (2,189 | )      |              |   | (8,724 | )     
|                     |                                  |                                          |        |        |              |  
|                     | Net noncurrent asset (liability) |                                          |        | 21,585 |              |   |        | (7,718 | )     
|                     |                                  |                                          |        |        |              |  
|                     |                                  | Total net deferred tax asset (liability) |        | $      | 22,494       |   |        | $      | (3,044 | )
|                     |                                  |                                          |        |        |              |  



|     |                              
|---- | -----------------------------
|(16) | New Accounting Pronouncements

Accounting for Stripping Costs Incurred during Production in
the Mining Industry,


Accounting for
Conditional Asset Retirement Obligations Accounting for Asset Retirement
Obligations.


Share-Based Payment, Accounting for Stock Based
Compensation. Accounting for Stock Issued to
Employees,


22



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##### Table of Contents



ALPHA NR HOLDING, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Unaudited)


March 31, 2005


(In thousands, except percentages and share data)






|     |                 
|---- | ----------------
|(17) | Subsequent Event



23



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##### Table of Contents



Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis in conjunction with our financial statements
and related notes included elsewhere in this report. The combined historical financial information
discussed below for all periods prior to the completion of our Internal Restructuring on February
11, 2005, is for ANR Fund IX Holdings, L.P. and Alpha NR Holding, Inc. and subsidiaries, which
prior to the completion of our Internal Restructuring were the owners of a majority of the
membership interests of ANR Holdings, and for all periods after our Internal Restructuring is for
Alpha NR Holding, Inc., the owner of 100% of the membership interests of ANR Holdings after our
Internal Restructuring. Cautionary Note Regarding Forward Looking Statements This report includes statements of our expectations, intentions, plans and beliefs that
constitute forward-looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934 and are intended to come within the
safe harbor protection provided by those sections. These statements, which involve risks and
uncertainties, relate to analyses and other information that are based on forecasts of future
results and estimates of amounts not yet determinable and may also relate to our future prospects,
developments and business strategies. We have used the words anticipate, believe, could,
estimate, expect, intend, may, plan, predict, project 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 plans and objectives for future operations and expansion or consolidation;
    
    our relationships with, and other conditions affecting, our customers;
    
    timing of reductions in customer coal inventories;
    
    long-term coal supply arrangements;
    
    inherent risks of coal mining beyond our control;
    
    environmental laws, including those directly affecting our coal mining and production, and those affecting our customers coal usage;
    
    competition in coal markets;
    
    railroad and other transportation performance and costs;
    
    availability of mining and processing equipment and parts;
    
    our assumptions concerning economically recoverable coal reserve estimates;
    
    employee workforce factors;
    
    regulatory and court decisions;
    
    future legislation and changes in regulations, governmental policies or taxes;
    
    changes in postretirement benefit obligations;
    
    our liquidity, results of operations and financial condition; and
    
    other factors, including the other factors discussed in Overview  Coal Pricing Trends and Uncertainties and Outlook below, and the Risks Factors section of our registration statement on Form S-4 (file number
333-124319-17). When considering these forward-looking statements, you should keep in mind the cautionary
statements in this report and the documents incorporated by reference. We do not undertake any
responsibility to release publicly any revisions to these forward-looking statements to take into
account events or circumstances that occur after the date of this report. Additionally, we do not
undertake any responsibility to update you on the occurrence of any unanticipated events which may
cause actual results to differ from those expressed or implied by the forward-looking statements
contained in this report. Overview We produce, process and sell steam and metallurgical coal from seven regional business units,
which, as of April 15, 2005, are supported by 43 active underground mines, 21 active surface mines
and 11 preparation plants located throughout Virginia, West Virginia, Kentucky, and Pennsylvania.
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. For the three months ended March 31, 2005, sales
of steam coal were 3.3 million tons which accounted for approximately 59% of our coal sales volume.
Sales of 24




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##### Table of Contents



metallurgical coal, which generally sells at a premium over steam coal, were 2.3 million tons and
accounted for approximately 41% of our first quarter 2005 coal sales volume. Our sales of steam
coal during the first quarter of 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
the quarter were made primarily to steel companies in the Northeastern and Midwestern regions of
the United States and in several countries in Europe and Asia. Approximately 45% of our sales
revenue in the first three months of 2005 was derived from sales made outside the United States. In addition, we generate other revenues from equipment and parts sales, equipment repair
income, rentals, royalties, commissions, coal handling, terminal and processing fees, and coal and
environmental analysis fees. We also record revenue for freight and handling charges incurred in
delivering coal to our customers, which we treat as being reimbursed by our customers. However,
these freight and handling revenues are offset by equivalent freight and handling costs and do not
contribute to our profitability. Our business is seasonal, with operating results varying from quarter to quarter. We generally
experience lower sales and hence build coal inventory during the winter months primarily due to the
freezing of lakes that we use to transport coal to some of our customers. 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 and coal handling and
processing operations. We report the revenues and costs from rentals, commissions and coal handling
and processing operations in our other revenues and cost of other revenues, respectively. Internal Restructuring and Initial Public Offering of Parent Company.On February 11, 2005, we
completed a series of transactions in connection with our 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 Alpha Natural Resources, Inc. (our parent) completed the initial public
offering of its common stock. As a result of the 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 have not incurred 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 received by our parent 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 $36.2 million for the
quarter ended March 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 options to
purchase up to 596,985 shares of our parents common stock in connection with the Internal
Restructuring (the ACM Converted Options), we recorded stock-based compensation of $0.2 million
in the first quarter of 2005. The aggregate amount of stock-based compensation expense we recorded
in the first quarter of 2005 was $36.4 million, equal to the $36.2 million of expense associated
with distributions paid and the vested portions of shares issued in the Internal Restructuring, and
$0.2 million of amortization expense from the ACM Converted Options. In addition, our parent
recorded deferred stock-based compensation in the amounts of $22.9 million and $3.5 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 applicable two-year and five-year vesting
periods, respectively, thereby reducing our earnings in those periods. In connection with our Internal Restructuring, Alpha Natural Resources, Inc. 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 are payable 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. Alpha Natural Resources, Inc.
made the first two payments to affiliates of AMCI on April 15,
2005 and June 15, 2005 in the amount of $1.2 million each
in cash. The Tax Distributions to First Reserve Fund IX, L.P. will be paid in
three installments of approximately $2.1 million, $2.1 million and $0.3 million on December 15,
2007, 2008 and 2009, respectively. The Tax Distributions will be payable by Alpha Natural
Resources, Inc. 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 Alpha Natural
Resources, Inc. to pay the Tax Distributions, in shares of Alpha Natural Resources, Inc. common
stock. Subsequent NKC Disposition.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. For the three months ended March 31,
2005, NKC contributed revenues of $3.6 million, and an after-tax and minority interest loss of $0.5
million on 0.1 million tons of steam coal sold. In connection with the closing of the transaction,
National King Coal, LLC 25




