**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe Quarterly Period Ended September 30, 2005**

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934

**Forthe Transition PeriodFrom                 to                 **

**CommissionFile Number 333-120979-49**

**Foundation Coal Corporation**

(Exact Name of Registrantas Specified in Its Charter)

| **Delaware**                                                             |   | **26-0085077**                        |
|--------------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization)         |   | (I.R.S. Employer  Identification No.) |
| **999 Corporate Boulevard, Suite 300  Linthicum Heights, Maryland** |   | **21090**                             |
| (Address of  Principal Executive Offices)                                |   | (Zip Code)                            |

 

(Registrant’s telephonenumber, including area code) **(410) 689-7500**

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No o

Indicate by check markwhether the Registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act). Yes o  No x

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

TheRegistrant’s common equity is not publicly traded. The common stock of theRegistrant’s ultimate parent, Foundation Coal Holdings, Inc., begantrading on the New York Stock Exchange on December 9, 2004. There were44,630,047 shares of Foundation Coal Holdings, Inc. common stockoutstanding on November 7, 2005. There were 100 shares of Foundation CoalCorporation common stock outstanding on November 7, 2005, all held by itsparent FC2 Corp. which are not publicly traded.

 

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**TABLE OF CONTENTS**

|                                            | ** ** | ** **                                                                                                                                                                                                                                                           | ** ** | **Page** |
|--------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I—FINANCIAL INFORMATION** |       |                                                                                                                                                                                                                                                                 |       |
| ITEM 1.                                    |       | FINANCIAL  STATEMENTS                                                                                                                                                                                                                                                |       | 3        |   |
|                                       |       | Statements  of Consolidated Operations and Comprehensive Income (Loss) for the Three  Months Ended September 30, 2005, For The Period From February 9,  2004 (date of formation) Through September 30, 2004 and One Month Ended  July 29, 2004   |       | 3        |   |
|                                       |       | Statements  of Consolidated Operations and Comprehensive Income (Loss) for the Nine  Months Ended September 30, 2005, For The Period From February 9,  2004 (date of formation) Through September 30, 2004 and Seven Months  Ended July 29, 2004 |       | 4        |   |
|                                       |       | Consolidated  Balance Sheets as of September 30, 2005 and December 31, 2004                                                                                                                                                                                |       | 5        |   |
|                                       |       | Statements  of Consolidated Cash Flows for the Nine Months Ended September 30, 2005,  For The Period From February 9, 2004 (date of formation) Through  September 30, 2004 and Seven Months Ended July 29, 2004                                  |       | 6        |   |
|                                       |       | Notes to Consolidated Financial  Statements                                                                                                                                                                                                                          |       | 7        |   |
| ITEM 2.                                    |       | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF  OPERATIONS                                                                                                                                                            |       | 31       |   |
| ITEM 3.                                    |       | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK                                                                                                                                                                                                         |       | 58       |   |
| ITEM 4.                                    |       | CONTROLS  AND PROCEDURES                                                                                                                                                                                                                                             |       | 59       |   |
| **PART II—OTHER  INFORMATION**   |       |                                                                                                                                                                                                                                                                 |       |
| ITEM 1.                                    |       | LEGAL  PROCEEDINGS                                                                                                                                                                                                                                                   |       | 60       |   |
| ITEM 2.                                    |       | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF  PROCEEDS                                                                                                                                                                                                        |       | 60       |   |
| ITEM 3.                                    |       | DEFAULTS  UPON SENIOR SECURITIES                                                                                                                                                                                                                                     |       | 60       |   |
| ITEM 4.                                    |       | SUBMISSION  OF MATTERS OF VOTE OF SECURITY HOLDERS                                                                                                                                                                                                                   |       | 60       |   |
| ITEM 5.                                    |       | OTHER  INFORMATION                                                                                                                                                                                                                                                   |       | 60       |   |
| ITEM 6.                                    |       | EXHIBITS                                                                                                                                                                                                                                                             |       | 60       |   |

 

2

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**Part I—FINANCIAL INFORMATION**

Unless the contextotherwise indicates, as used in this Form 10-Q the terms “we”, “our”,“us” and similar terms refer to Foundation Coal Corporation and itsconsolidated subsidiaries.

