##### 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 1934
 For the quarterly period ended June 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from       to
 Commission File No. 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)One Alpha Place, P.O. Box 2345, Abingdon, Virginia
    
    24212(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code:
 (276) 619-4410
 o þ
  o o þ
 o o




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##### 



TABLE OF CONTENTS
 PagePART IItem 1. Financial Statements
    
    3Condensed
Consolidated Balance Sheets (unaudited)
    
    3Condensed
Consolidated Statements of Income (unaudited)
    
    4Condensed
Consolidated Statements of Cash Flows (unaudited)
    
    5Notes to
Condensed Consolidated Financial Statements (Unaudited)
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    21Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    33Item 4. Controls and Procedures
    
    33PART IIItem 1A. Risk Factors
    
    35Item 6. Exhibits
    
    35EX-31.A: CERTIFICATIONEX-31.B: CERTIFICATIONEX-32.A: CERTIFICATIONEX-32.B: CERTIFICATION
  2




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##### Table of Contents



Item 1.
Financial Statements
 ALPHA NR HOLDING, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Balance Sheets (Unaudited)
 (In thousands, except share and per share amounts)
 June 30,
    
    
    December 31,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    4,800
    
    
    
    39,622Trade accounts receivable, net
    
    
    160,117
    
    
    
    147,961Notes and other receivables
    
    
    3,692
    
    
    
    10,330Inventories
    
    
    84,859
    
    
    
    84,885Due from affiliate
    
    
    4,727
    
    
    
    3,423Prepaid expenses and other current assets
    
    
    38,779
    
    
    
    35,975Total current assets
    
    
    296,974
    
    
    
    322,196Property, plant, and equipment, net
    
    
    649,769
    
    
    
    582,750Goodwill
    
    
    18,641
    
    
    
    18,641Other intangibles, net
    
    
    9,193
    
    
    
    11,014Deferred income taxes
    
    
    39,863
    
    
    
    38,967Other assets
    
    
    43,770
    
    
    
    43,371Total assets
    
    $
    1,058,210
    
    
    
    1,016,939Liabilities and Stockholders EquityCurrent liabilities:Current portion of long-term debt
    
    $
    3,224
    
    
    
    3,242Notes payable
    
    
    8,783
    
    
    
    59,014Bank overdraft
    
    
    14,402
    
    
    
    17,060Trade accounts payable
    
    
    79,611
    
    
    
    99,746Deferred income taxes
    
    
    12,575
    
    
    
    11,243Accrued expenses and other current liabilities
    
    
    88,500
    
    
    
    91,131Total current liabilities
    
    
    207,095
    
    
    
    281,436Long-term debt, net of current portion
    
    
    452,369
    
    
    
    423,547Workers compensation benefits
    
    
    6,516
    
    
    
    5,901Postretirement medical benefits
    
    
    28,874
    
    
    
    24,461Asset retirement obligation
    
    
    55,389
    
    
    
    46,296Deferred gains on sale of property interests
    
    
    5,274
    
    
    
    5,762Other liabilities
    
    
    19,983
    
    
    
    6,585Total liabilities
    
    
    775,500
    
    
    
    793,988Stockholders equity: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
    
    
    214,383
    
    
    
    204,438Accumulated other comprehensive (loss)
    
    
    (525
    )Retained earnings
    
    
    68,852
    
    
    
    18,513Total stockholders equity
    
    
    282,710
    
    
    
    222,951Total liabilities and stockholders equity
    
    $
    1,058,210
    
    
    
    1,016,939
  3




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ALPHA NR HOLDING, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Income (Unaudited)
(In thousands)
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Coal revenues
    
    $
    436,529
    
    
    $
    364,070
    
    
    $
    860,903
    
    
    $
    637,204Freight and handling revenues
    
    
    50,935
    
    
    
    48,239
    
    
    
    97,327
    
    
    
    79,991Other revenues
    
    
    8,217
    
    
    
    5,327
    
    
    
    19,761
    
    
    
    12,596Total revenues
    
    
    495,681
    
    
    
    417,636
    
    
    
    977,991
    
    
    
    729,791Costs and expenses:Cost of coal sales (exclusive of items shown
separately below)
    
    
    345,505
    
    
    
    293,493
    
    
    
    676,391
    
    
    
    519,777Freight and handling costs
    
    
    50,935
    
    
    
    48,239
    
    
    
    97,327
    
    
    
    79,991Cost of other revenues
    
    
    5,445
    
    
    
    4,319
    
    
    
    13,396
    
    
    
    10,384Depreciation, depletion and amortization
    
    
    34,207
    
    
    
    15,075
    
    
    
    67,841
    
    
    
    29,245Selling, general and administrative expenses
(exclusive of depreciation and amortization
shown separately above)
    