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##### Table of Contents



was renamed NatCoal LLC, and Gallup Transportation and Transloading Company, LLC was renamed GTTC
LLC. Giving effect to this disposition as if it had occurred on January 1, 2005, our revenues would
have been reduced by $3.6 million and our net loss would have decreased by $0.5 million. Coal Pricing Trends and Uncertainties.During the three months ended March 31, 2005 when
compared to the corresponding period in 2004, prices for our coal increased significantly due to a
combination of conditions in the United States and internationally, including an improving U.S.
economy and robust economic growth in Asia, relatively low customer stockpiles, limited
availability of high-quality coal from competing producers in Central Appalachia, capacity
constraints of U.S. nuclear-powered electricity generators, high current and forward prices for
natural gas and oil, and increased international demand for U.S. coal. This strong coal pricing
environment has contributed to our growth in revenues during the quarter ended March 31, 2005.
While our outlook on coal pricing remains positive as noted below under Outlook, future coal
prices are subject to factors beyond our control and we cannot predict whether and for how long
this strong coal pricing environment will continue. As of April 15, 2005, approximately 1% of our
planned 2005 production, 34% of our planned 2006 production and 66% of our planned 2007 production
was uncommitted and was not yet priced. During the first quarter 2005, we continued to experience increased costs for purchased coal
which have risen with coal prices generally, and increased operating costs for steel-manufactured
equipment and supplies, employee wages and salaries and contract mining and trucking. We also
experienced disruptions in railroad service during the first three months of 2005, which caused
delays in delivering products to customers and increased our internal coal handling costs at our
operations. While as noted under Outlook, we anticipate gradual improvement in railroad service
beginning in the second half of 2005, conditions affecting railroad service are subject to factors
beyond our control and we cannot predict the future impact of rail related service issues on our
operations and costs. We continued to experience a tight market for supplies of mining and processing equipment and
parts during the quarter ended March 31, 2005, due to increased demand by coal producers attempting
to increase production in response to the strong market demand for coal. Although we are attempting
to obtain adequate supplies of mining and processing equipment and parts to meet our production
forecasts, continued limited availability of equipment and parts could prevent us from meeting
those forecasts. The supply of mining and processing equipment and parts is subject to factors
beyond our control and we cannot predict whether and for how long this supply market will remain
limited. In January 2005, the state of West Virginia passed legislation to increase the severance tax
on coal by $0.56 per ton effective December 1, 2005. The estimated impact for this increased
severance tax in 2005 is approximately $0.3 million and we estimate an annual impact beginning in
2006 of approximately $4.0 million based on current operating levels. A portion of this increase
may be recoupable from customers based on allowances in some sales contracts for changes in law. The U.S. dollar has weakened over the last two years, which has made U.S. coal relatively less
expensive and, therefore, more competitive in foreign markets. We believe that the weakening of the
U.S. dollar has enabled us to export more metallurgical coal at higher prices than would otherwise
have been the case during 2003, 2004, and the first quarter of 2005, and this trend has contributed
to our growth in revenues and income during those periods. Changes in currency conversion rates are
subject to factors beyond our control and we cannot predict whether and for how long the dollar
will continue to weaken against foreign currencies. We believe that a strengthening of the U.S.
dollar would adversely affect our exports. Two negotiated wage agreements between one of our subsidiaries and the United Mine Workers of
America (UMWA) have expired. One agreement, covering approximately 136 employees as of May 31,
2005, expired on December 31, 2003. Following 15 months of negotiations with the UMWA over
a successor agreement, our subsidiary determined that an impasse had been reached and implemented the
terms of its last offer to the UMWA on April 4, 2005. The UMWA has not challenged this
implementation. The second agreement, covering approximately 87 employees as of May 31, 2005 at our
Cherokee mine, expired on March 23, 2005. Our subsidiary is currently in negotiations with the UMWA
over a successor agreement to cover union workers at this mine. For additional information regarding some of the risks and uncertainties that affect our
business, see the Risks Factors section of our registration statement on Form
S-4 (file number 333-124319-17). 26




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##### Table of Contents



Reconciliation of Non - GAAP Measures The
following unaudited table reconciles EBITDA and EBITDA, as adjusted, to net income (loss),
the most directly comparable GAAP measure (in thousands): Three months endedMarch 31,2005
    
    
    2004Net income (loss)
    
    $
    (25,430
    )
    
    $
    1,237Interest expense
    
    
    5,827
    
    
    
    2,051Interest income
    
    
    (294
    )
    
    
    (21
    )Income tax expense
    
    
    2,457
    
    
    
    310Depreciation, depletion and amortization
    
    
    14,480
    
    
    
    11,929EBITDA (1)
    
    
    (2,960
    )
    
    
    15,506Minority interest
    
    
    2,846
    
    
    
    1,282EBITDA, as adjusted (1)
    
    $
    (114
    )
    
    $
    16,788
 
 (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, includes EBITDA plus minority
interest. EBITDA and EBITDA, as adjusted, are used by management to
measure operating performance, and management also believes they are
useful indicators 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 calculations may not
be comparable to similarly titled measures of other companies. Results of Operations Three months Ended March 31, 2005 Compared to the Three months Ended March 31, 2004 Summary For the quarter ended March 31, 2005, our revenues increased $69.0 million to $315.8 million
compared to $246.7 million for the quarter ended March 31, 2004. Net income decreased from $1.2
million in 2004 to a loss of $25.4 million for 2005, after our stock-based compensation charge in
the amount of $36.4 million ($35.5 million after-tax) and a benefit in the amount of $1.8 million
($0.8 million after-tax and minority interest) related to the settlement of a funded reclamation
bonding program. EBITDA, as reconciled to our net income or loss in the table above, was $(3.0)
million in the first quarter 2005, including the stock-based compensation charge in the amount of
$36.4 million, and was $18.5 million less than the same period in 2004. We sold 5.6 million tons of coal during the first quarter of 2005, 0.4 million less than the
comparable period in 2004. Production for the first quarter of 2005 totaled 6.2 million tons
including 5.0 million tons of produced and processed coal and 1.2 million tons of purchased coal.
Our production for the first quarter of 2004 was 5.1 million tons of produced and processed coal
and 1.2 million tons of purchased coal. Coal margin, which we define as coal revenues less cost of
coal sales, divided by coal revenues, increased from 12.5% in 2004 to 16.9% in 2005. Coal margin
per ton was $8.26 in the first quarter 2005, an 87% increase from the first quarter of 2004. Coal
margin per ton is calculated as coal sales realization per ton less cost of coal sales per ton.
Cost of coal sales and cost of coal sales per ton exclude depreciation, depletion and amortization. 27




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##### Table of Contents



Revenues Three months Ended
    
    
    IncreaseMarch 31,
    
    
    (Decrease)2005
    
    
    2004
    
    
    $ or Tons
    
    
    %(in thousands, except per ton data)Coal revenues
    
    $
    275,333
    
    
    $
    214,373
    
    
    $
    60,960
    
    
    
    28
    %Freight and handling revenues
    
    
    33,165
    
    
    
    25,604
    
    
    
    7,561
    
    
    
    30
    %Other revenues
    
    
    7,275
    
    
    
    6,761
    
    
    
    514
    
    
    
    8
    %Total revenues

    
    $
    315,773
    
    
    $
    246,738
    
    
    $
    69,035
    
    
    
    28
    %Tons Sold:Steam
    
    
    3,304
    
    
    
    3,881
    
    
    
    (577
    )
    
    
    (15
    )%Metallurgical
    
    
    2,328
    
    
    
    2,180
    
    
    
    148
    
    
    
    7
    %Total
    
    
    5,632
    
    
    
    6,061
    
    
    
    (429
    )
    
    
    (7
    )%Coal sales realization per ton:Steam
    
    $
    36.20
    
    
    $
    30.11
    
    
    $
    6.09
    
    
    
    20
    %Metallurgical
    
    
    66.89
    
    
    
    44.73
    
    
    
    22.16
    
    
    
    50
    %Total
    
    $
    48.89
    
    
    $
    35.37
    
    
    $
    13.52
    
    
    
    38
    %
 Coal Revenues.Coal revenues increased by $61.0 million, or 28%, for the quarter ended March 31,
2005 as compared to the first quarter of 2004. This increase was primarily driven by a 38% increase
in sales realization from $35.37 per ton in the first quarter 2004 to $48.89 per ton in the first
quarter of 2005. Our metallurgical coal (met coal) realization per ton increased 50% from $44.73
per ton in the first quarter of 2004 to $66.89 per ton in the first quarter of 2005, and steam coal
realization per ton increased 20% from $30.11 to $36.20. Met coal sales were 41% of our coal sales
volume in the first quarter of 2005 compared to 36% in the first quarter 2004. Total tons sold for
the first quarter of 2005 were 5.6 million, including 2.3 million tons of met coal and 3.3 million
of steam coal. Sales for the first quarter of 2004 were 6.1 million tons of which 2.2 million were
met coal and 3.9 million were steam coal. Our total revenues increased by $69.0 million, or 28%,
from the first quarter of 2004 to the first quarter of 2005. Freight and Handling Revenues.Freight and handling revenues increased to $33.2 million for the
three months ended March 31, 2005, an increase of $7.6 million compared to the three months ended
March 31, 2004 due to an increase of 0.2 million tons of export shipments and higher freight rates.
However, these revenues are offset by equivalent costs and do not contribute to our profitability. Other Revenues.Other revenues increased by $0.5 million mainly due to higher coal processing fees
and revenues from equipment sales and repairs partially offset by a decrease in trucking revenues
and sales commissions. Net sales commission recorded for the first quarter of 2005 were $1.2
million less than in the first quarter of 2004. Costs and Expenses Three months ended
    
    
    IncreaseMarch 31.
    