    
    18,583
    
    
    
    15,375
    
    
    
    35,392
    
    
    
    63,073Total costs and expenses
    
    
    454,675
    
    
    
    376,501
    
    
    
    890,347
    
    
    
    702,470Income from operations
    
    
    41,006
    
    
    
    41,135
    
    
    
    87,644
    
    
    
    27,321Other income (expense):Interest expense
    
    
    (10,786
    )
    
    
    (6,647
    )
    
    
    (21,063
    )
    
    
    (12,474
    )Interest income
    
    
    171
    
    
    
    191
    
    
    
    358
    
    
    
    485Miscellaneous income (expense), net
    
    
    1,413
    
    
    
    34
    
    
    
    1,696
    
    
    
    (9
    )Total other income (expense), net
    
    
    (9,202
    )
    
    
    (6,422
    )
    
    
    (19,009
    )
    
    
    (11,998
    )Income from continuing operations before
income taxes
and minority interest
    
    
    31,804
    
    
    
    34,713
    
    
    
    68,635
    
    
    
    15,323Income tax expense
    
    
    8,676
    
    
    
    8,957
    
    
    
    18,296
    
    
    
    11,599Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,918Income from continuing operations
    
    
    23,128
    
    
    
    25,756
    
    
    
    50,339
    
    
    
    806Discontinued operations:Income (loss) from discontinued operations
before income taxes and
minority interest
    
    
    
    
    
    
    359
    
    
    
    
    
    
    
    (379
    )Income tax expense (benefit)
    
    
    
    
    
    
    93
    
    
    
    
    
    
    
    (93
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72
    )Loss from discontinued operations
    
    
    
    
    
    
    266
    
    
    
    
    
    
    
    (214
    )Net income
    
    $
    23,128
    
    
    $
    26,022
    
    
    $
    50,339
    
    
    $
    592
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ALPHA
NR HOLDING, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
 (In thousands)
 Six months endedJune 30,2006
    
    
    2005Operating activities:Net income
    
    $
    50,339
    
    
    
    592Adjustments to reconcile net income
to net cash provided by (used in) operating
activities:Depreciation, depletion and amortization
    
    
    67,841
    
    
    
    29,528Amortization of debt issuance costs
    
    
    1,132
    
    
    
    875Accretion of asset retirement obligation
    
    
    2,246
    
    
    
    1,631Virginia tax credit
    
    
    
    
    
    
    (343
    )Stock-based compensation  non-cash
    
    
    9,945
    
    
    
    39,788Amortization of deferred gains on sales
of property interests
    
    
    (488
    )
    
    
    (395
    )Amortization of deferred gain on railroad incentives
    
    
    (154
    )
    
    
    (340
    )(Gain)/loss on sale of fixed assets, net
    
    
    (134
    )
    
    
    113Gain on sale of discontinued operations
    
    
    
    
    
    
    (704
    )Loss on settlement of asset retirement obligation
    
    
    322
    
    
    
    490Provision for non-recoupable advance royalties
    
    
    469
    
    
    
    Minority interest
    
    
    
    
    
    
    2,846Deferred income taxes
    
    
    5,274
    
    
    
    1,588Other
    
    
    116
    
    
    
    44Changes in operating assets and liabilities:Trade accounts receivable
    
    
    (12,198
    )
    
    
    (55,382
    )Notes and other receivables
    
    
    4,558
    
    
    
    (477
    )Inventories
    
    
    4,349
    
    
    
    (37,953
    )Due from affiliate
    
    
    (1,304
    )
    
    
    (3,085
    )Prepaid expenses and other current
assets
    
    
    (2,716
    )
    
    
    10,966Other assets
    
    
    (1,934
    )
    
    
    (4,065
    )Trade accounts payable
    
    
    (20,891
    )
    
    
    15,947Accrued expenses and other current
liabilities
    
    
    (12,655
    )
    
    
    64Workers compensation benefits
    
    
    616
    
    
    
    (266
    )Postretirement medical benefits
    
    
    4,413
    
    
    
    4,503Asset retirement obligation
    
    
    (928
    )
    
    
    (1,772
    )Other liabilities
    
    
    773
    
    
    
    605Net cash provided by
operating activities
    
    
    98,991
    
    
    
    4,798
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ALPHA NR HOLDING, INC. AND SUBSIDIARIES
 Condensed Consolidated Statements of Cash Flows (Unaudited)  (Continued)
 (In thousands)
 Six months endedJune 30,2006
    
    
    2005Investing activities:Capital expenditures
    
    $
    (84,000
    )
    
    
    (66,521
    )Proceeds from disposition of property, plant,
and equipment
    
    
    264
    
    
    
    5,148Purchase of equity investment
    
    
    (107
    )
    
    
    (654
    )Purchase of acquired companies
    
    
    (28,273
    )
    