    
    (Decrease)2005
    
    
    2004
    
    
    $
    
    
    %(in thousands, except per ton data)Cost of coal sales (exclusive of items shown separately below)
    
    $
    228,845
    
    
    $
    187,593
    
    
    $
    41,252
    
    
    
    22
    %Freight and handling costs
    
    
    33,165
    
    
    
    25,604
    
    
    
    7,561
    
    
    
    30
    %Cost of other revenues
    
    
    6,138
    
    
    
    5,161
    
    
    
    977
    
    
    
    19
    %Depreciation, depletion and amortization
    
    
    14,480
    
    
    
    11,929
    
    
    
    2,551
    
    
    
    21
    %Selling, general and administrative expenses (exclusive of
depreciation and amortization shown separately above and
including stock-based compensation expense in the amount of
$36,407 in 2005)
    
    
    47,697
    
    
    
    11,805
    
    
    
    35,892
    
    
    
    304
    %Total costs and expenses
    
    $
    330,325
    
    
    $
    242,092
    
    
    $
    88,233
    
    
    
    36
    %
 28




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##### Table of Contents



Three months ended
    
    
    IncreaseMarch 31.
    
    
    (Decrease)2005
    
    
    2004
    
    
    $
    
    
    %(in thousands, except per ton data)Cost of coal sales per ton:Company mines
    
    $
    33.77
    
    
    $
    27.24
    
    
    $
    6.53
    
    
    
    24
    %Contract mines (including purchased and processed)
    
    
    48.28
    
    
    
    35.17
    
    
    
    13.11
    
    
    
    37
    %Total produced and processed
    
    
    36.68
    
    
    
    29.03
    
    
    
    7.65
    
    
    
    26
    %Purchased and sold without processing
    
    
    60.67
    
    
    
    38.55
    
    
    
    22.12
    
    
    
    57
    %Total cost of coal sales per ton
    
    $
    40.63
    
    
    $
    30.95
    
    
    $
    9.68
    
    
    
    31
    %
 Cost of Coal Sales:Our cost of coal sales increased by $41.3 million, or $9.68 per ton, from
$187.6 million, or $30.95 per ton, in the first quarter of 2004 to $228.8 million, or $40.63 per
ton, in the first quarter of 2005. Our cost of sales per ton of our produced and processed tons was
$36.68 per ton in the first three months of 2005 as compared to $29.03 per ton in the comparable
period in 2004. This increase is attributable to increased costs for steel-related mine supplies,
added costs involved in increasing the proportion of our sales made to the metallurgical markets,
such as higher preparation and trucking costs, and increased variable sales-related costs, such as
royalties and severance taxes. Also, our cost for contract miner services increased 37% in the
current quarter as compared to the first quarter 2004. The cost of sales per ton of our purchased
coal was $60.67 per ton in the first quarter of 2005, and $38.55 per ton for the corresponding
period of 2004. This $22.12 per ton increase in costs is due to the general increase in coal prices
since the first quarter 2004 and the change in the mix of coal qualities purchased. Approximately
62% of our purchased coal sold during the first quarter of 2005 was blended with our produced and
processed coal prior to resale. Freight and Handling Costs.Freight and handling costs increased to $33.2 million for the three
months ended March 31, 2005, an increase of $7.6 million compared to the three months ended March
31, 2004 due to an increase of 0.2 million tons of export shipments and higher freight rates. We
paid these freight and handling costs which we treated as being reimbursed by the customer. These
costs were offset by an equivalent amount of freight and handling revenue. Cost of Other Revenues. Our cost of other revenues increased by 19% or $1.0 million in the first
quarter of 2005 when compared to the first quarter of 2004 due to increased costs associated with
higher coal processing volumes and increases in costs to sell and repair equipment. The margin
(other revenues less cost of other revenues) on other revenues reflects a decrease of $0.5 million
compared to the first quarter of 2004 due to the decrease in sales commission revenue discussed
above. Depreciation, Depletion and Amortization.Depreciation, depletion, and amortization increased $2.6
million or 21%, to $14.5 million for the three months ended March 31, 2005 as compared to the same
period of 2004 due mainly to capital additions during 2004. Depreciation, depletion and
amortization per ton increased from $1.97 per ton for the three months ended March 31, 2004 to
$2.57 per ton in the same period of 2005. Approximately $0.18 per ton of the $0.60 per ton increase
was due to lower coal sales volumes, as depreciation of our mining equipment was spread over a
smaller volume of production. Selling, General and Administrative Expenses.Our selling, general and administrative expenses
increased by $35.9 million during the first quarter of 2005 over the corresponding quarter last
year. Excluding our stock-based compensation charge of $36.4 million for the first quarter of 2005,
selling, general and administrative costs decreased in the first quarter of 2005 by $0.5 million
from the first quarter of last year. Our selling expenses were negatively impacted in the first
quarter 2004 because we repurchased approximately 0.1 million tons from a customer for a payment in
the amount of $3.1 million in order to sell additional met tons in the second quarter 2004. In the
first quarter of 2005, in addition to a 24% increase in staffing over the first quarter 2004
levels, we incurred additional professional fees related to compliance with the Sarbanes-Oxley Act
of 2002, our purchasing initiative and our annual audit. These increased staffing costs and
professional fees totaled approximately $2.4 million. Interest Expense.Interest expense increased $3.8 million to $5.8 million during the first quarter
2005 compared to the same period in 2004. The increase was mainly due to the additional interest
expense related to our 10% senior notes issued in May 2004. Interest Income.Interest income increased by $0.3 million in the three months ended March 31, 2005
from the three months ended March 31, 2004. The majority of this increase was related to our $10.0
million loan to a coal supplier which we made in June 2004. Income Tax Expense:Since the condensed consolidated statements of operations for the three months
ended March 31, 2005 include activity both prior to and after the Internal Restructuring and IPO,
the total income tax provision is the sum of the provisions for the pre and post restructuring
periods. Prior to February 12, 2005, the minority interest owners and ANR Fund IX Holdings, L.P. owned
interests in ANR Holdings, a limited 29