    
    (389
    )Collections on note receivable from coal supplier
    
    
    3,000
    
    
    
    2,612Payment of additional consideration on prior acquisition
    
    
    
    
    
    
    (5,000
    )Net cash used in investing activities
    
    
    (109,116
    )
    
    
    (64,804
    )Financing activities:Repayments of notes payable
    
    
    (50,232
    )
    
    
    (8,230
    )Proceeds from issuance of long-term debt
    
    
    200,000
    
    
    
    70,000Repayments on long-term debt
    
    
    (171,806
    )
    
    
    (944
    )Increase (decrease) in bank overdraft
    
    
    (2,659
    )
    
    
    8,405Debt issuance costs
    
    
    
    
    
    
    (422
    )Distributions to prior members of
ANR Holdings, LLC
prior to Internal Restructuring
    
    
    
    
    
    
    (7,732
    )Reimbursement of deferred commom stock offering costs
    
    
    
    
    
    
    1,655Net cash provided by (used in)
financing activities
    
    
    (24,697
    )
    
    
    62,732Net increase (decrease) in cash
and cash equivalents
    
    
    (34,822
    )
    
    
    2,726Cash and cash equivalents at beginning of period
    
    
    39,622
    
    
    
    7,391Cash and cash equivalents at end of period
    
    $
    4,800
    
    
    
    10,117
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ALPHA
NR HOLDING, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Financial Statements (Unaudited)
 June 30, 2006
(In thousands, except percentage and share data)
 (1) Business and Basis of Presentation
 Organization and Business
   Basis of Presentation
  Accounting for Derivative Instruments and
Hedging Activities
  7




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(2) Inventories
  June 30,
    
    
    December 31,2006
    
    
    2005Raw coal
    
    $
    5,024
    
    
    $
    6,401Saleable coal
    
    
    64,063
    
    
    
    65,318Materials and supplies
    
    
    15,772
    
    
    
    13,166Total inventories
    
    $
    84,859
    
    
    $
    84,885
 (3) Long-Term Debt
  June 30,
    
    
    December 31,2006
    
    
    2005Term loan
    
    $
    248,750
    
    
    $
    250,00010% Senior notes due 2012
    
    
    175,000
    
    
    
    175,000Revolving credit facility
    
    
    30,000
    
    
    
    0Variable rate term notes
    
    
    
    
    
    
    293Capital lease obligations
    
    
    1,843
    
    
    
    1,496Total long-term debt
    
    
    455,593
    
    
    
    426,789Less current portion
    
    
    3,224
    
    
    
    3,242Long-term debt, net of current
portion
    
    $
    452,369
    
    
    $
    423,547
 8




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##### Table of Contents



(4) Asset Retirement Obligation
  Total asset retirement obligation at December 31, 2005
    
    $
    53,487Accretion for the six months ended June 30, 2006
    
    
    2,247Sites added during the six months ended June 30, 2006
    
    
    8,323Expenditures for the six months ended June 30, 2006
    
    
    (1,893
    )Change in estimates
    
    
    116Settlement of asset retirement obligation
    
    
    322Total asset retirement obligation at June 30, 2006
    
    $
    62,602
 (5) Stock-Based Compensation Awards
  9




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Three months
    
    Six monthsended
    
    endedJune 30,
    
    June 30,2005
    
    2005Net income, as adjusted
    
    $
    26,022
    
    
    $
    503Add: shared-based employee compensation cost, included in net loss,
as adjusted, net of income taxes and minority interest
    
    
    2,508
    
    
    
    38,029Deduct: share-based employee compensation cost determined
under the fair value based method,
net of income taxes and minority interest
    
    
    (2,709
    )
    
    
    (38,375
    )Pro forma net income, adjusted for effect of fair value of
stock options
    
    $
    25,821
    
    
    $
    157
 10




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Expected life (years)
    
    
    4.0Expected volatility
    
    
    38.0
    %Risk-free interest rate
    
    
    3.38
    %Expected annual dividend
    
    $
    0.10
      Disclosure of Share-Based Payment Arrangements
    11




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##### Table of Contents



Weighted-Weighted-
    
    
    AverageAverage
    
    
    RemainingNumber of
    
    
    Exercise
    
    
    ContractShares
    
    
    Price
    
    
    Life (Years)Outstanding at December 31, 2005
    
    
    1,253,593
    
    
    $
    16.71Granted
    
    
    
    
    
    
    Exercised
    
    
    (60,195
    )
    
    $
    15.86Forfeited/Cancelled
    
    
    (36,000
    )
    
    $
    19.00Outstanding at June 30, 2006
    
    
    1,157,398
    
    
    $
    16.68
    
    
    
    8.54Exercisable at June 30, 2006
    
    
    174,041
    
    
    $
    17.24
    
    
    