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##### Table of Contents



liability company and pass-through entity for income tax purposes. As a pass-through entity, ANR
Holdings provides information returns reflecting the allocated income (loss) to the minority
interest owners and ANR Fund IX Holdings, L.P. based upon their respective ownership percentage and
certain special allocations as provided by the limited liability company agreement and the Internal
Revenue Code. The income tax consequences of the income (loss) allocated to these owners for the
period from January 1, 2005 to February 11, 2005 and from January 1, 2004 to March 31, 2004 is not
reflected in the financial statements. For these periods, only the income tax expense associated
with Alpha NR Holding, Inc., a taxable entity, is included. The primary source of the income tax
impact is derived from the allocated income (loss) from ANR Holdings, Alpha Natural Resources, LLC
and its operating subsidiaries, all of which are pass-through entities for tax purposes. Subsequent
to the Internal Restructuring, all of the income of ANR Holdings is taxed to Alpha NR Holding, Inc. A tax provision of $2.5 million was recorded for the three months ended March 31, 2005 on a
pre-tax loss of $20.1 million which equates to an effective tax rate of (12.2%). This rate differs
from the federal statutory rate of 35% due primarily to a significant portion of the stock-based
compensation charge associated with the issuance of common stock to management in connection with
the Internal Restructuring and IPO not being deductible for tax purposes. The increase in expected
income tax expense related to the stock-based compensation charge is offset in part by the tax
benefits associated with percentage depletion and taxes not being provided for on the minority
interest and pass-through entity owners respective shares for the period prior to the Internal
Restructuring. As $33.0 million of the stock-based compensation charge has been identified as a
significant unusual item, the tax effect of the $33.0 million expense (no tax benefit) has been
accounted for in the current period tax provision and excluded from the estimated annual effective
tax rate of approximately 26%. The Companys effective tax rate is applied to pre-tax income
exclusive of the $33.0 million stock-based compensation charge. Since the majority of the 2005
stock-based compensation is recorded in the first quarter, the first quarters effective tax rate
will not be indicative of the effective tax for the remainder of 2005. We estimate that exclusive
of the stock-based compensation charge (both the $33.0 million significant unusual portion and the
recurring portion for the full year of 2005), our 2005 effective tax rate would be approximately
23.5%, which is lower than the federal statutory rate of 35% due to the benefits of percentage
depletion and a combination of the Extraterritorial Income Exclusion and deduction for domestic
production activities enacted as part of the American Jobs Creation Act of 2004, partially offset
by state income taxes and increases in the valuation allowances. Actual pre-tax income for the year
will have an impact on the effective tax rates and therefore our estimate of the estimated annual
income tax rate may change in subsequent quarters. Alpha NR Holding Inc.s effective tax rate for the first quarter of 2005 is much greater
compared to the first quarter of 2004 primarily due to the significant stock-based compensation
charge for 2005 that did not exist in 2004. In addition, the portion of pre-tax income related to
the minority interest and pass-through entity owners not tax affected is greater in the first
quarter of 2004, thereby reducing the effective rate more in that period of 2004 compared to the
same period in 2005. Liquidity and Capital Resources Our primary sources of liquidity are cash flow from sales of our produced and purchased coal,
other income and borrowings under our senior credit facility. Our primary liquidity and capital
resource requirements are to finance the cost of our coal production and purchases, to make capital
expenditures, and to service our debt and reclamation obligations. Historically we have made
significant distributions to our equity holders, and in connection with our Internal Restructuring
our parent has agreed to pay the Tax Distributions totaling $10.5 million in cash or, to the extent
we are not permitted by the terms of our credit facility or the indenture governing our senior
notes to pay the Tax Distributions in cash, in shares of our parents common stock. At March 31, 2005, our available liquidity was $89.3 million, including cash of $0.2 million
and $89.1 million available under our credit facility. Total debt represented 68% of our total
capitalization at March 31, 2005. We currently project cash capital spending for the full year of 2005 at the upper end of our
previously stated range of $90 million to $120 million. These forecasted expenditures are to be
used to develop new mines and replace or add equipment. We believe that cash generated from our
operations and borrowings under our credit facility will be sufficient to meet our working capital
requirements, anticipated capital expenditures and debt service requirements for at least the next
twelve months. Cash Flows Cash provided by operating activities was $2.4 million for the three months ended March 31,
2005 compared to $16.0 million of cash provided by operations in the corresponding period in 2004.
This decrease is attributable to an additional investment in net operating assets and liabilities
of $27.5 million in the 2005 quarter as compared to the 2004 quarter. The increase in net operating
assets and liabilities is due to increased coal inventory ($30.1 million) caused by delays in
export shipments, poor rail service and an increase in the cost per ton of our inventory; an
increase in trade accounts receivables ($10.2 million) due to the increase in total sales; and an
offsetting net increase in accounts payable and accrued expenses of $12.6 million. Our net loss and
non-cash charges provided net cash in the amount of $28.8 million, an increase from the first
quarter 2004 of $13.9 million mainly due to the non-cash portion of our stock-based compensation
charge included in our net loss in the amount of $36.4 million and higher depreciation expense. Net cash used in investing activities was $34.4 million during the three months ended March
31, 2005, $18.4 million more than the same period of 2004. Capital expenditures increased $14.0
million from the first quarter 2004 level, to $30.3 million during the 2005 first quarter. The
increase in capital expenditures was primarily due to the purchase of new and replacement mining
equipment and the development of new 30