    8.55
  12




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Weighted-AverageNumber of
    
    
    Grant DateShares
    
    
    Fair ValueNonvested restricted shares outstanding at December 31, 2005
    
    
    684,465
    
    
    $
    19.15Granted
    
    
    519,242
    
    
    
    21.26Vested
    
    
    (358,848
    )
    
    
    19.31Forfeited
    
    
    Nonvested restricted shares outstanding at June 30, 2006
    
    
    844,859
    
    
    $
    20.38
   (6) Post Retirement Benefits Other Than Pensions
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    859
    
    
    $
    1,000
    
    
    $
    1,920
    
    
    $
    1,944Interest cost
    
    
    766
    
    
    
    717
    
    
    
    1,413
    
    
    
    1,255Amortization of net actuarial (gain) or loss
    
    
    85
    
    
    
    15
    
    
    
    93
    
    
    
    9Amortization of prior service cost
    
    
    489
    
    
    
    608
    
    
    
    1,136
    
    
    
    1,306Net periodic benefit cost
    
    $
    2,199
    
    
    $
    2,340
    
    
    $
    4,562
    
    
    $
    4,514
  13




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(7) Related Party Transactions
  June 30,
    
    
    December 31,2006
    
    
    2005AMCI
    
    $
    63
    
    
    $
    10,390Robindale Energy & Subsidiary
    
    
    
    
    
    
    63Total
    
    $
    63
    
    
    $
    10,453
   June 30,
    
    
    December 31,2006
    
    
    2005AMCI
    
    $
    7,535
    
    
    $
    13,735First Reserve Fund IX, L.P.
    
    
    
    
    
    
    4,500Foundation Energy
    
    
    
    
    
    
    2,605Robindale Energy & Subsidiary
    
    
    10
    
    
    
    51Total
    
    $
    7,545
    
    
    $
    20,891
  14




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##### Table of Contents



(8) Segment Information
   CorporateCoal
    
    All
    
    andOperations
    
    Other
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    488,975
    
    
    $
    15,339
    
    
    $
    (8,633
    )
    
    $
    495,681Depreciation, depletion, and amortization
    
    
    32,072
    
    
    
    1,435
    
    
    
    700
    
    
    
    34,207EBITDA, as adjusted
    
    
    92,998
    
    
    
    2,209
    
    
    
    (18,581
    )
    
    
    76,626Capital expenditures
    
    
    32,430
    
    
    
    60
    
    
    
    71
    
    
    
    32,561Total assets
    
    
    1,098,569
    
    
    
    90,418
    
    
    
    (130,777
    )
    
    
    1,058,210
 15




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Coal
    
    All
    
    andOperations
    
    Other
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    961,514
    
    
    $
    34,825
    
    
    $
    (18,348
    )
    
    $
    977,991Depreciation, depletion, and amortization
    
    
    63,132
    
    
    
    3,414
    
    
    
    1,295
    
    
    
    67,841EBITDA
    
    
    187,711
    
    
    
    4,894
    
    
    
    (35,424
    )
    
    
    157,181Capital expenditures
    
    
    76,872
    
    
    
    6,025
    
    
    
    1,103
    
    
    
    84,000Total assets
    
    
    1,098,569
    
    
    
    90,418
    
    
    
    (130,777
    )
    
    
    1,058,210
  CorporateCoal
    
    All
    
    andOperations
    
    Other
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    414,660
    
    
    $
    10,517
    
    
    $
    (7,541
    )
    
    $
    417,636Depreciation, depletion, and amortization
    
    
    14,344
    
    
    
    369
    
    
    
    362
    
    
    
    15,075EBITDA
    
    
    70,502
    
    
    
    1,112
    
    
    
    (15,370
    )
    
    
    56,244Capital expenditures
    
    
    35,924
    
    
    
    40
    
    
    
    235
    
    
    
    36,199Total assets
    
    
    505,097
    
    
    
    72,329
    
    
    
    33,186
    
    
    
    610,612
  CorporateCoal
    
    All
    
    andOperations
    
    Other
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    722,116
    
    
    $
    20,229
    
    
    $
    (12,554
    )
    
    $
    729,791Depreciation, depletion, and amortization
    
    
    27,494
    
    
    
    788
    
    
    
    963
    
    
    
    29,245EBITDA, as adjusted
    
    
    116,377
    
    
    
    2,341
    
    
    
    (62,161
    )
    
    
    56,557Capital expenditures
    
    
    65,458
    
    
    
    322
    
    
    
    431
    
    
    
    66,211Total assets
    
    
    505,097
    
    
    
    72,329
    
    
    
    33,186
    
    
    
    610,612
 16




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Total segment EBITDA, as adjusted, from
continuing operations
    