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##### Table of Contents



mines. Also during the current quarter, we paid $5.0 million as contingent purchase price related
to the coal assets purchased from The Brinks Company. We also paid our final installment in the
amount of $0.5 million related to our equity investment in Excelven. Net cash provided by financing activities during the quarter ended March 31, 2005 was $24.8
million compared with net cash used in financing activities of $2.7 million in the quarter ended
March 31, 2004. The amount outstanding under our revolving line of credit increased $24.5 million
and our bank overdraft increased $10.9 million for the quarter ended March 31, 2005. Distributions
to prior members of ANR Holdings, LLC were $7.7 million as part of the Internal Restructuring. We
also received reimbursement from Alpha Natural Resources, Inc. during the three months ended March
31, 2005 of deferred common stock offering costs of $1.7 million previously paid on behalf of Alpha
Natural Resources, Inc. Credit Facility and Long-term Debt As of March 31, 2005 our total long-term indebtedness, including capital lease obligations,
consisted of the following (in thousands): March 31,200510% Senior notes due 2012
    
    $
    175,000Revolving credit facility
    
    
    32,500Variable rate term notes (1)
    
    
    1,173Capital lease obligation
    
    
    1,875Other
    
    
    44Total long-term debt
    
    
    210,592Less current portion
    
    
    (1,707
    )Long-term debt, net of current portion
    
    $
    208,885
 
 (1)
    
    The term notes, which were issued in connection with equipment financing provided by The CIT
Group Equipment Financing, Inc., bear interest at a variable rate of 6.17% at March 31, 2005,
are payable in monthly installments ranging from $34,000 to $64,000 through April 2006 and are
secured by a lien on the equipment purchased with the proceeds of the notes. On March 30, 2005, Alpha NR Holding, Inc., Alpha NR Ventures, Inc., and ANR Holdings were
added as parent guarantors of the 10% senior notes. These parent guarantors and the issuers of the
senior notes 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 parent guarantors and all subsidiaries of Alpha Natural Resources, LLC other than
Alpha Natural Resources Capital Corp. have fully and unconditionally guaranteed the senior notes on
a joint and several basis. The 10% senior notes and our credit facility place restrictions on the
ability of Alpha Natural Resources, LLC to make distributions or loans to the parent guarantors. At
March 31, 2005, Alpha Natural Resources, LLC had net assets of $77.0 million and, except for
allowable distributions for the payment of income taxes, administrative expenses and dividends on
the common stock of Alpha Natural Resources, Inc., the net assets of Alpha Natural Resources, LLC
are restricted. The credit facility, as amended, and the indenture governing the senior notes each impose
certain restrictions on us, including restrictions on our 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, the
credit facility provides that we must meet or exceed certain interest coverage ratios and must not
exceed certain leverage ratios. Borrowings under our credit facility will be subject to mandatory prepayment (1) with 100% of
the net cash proceeds received from asset sales or other dispositions of property by ANR Holdings
and its subsidiaries (including insurance and other condemnation proceedings), subject to certain
exceptions and reinvestment provisions, (2) with 100% of the net cash proceeds received by ANR
Holdings and its subsidiaries from the issuance of debt securities or other incurrence of debt,
excluding certain indebtedness, and (3) 50% (or 25%, if our leverage ratio is less than or equal to
2.00 to 1.00 but greater than 1.00, or 0% if our leverage ratio is less than or equal to 1.00) of
the net cash proceeds of equity issuances of ANR Holdings and its subsidiaries. Other As a regular part of our business, we review opportunities for, and engage in discussions and
negotiations concerning, the acquisition of coal 31




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##### Table of Contents



mining assets and interests in coal mining companies, and acquisitions of, or combinations with,
coal mining companies. 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 credit facility and the indenture governing
our senior notes as of March 31, 2005. The financial covenants in our credit facility require, among other things, that:  
    
    Alpha Natural Resources, LLC must maintain a leverage ratio, defined
as the ratio of total debt to Adjusted EBITDA (as defined in the
credit agreement), of less than 3.75 at December 31, 2004, 3.50 at
March 31 and June 30, 2005, 3.25 at September 30 and December 31,
2005, 3.15 at March 31, June 30, September 30 and December 31, 2006
and 3.00 at March 31, 2007 (and thereafter), respectively, with
Adjusted EBITDA being computed using the most recent four quarters;
and
    
    Alpha Natural Resources, LLC must maintain an interest coverage ratio,
defined as the ratio of adjusted EBITDA (as defined in the credit
agreement), to cash interest expense (defined as the sum of cash
interest expense plus cash letter of credit fees and commissions), of
greater than 2.50 at September 30, 2004 and at each quarter end
thereafter. Based upon Adjusted EBITDA (as defined in the credit agreement), Alpha Natural Resources,
LLCs leverage ratio and interest coverage ratio for the twelve months ended March 31, 2005 were
1.62 (maximum of 3.50) and 9.51 (minimum of 2.50), respectively. Alpha Natural Resources, LLC
maintained the leverage and interest coverage ratios specified in, and were in compliance with, the
credit facility as of March 31, 2005. Adjusted EBITDA, as defined in the credit agreement, is used to determine compliance with many
of the covenants under the credit facility. The breach of 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 would also
result in a default under our indenture. Because the covenants in our credit facility relate to Alpha Natural Resources, LLC, EBITDA as
presented in the table below reflects adjustments for minority interest necessary to reconcile our
net income to Alpha Natural Resources, LLCs EBITDA. Adjusted EBITDA is defined 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. Three Months
    
    
    Three Months
    
    
    Three Months
    
    
    Three Months
    
    
    Twelve MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    Ended
    
    
    EndedJune 30,
    
    
    September 30,
    
    
    December 31,
    
    
    March 31,
    
    
    March 31,2004
    
    
    2004
    
    
    2004
    
    
    2005
    
    
    2005(In thousands)Net income (loss)
    
    $
    12,088
    
    
    $
    5,342
    
    
    $
    1,115
    
    
    $
    (25,430
    )
    
    $
    (6,885
    )Interest expense, net
    
    
    6,711
    
    
    
    5,449
    
    
    
    5,344
    
    
    
    5,533
    
    
    
    23,037Income tax expense (benefit)
    
    
    3,022
    
    
    
    1,335
    
    
    
    (772
    )
    
    
    2,457
    
    
    
    6,042Depreciation, depletion and
amortization expenses
    
    
    13,111
    
    
    
    14,312
    
    
    
    16,660
    
    
    
    14,480
    
    
    
    58,563EBITDA
    
    
    34,932
    
    
    
    26,438
    
    
    
    22,347
    
    
    
    (2,960
    )
    
    
    80,757Minority interest(1)
    
    
    12,872
    
    
    
    5,688
    
    
    
    268
    
    
    
    2,846
    
    
    
    21,674Stock-based compensation charge(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,932
    
    
    
    28,932Asset impairment charge(2)
    
    
    
    
    
    
    5,100
    
    
    
    
    
    
    
    
    
    
    
    5,100Adjusted EBITDA
    
    $
    47,804
    
    
    $
    37,226
    
    
    $
    22,615
    
    
    $
    28,818
    
    
    $
    136,463Leverage ratio(3)
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    1.62Interest coverage ratio(4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9.51
 
 (1)
    
    Because our credit facility and our senior notes are issued by our subsidiaries, we are required to adjust
our EBITDA for our minority interest which does not exist at the subsidiary level. 32




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(2)
    
    We are required to adjust EBITDA under our credit facility for the asset impairment charge related to our NKC
operations and our parent's non-cash portion of the stock-based compensation charge related to our Internal
Restructuring and the initial public offering of our parent.(3)
    
    Leverage ratio is defined in our credit facility as total debt divided by Adjusted EBITDA.(4)
    
    Interest coverage ratio is defined in our credit facility as Adjusted EBITDA divided by cash interest expense. Outlook While our business is subject the general risks of the coal industry and specific individual risks,
we believe that the outlook for coal markets remains positive worldwide, assuming continued growth
in the U.S., China, Pacific Rim, Europe and other industrialized economies that are increasing coal
demand for electricity generation and steelmaking. Published indices show improved year-over-year
coal prices in most U.S. and global coal markets, and worldwide coal supply/demand fundamentals
remain tight due to high market demand, transportation constraints and production difficulties in
most countries. Metallurgical coal is generally selling at a significant premium to steam coal, and
we expect that pricing relationship to continue based on the same assumptions made above. For 2005, we are targeting annual production of 20 million to 22 million tons and total sales
volume of 25 million to 26 million tons. Approximately 99%, 66% and 34% of our planned production
in 2005, 2006 and 2007, respectively, has been priced as of April 15, 2005. We anticipate continued challenges with railroad service, hopefully with gradual improvement in
rail service beginning in the second half of 2005. We are working with our customers and the
railroads in an effort to address these issues in a timely manner. Based on current market conditions in the steam and metallurgical coal markets, we anticipate
increasing the proportion of our metallurgical coal sales that are committed under long-term
contracts as compared to prior years and continuing to market portions of our high quality steam
coal production as metallurgical coal. We plan to focus on organic growth by continuing to develop
our existing reserves. In addition, we also plan to evaluate attractively priced acquisitions that
create potential synergies with our existing operations. Critical Accounting Estimates and Assumptions The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect reported
amounts. These estimates and assumptions are based on information available as of the date of the
financial statements. Accounting measurements at interim dates inherently involve greater reliance
on estimates than at year-end. The results of operations for the quarterly period ended March 31,
2005 are not necessarily indicative of results that can be expected for the full year. Please refer
to the section entitled Critical Accounting Estimates and Assumptions of Managements Discussion
and Analysis of Financial Condition and Results of Operations
in our registration statement on Form S-4 (file number
333-124319-17) for a discussion of our
critical accounting estimates and assumptions. 
 Item 3.Quantitative and Qualitative Disclosures About Market Risk Omitted pursuant to General Instruction H(2)(c) of Form 10-Q . 
 Item 4.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
report. Changes in internal control over financial reporting.Beginning with the year ending December
31, 2006, Section 404 of the Sarbanes-Oxley Act of 2002 will require us to include managements
report on our internal control over financial reporting in our Annual Report on Form 10-K. 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, and (4) a statement that our registered independent public accounting firm
has issued an attestation report on managements assessment of our internal control over financial
reporting. In order to achieve compliance with Section 404 within the prescribed period, management has
commenced a Section 404 compliance project under which management has engaged outside consultants
and adopted a detailed project work plan to assess the adequacy of our internal control over
financial reporting, remediate any control deficiencies that may be identified, validate through
testing that controls are 33