    $
    76,626
    
    
    $
    56,244
    
    
    $
    157,181
    
    
    $
    56,557Interest expense
    
    
    (10,786
    )
    
    
    (6,647
    )
    
    
    (21,063
    )
    
    
    (12,474
    )Interest income
    
    
    171
    
    
    
    191
    
    
    
    358
    
    
    
    485Income tax expense from continuing operations
    
    
    (8,676
    )
    
    
    (8,957
    )
    
    
    (18,296
    )
    
    
    (11,599
    )Depreciation, depletion and amortization from
continuing operations
    
    
    (34,207
    )
    
    
    (15,075
    )
    
    
    (67,841
    )
    
    
    (29,245
    )Minority interest in income from continuing
operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,918
    )Income from continuing operations
    
    $
    23,128
    
    
    $
    25,756
    
    
    $
    50,339
    
    
    $
    806
  (9) Commitments and Contingencies
 (a) Guarantees and Financial Instruments with Off-balance Sheet Risk
  (b) Litigation
  17




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##### Table of Contents



(10) Discontinued Operations
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2005Total revenues
    
    $
    906
    
    
    $
    4,523Total costs and expenses
    
    
    1,251
    
    
    
    5,607Gain on sale of discontinued operations
    
    
    704
    
    
    
    704Income (loss) from operations
    
    
    359
    
    
    
    (380
    )Miscellaneous income
    
    
    
    
    
    
    1Income tax expense (benefit) from discontinued
operations
    
    
    93
    
    
    
    (93
    )Minority interest in income (loss) from
discontinued operations
    
    
    
    
    
    
    (72
    )Income (loss) from discontinued operations
    
    $
    266
    
    
    $
    (214
    )
 (11) Income Taxes
    18




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##### Table of Contents



Three months
    
    
    Six monthsended
    
    
    ended2005
    
    
    2005Continuing operations
    
    $
    8,957
    
    
    $
    11,599Discontinued operations
    
    
    93
    
    
    
    (93
    )$
    9,050
    
    
    $
    11,506
 19




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Federal statutory income tax expense
    
    $
    11,131
    
    
    $
    12,150
    
    
    $
    24,023
    
    
    $
    5,362Increases (reductions) in taxes due to:Percentage depletion allowance
    
    
    (5,077
    )
    
    
    (4,895
    )
    
    
    (9,941
    )
    
    
    (6,563
    )Extraterritorial income exclusion
    
    
    (469
    )
    
    
    (521
    )
    
    
    (882
    )
    
    
    (705
    )Deduction for domestic production activities
    
    
    (101
    )
    
    
    (202
    )
    
    
    (266
    )
    
    
    (279
    )State taxes, net of federal tax impact
    
    
    806
    
    
    
    757
    
    
    
    1,771
    
    
    
    1,056Stock-based compensation
    
    
    1,199
    
    
    
    1,300
    
    
    
    2,229
    
    
    
    13,354Change in valuation allowance
    
    
    986
    
    
    
    268
    
    
    
    989
    
    
    
    397Taxes not provided for minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,001
    )Taxes not provided for pass-through entity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (133
    )Other, net
    
    
    201
    
    
    
    100
    
    
    
    373
    
    
    
    111Actual income tax expense
    
    $
    8,676
    
    
    $
    8,957
    
    
    $
    18,296
    
    
    $
    11,599
   (12) Progress Acquisition
  (13) Accumulated Other Comprehensive Income
  20




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##### Table of Contents



(14) New Accounting Pronouncements
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Cautionary Note Regarding Forward Looking Statements
   
    
    market demand for coal, electricity and steel;
    
    future economic or capital market conditions;
    
    weather conditions or catastrophic weather-related damage;
    
    our production capabilities;
    
    the consummation of financing, acquisition or disposition transactions and the effect thereof on our business;
    
    our ability to successfully integrate the operations we acquired in the Nicewonder and
Progress acquisitions with our existing operations, and to successfully operate the highway
construction business we acquired in the Nicewonder acquisition, as well as our ability to
successfully integrate operations we may acquire in the future;
    
    our plans and objectives for future operations and expansion or consolidation;
    
    our relationships with, and other conditions affecting, our customers;
    
    timing of changes in customer coal inventories;
    
    long-term coal supply arrangements;
 21




---



##### Table of Contents




    
    inherent risks of coal mining beyond our control;
    
    environmental laws, including those directly affecting our coal mining and production,
and those affecting our customers coal usage;
    
    competition in coal markets;
    
    railroad, barge, truck and other transportation performance and costs;
    
    availability of mining and processing equipment and parts;
    
    our assumptions concerning economically recoverable coal reserve estimates;
    
    availability of skilled employees and other employee workforce factors;
    
    regulatory and court decisions;
    
    future legislation and changes in regulations, governmental policies or taxes;
    
    changes in postretirement benefit obligations;
    
    our liquidity, results of operations and financial condition; and
    
    other factors, including the other factors discussed in Overview  Coal Pricing Trends
and Uncertainties and Outlook below, and the factors discussed in Part I, Item 1A Risk
Factors section of our annual report on Form 10-K for the year ended December 31, 2005.
  Overview
   22




---



##### Table of Contents



Accounting for Derivative Instruments and
Hedging Activities
     Coal Pricing Trends and Uncertainties.
  23




---



##### Table of Contents



Reconciliation of Non-GAAP Measures
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Net income
    
    $
    23,128
    
    
    $
    26,022
    
    
    $
    50,339
    
    
    $
    592Interest expense
    
    
    10,786
    
    
    
    6,647
    
    
    
    21,063
    
    
    
    12,474Interest income
    
    
    (171
    )
    
    
    (191
    )
    
    
    (358
    )
    
    
    (485
    )Income tax expense
    
    
    8,676
    
    
    
    9,050
    
    
    
    18,296
    
    
    
    11,506Depreciation, depletion and amortization
    
    
    34,207
    
    
    
    15,048
    
    
    
    67,841
    
    
    
    29,528EBITDA (1)
    
    
    76,626
    
    
    
    56,576
    
    
    
    157,181
    
    
    
    53,615Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,846EBITDA, as adjusted (1)
    
    $
    76,626
    
    
    $
    56,576
    
    
    $
    157,181
    
    
    $
    56,461
 
 (1)
    
    EBITDA is defined as net income 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 calculation may not be comparable to
similarly titled measures of other companies. In addition, the amounts presented for EBITDA and
EBITDA, as adjusted, differ from the amounts calculated under the definition of EBITDA used in our
debt covenants. The definition of EBITDA used in our debt covenants is further adjusted for certain
cash and non-cash charges and is used to determine compliance with financial covenants and our
ability to engage in certain activities such as incurring debt and making certain payments.
Adjusted EBITDA as it is used and defined in our debt covenants is described and reconciled to net
income (loss) in  Analysis of Material Debt Covenants below. 24




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##### Table of Contents



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




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##### Table of Contents



Other Revenues.
 Costs and Expenses
 Three months ended
    
    
    IncreaseJune 30.
    
    
    (Decrease)2006
    
    
    2005
    
    
    $
    
    
    %(in thousands, except per ton data)Cost of coal sales (exclusive of items shown separately below)
    
    $
    345,505
    
    
    $
    293,493
    
    
    $
    52,012
    
    
    
    18
    %Freight and handling costs
    
    
    50,935
    
    
    
    48,239
    
    
    
    2,696
    
    
    
    6
    %Cost of other revenues
    
    
    5,445
    
    
    
    4,319
    
    
    
    1,126
    
    
    
    26
    %Depreciation, depletion and amortization
    
    
    34,207
    
    
    
    15,075
    
    
    
    19,132
    
    
    
    127
    %Selling, general and administrative expenses (exclusive of
depreciation and amortization shown separately above and including
stock-based compensation expense in the amount of $5,311 in 2006
and $3,381 in 2005)
    
    
    18,583
    
    
    
    15,375
    
    
    
    3,208
    
    
    
    21
    %Total costs and expenses
    
    $
    454,675
    
    
    $
    376,501
    
    
    $
    78,174
    
    
    
    21
    %Cost of coal sales per ton:Company mines
    
    $
    42.63
    
    
    $
    36.65
    
    
    $
    5.98
    
    
    
    16
    %Contract mines (including purchased and processed)
    
    
    53.40
    
    
    
    53.12
    
    
    
    0.28
    
    
    
    1
    %Total produced and processed
    
    
    44.39
    
    
    
    40.40
    
    
    
    3.99
    
    
    
    10
    %Purchased and sold without processing
    
    
    57.82
    
    
    
    56.46
    
    
    
    1.36
    
    
    
    2
    %Cost of coal sales per ton
    
    $
    46.32
    
    
    $
    43.87
    
    
    $
    2.45
    
    
    
    6
    %
 Cost of Coal Sales:
 Freight and Handling Costs.
 Cost of Other Revenues
 Depreciation, Depletion and Amortization.
 Selling, General and Administrative Expenses.
 26




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##### Table of Contents



Interest Expense.
 Interest Income.
 Income Tax Expense:
 Six months Ended June 30, 2006 Compared to the Six months Ended June 30, 2005
 Summary
   27




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##### Table of Contents



Revenues
 Six months Ended
    
    
    IncreaseJune 30,
    
    
    (Decrease)2006
    
    
    2005
    
    
    $ or Tons
    
    
    %(in thousands, except per ton data)Coal revenues
    
    $
    860,903
    
    
    $
    637,204
    
    
    $
    223,699
    
    
    