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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
first quarter of fiscal 2005 we continued the process of implementing measures designed to improve
our internal control over financial reporting in the following areas: documentation of controls and
procedures; segregation of duties; timely reconciliation of accounts; methods of reconciling fixed
asset accounts; the structure of our general ledger information; security access controls and
testing of our disaster recovery plan for our information technology systems; 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, 2006 in connection with our
Section 404 compliance project. Except as described above, during the first quarter of 2005, 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. Limitations of the effectiveness of internal control.A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of
the internal control system are met. Because of the inherent limitations of any internal control
system, no evaluation of controls can provide absolute assurance that all control issues, if any,
within a company have been detected. Notwithstanding these limitations, our disclosure controls and
procedures are designed to provide reasonable assurance of achieving their objectives. Our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure controls and
procedures are, in fact, effective at the reasonable assurance level as of the end of the period
covered by this report. 34




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PART II 
 Item 2.Unregistered Sales of Equity Securities and Use of Proceeds Omitted pursuant to General Instruction H(2)(b) of Form 10-Q . 
 Item 4.Submission of Matters to a Vote of Security Holders Omitted pursuant to General Instruction H(2)(b) of Form 10-Q . 
 Item 6.Exhibits The exhibits to this report are listed in the Exhibit Index. 35




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALPHA NR HOLDING, INC.By:
    
    /s/ DAVID C. STUEBEName: David C. StuebeTitle: Vice President, Treasurer, and Chief Financial Officer
 Date: June 27, 2005 36




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10-Q EXHIBIT INDEX Exhibit No
    
    Description of Exhibit2.1
    
    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).2.2
    
    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.)2.3
    
    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.)3.1
    
    Restated Certificate of Incorporation of Alpha NR Holding, Inc.
(Incorporated by reference to Exhibit 3.11 to Amendment No. 1
to the Registration Statement on Form S-4 of Alpha NR Holding,
Inc. (File No. 333-124319-17) filed on May 11, 2005).3.2
    
    Bylaws of Alpha NR Holding, Inc. (Incorporated by reference to
Exhibit 3.12 to Amendment No. 1 to the Registration Statement
on Form S-4 of Alpha NR Holding, Inc. (File No. 333-124319-17)
filed on May 11, 2005).4.1
    
    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.)4.2
    
    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.)10.1
    
    Third Amendment, dated as of January 25, 2005, to Credit
Agreement (Incorporated by reference to Exhibit 10.16 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.)10.2
    
    Fourth Amendment, dated as of March 28, 2005, to Credit
Agreement (Incorporated by reference to Exhibit 10.5 to the
Annual Report on Form 10-K of Alpha Natural Resources, Inc.
(File No. 1-32423) filed on March 30, 2005.)10.3
    
    Second Amended and Restated Employment Agreement between Alpha
Natural Resources Services, LLC and Michael J. Quillen dated
January 28, 2005 (Incorporated by reference to Exhibit 10.6 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.)10.4
    
    Stockholder Agreement dated as of February 11, 2005 by and
among Alpha Natural Resources, Inc., the FRC Parties named
therein, the AMCI Parties named therein, Madison Capital
Funding LLC and the other stockholders named therein (the
Stockholder Agreement) (Incorporated by reference to Exhibit
10.10 to the Annual Report on Form 10-K of Alpha Natural
Resources, Inc. (File No. 1-32423) filed on March 30, 2005.)10.5
    
    Letter agreement waiving certain provisions of the Stockholder
Agreement dated March 28, 2005 by the FRC Parties and the AMCI
Parties (Incorporated by reference to Exhibit 10.11 to the
Annual Report on Form 10-K of Alpha Natural Resources, Inc.
(File No. 1-32423) filed on March 30, 2005.)10.6
    
    Alpha Natural Resources Annual Incentive Bonus (AIB) Plan (the
AIB Plan) (Incorporated by reference to Exhibit 10.9 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.)
 37




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Exhibit No
    
    Description of Exhibit10.7
    
    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.)10.8
    
    Alpha Natural Resources, Inc. 2005 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.11
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.)10.9
    
    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.)10.10
    
    Cash bonus awards paid to Alpha Natural Resources, Inc.s named executive officers who also serve as
executive officers of the registrant with respect to fiscal 2004 pursuant to the AIB Plan as reported on
Alpha Natural Resources, Inc.s Current Report on Form 8-K filed on March 4, 2005 and incorporated by
this reference10.11
    
    Base salary amounts set for Alpha Natural Resources, Inc.s named executive officers who also serve as
executive officers of the registrant as reported on Alpha Natural Resources, Inc.s Current Report on
Form 8-K filed on March 4, 2005 and incorporated by this reference10.12
    
    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.)31(a)*
    
    Certification Pursuant to Rule 15d-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 15d-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.
    
    Management contract or compensatory plan or arrangement. 38