    35
    %Freight and handling revenues
    
    
    97,327
    
    
    
    79,991
    
    
    
    17,336
    
    
    
    22
    %Other revenues
    
    
    19,761
    
    
    
    12,596
    
    
    
    7,165
    
    
    
    57
    %Total revenues
    
    $
    977,991
    
    
    $
    729,791
    
    
    $
    248,200
    
    
    
    34
    %Tons Sold:Steam
    
    
    9,247
    
    
    
    7,111
    
    
    
    2,136
    
    
    
    30
    %Metallurgical
    
    
    5,336
    
    
    
    5,112
    
    
    
    224
    
    
    
    4
    %Total
    
    
    14,583
    
    
    
    12,223
    
    
    
    2,360
    
    
    
    19
    %Coal sales realization per ton:Steam
    
    $
    49.62
    
    
    $
    39.01
    
    
    $
    10.61
    
    
    
    27
    %Metallurgical
    
    
    75.36
    
    
    
    70.37
    
    
    
    4.99
    
    
    
    7
    %Total
    
    $
    59.04
    
    
    $
    52.13
    
    
    $
    6.91
    
    
    
    13
    %
 Coal Revenues.
 Freight and Handling Revenues.
 Other Revenues.
 28




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##### Table of Contents



Costs and Expenses
 Six months ended
    
    
    IncreaseJune 30.
    
    
    (Decrease)2006
    
    
    2005
    
    
    $
    
    
    %(in thousands, except per ton data)Cost of coal sales (exclusive of items shown separately below)
    
    $
    676,391
    
    
    $
    519,777
    
    
    $
    156,614
    
    
    
    30
    %Freight and handling costs
    
    
    97,327
    
    
    
    79,991
    
    
    
    17,336
    
    
    
    22
    %Cost of other revenues
    
    
    13,396
    
    
    
    10,384
    
    
    
    3,012
    
    
    
    29
    %Depreciation, depletion and amortization
    
    
    67,841
    
    
    
    29,245
    
    
    
    38,596
    
    
    
    132
    %Selling, general and administrative expenses (exclusive of
depreciation and amortization shown separately above and including
stock-based compensation
expense in the amount of $9,144 in 2006 and $39,788 in 2005)
    
    
    35,392
    
    
    
    63,073
    
    
    
    (27,681
    )
    
    
    (44
    )%Total costs and expenses
    
    $
    890,347
    
    
    $
    702,470
    
    
    $
    187,877
    
    
    
    27
    %Cost of coal sales per ton:Company mines
    
    $
    41.57
    
    
    $
    35.65
    
    
    $
    5.92
    
    
    
    17
    %Contract mines (including purchased and processed)
    
    
    53.18
    
    
    
    50.14
    
    
    
    3.04
    
    
    
    6
    %Total produced and processed
    
    
    43.48
    
    
    
    38.78
    
    
    
    4.70
    
    
    
    12
    %Purchased and sold without processing
    
    
    62.27
    
    
    
    58.09
    
    
    
    4.18
    
    
    
    7
    %Cost of coal sales per ton
    
    $
    46.38
    
    
    $
    42.52
    
    
    $
    3.86
    
    
    
    9
    %
 Cost of Coal Sales:
 Freight and Handling Costs.
 Cost of Other Revenues
 Depreciation, Depletion and Amortization.
 Selling, General and Administrative Expenses.
 Interest Expense.
 Interest Income.
 29




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##### Table of Contents



Income Tax Expense:
    Liquidity and Capital Resources
    Cash Flows
  30




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##### Table of Contents



Credit Facility and Long-term Debt
  June 30,200610% Senior notes due 2012
    
    $
    175,000Term Loan
    
    
    248,750Revolving credit facility
    
    
    30,000Capital
lease obligations
    
    
    1,843Total long-term debt
    
    
    455,593Less current portion
    
    
    3,224Long-term debt, net of current portion
    
    $
    452,369
   Analysis of Material Debt Covenants
   
    
    Alpha NR Holding Inc. must maintain a leverage ratio, defined as the ratio of
consolidated adjusted debt (consolidated debt less unrestricted cash and cash equivalents)
to Adjusted EBITDA (as defined in the new credit agreement), of not more than
 31




---



##### Table of Contents



4.00 at December 31, 2005, March 31, June 30, September 30 and December 31, 2006, 3.75 at
March 31, June 30, September 30 and December 31, 2007 and 3.50 at March 31, 2008 and each
quarter end thereafter with Adjusted EBITDA being computed using the most recent four
quarters; and
    
    Alpha NR Holding Inc. must maintain an interest coverage ratio, defined as the ratio of
Adjusted EBITDA, to cash interest expense, of 2.50 or greater on the last day of any fiscal
quarter.
   Three Months
    
    
    Three Months
    
    
    Three Months
    
    
    Three Months
    
    
    Twelve MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    December 31,
    
    
    March 31,
    
    
    June 30,
    
    
    June 30,2005
    
    
    2005
    
    
    2006
    
    
    2006
    
    
    2006(in thousands)Net income
    
    $
    8,210
    
    
    $
    12,413
    
    
    $
    27,212
    
    
    $
    23,128
    
    
    $
    70,963Interest expense, net of interest income
    
    
    6,439
    
    
    
    10,155
    
    
    
    10,089
    
    
    
    10,615
    
    
    
    37,298Income tax expense
    
    
    3,542
    
    
    
    3,812
    
    
    
    9,620
    
    
    
    8,676
    
    
    
    25,650Depreciation, depletion and
amortization expenses
    
    
    16,277
    
    
    
    27,600
    
    
    
    33,634
    
    
    
    34,207
    
    
    
    111,718EBITDA
    
    
    34,468
    
    
    
    53,980
    
    
    
    80,555
    
    
    
    76,626
    
    
    
    245,629Stock-based compensation charge(1)
    
    
    3,381
    
    
    
    3,350
    
    
    
    3,833
    
    
    
    6,112
    
    
    
    16,676Other EBITDA Charges (1)
    
    
    520
    
    
    
    930
    
    
    
    1,213
    
    
    
    1,451
    
    
    
    4,114Callaway EBITDA before integration (1)
    
    
    18,581
    
    
    
    4,832
    
    
    
    
    
    
    
    
    
    
    
    23,413Adjusted EBITDA
    
    $
    56,950
    
    
    $
    63,092
    
    
    $
    85,601
    
    
    $
    84,189
    
    
    $
    289,832Leverage ratio(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.64Interest coverage ratio(3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.16
 
 (1)
    
    We are required to adjust EBITDA under our credit facility for the stock-based
compensation charge, the EBITDA related to our Callaway operations before integration into
Alphas system, and other minor EBITDA charges such as secondary offering costs, accretion
expense, and amortization of deferred gains.(2)
    
    Leverage ratio is defined in our credit facility as total debt divided by Adjusted EBITDA.(3)
    
    Interest coverage ratio is defined in our credit facility as Adjusted EBITDA divided by cash
interest expense. Other
  32




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##### Table of Contents



Outlook
      Critical Accounting Estimates and Assumptions
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures.
 33




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##### Table of Contents



Changes in internal control over financial reporting.
 Accounting for
Derivative Instruments and Hedging Activities
   34




---



##### Table of Contents



PART II
 
 Item 1A.
Risk Factors
   
 Item 6. Exhibits
 See the Exhibit Index following the signature page of this quarterly report.
 35




---



##### Table of Contents



SIGNATURE
  ALPHA NR HOLDING, INC.By: /s/ David C. StuebeName:
    David C. StuebeTitle:
    Vice President and Chief Financial Officer  36




---



##### Table of Contents



10-Q EXHIBIT INDEX
 Exhibit No
    
    Description of Exhibit3.1
    
    Restated Certificate of Incorporation of Alpha NR Holding, Inc. (Incorporated by reference to Exhibit
3.11 to the Registration Statement on Form S-4 of Alpha NR Holding, Inc. (File No. 333-124319-17) filed
on April 26, 2005).3.2
    
    Bylaws of Alpha NR Holding, Inc. (Incorporated by reference to Exhibit 3.12 to the Registration Statement
on Form S-4 of Alpha NR Holding, Inc. (File No. 333-124319-17) filed on April 26, 2005).4.1
    
    Fifth Supplemental Indenture dated
as of May 1, 2006, among Alpha Natural Resources, LLC, Alpha Natural
Resources Capital Corp., the Guarantors party thereto, the Guaranteeing
Subsidiary party thereto and Wells Fargo Bank, N.A. as Trustee (Incorporated by reference to Exhibit 4.1 to the Quarterly Report on Form
10-Q of Alpha Natural Resources, Inc. (File No. 1-32423) filed on
August 18, 2006).10.1
    
    Form of Director Deferred Compensation Agreement for Alpha Natural Resources, Inc. 2005 Long-Term
Incentive Plan (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Alpha
Natural Resources, Inc. (File No. 1-32423) filed on August 3, 2006).31(a)*
    
    Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant
to § 302 of the Sarbanes-Oxley Act of 200231(b)*
    
    Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant
to § 302 of the Sarbanes-Oxley Act of 200232(a)*
    
    Certification Pursuant to 18 U.S.C. § 1350, As Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 200232(b)*
    
    Certification Pursuant to 18 U.S.C. § 1350, As Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Filed herewith. 37