**ITEM 1.   FINANCIAL STATEMENTS**

**Foundation Coal Corporation and Subsidiaries(An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.)Statements ofConsolidated Operations and Comprehensive Income (Loss) (Dollars in thousands)**

| ** **                                                                                                                   | ** ** | **Successor**          | ** ** | **Predecessor**                   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                   | ** ** | ** **             | ** ** | **For the Period**      | ** ** | ** ** | ** ** |
| ** **                                                                                                                   | ** ** | ** **             | ** ** | **From**                          | ** ** | ** ** | ** ** |
| ** **                                                                                                                   | ** ** | ** **             | ** ** | **February 9, 2004**    | ** ** | ** ** | ** ** |
| ** **                                                                                                                   | ** ** | **Three Months**  | ** ** | **(date of formation)** | ** ** | **One Month** | ** ** |
| ** **                                                                                                                   | ** ** | **Ended**              | ** ** | **Through**                       | ** ** | **Ended** | ** ** |
| ** **                                                                                                                   | ** ** | **September 30,** | ** ** | **September 30,**            | ** ** | **July 29,** | ** ** |
| ** **                                                                                                                   | ** ** | **2005**               | ** ** | **2004**                          | ** ** | **2004** | ** ** |
| ** **                                                                                                                   | ** ** | **(Unaudited)**        | ** ** | **(Unaudited)**                   | ** ** | ** ** | ** ** |
| Revenues:                                                                                                                    |       |                   |       |                              |       |   |   |   |   |   |   |   |   |
| Coal sales                                                                                                                   |       |                   | $          | 333,469                           |       |   |   | $ | 180,427 |   |   |   | $ | 70,849 |   |   |
| Other revenue                                                                                                                |       |                   | 7,841      |                              |       |   | 2,793 |   |   |   | 1,724 |   |   |
| Total revenues                                                                                                               |       |                   | 341,310    |                              |       |   | 183,220 |   |   |   | 72,573 |   |   |
| Costs and  expenses:                                                                                                         |       |                   |       |                              |       |   |   |   |   |   |   |   |   |
| Cost of coal sales (excludes depreciation, depletion  and amortization)                                                 |       |                   | 241,238    |                              |       |   | 147,620 |   |   |   | 70,989 |   |   |
| Selling, general and administrative expense  (excludes depreciation, depletion and amortization)                             |       |                   | 13,244     |                              |       |   | 6,693 |   |   |   | 6,521 |   |   |
| Accretion on asset retirement obligations                                                                                    |       |                   | 2,119      |                              |       |   | 1,343 |   |   |   | 574 |   |   |
| Depreciation, depletion and amortization                                                                                     |       |                   | 53,131     |                              |       |   | 26,197 |   |   |   | 8,750 |   |   |
| Amortization of coal supply agreements                                                                                       |       |                   | (20,467    | )                                 |       |   | (22,453 | ) |   |   | 1,042 |   |   |
| Income (loss)  from operations                                                                                               |       |                   | 52,045     |                              |       |   | 23,820 |   |   |   | (15,303 | ) |   |
| Other income (expense):                                                                                                      |       |                   |       |                              |       |   |   |   |   |   |   |   |   |
| Interest expense                                                                                                             |       |                   | (15,092    | )                                 |       |   | (8,533 | ) |   |   | (1,746 | ) |   |
| Contract settlement                                                                                                          |       |                   | —     |                              |       |   | — |   |   |   | (26,015 | ) |   |
| Mark-to-market gain on interest rate  swaps                                                                                  |       |                   | —     |                              |       |   | (90 | ) |   |   | — |   |   |
| Loss on early debt extinguishment                                                                                            |       |                   | —     |                              |       |   | — |   |   |   | (21,724 | ) |   |
| Interest income                                                                                                              |       |                   | 235        |                              |       |   | 157 |   |   |   | 72 |   |   |
| Income (loss)  before income tax (expense) benefit                                                                           |       |                   | 37,188     |                              |       |   | 15,354 |   |   |   | (64,716 | ) |   |
| Income tax  (expense) benefit                                                                                                |       |                   | (14,714    | )                                 |       |   | (5,090 | ) |   |   | 22,380 |   |   |
| Net income (loss)                                                                                                            |       |                   | 22,474     |                              |       |   | 10,264 |   |   |   | (42,336 | ) |   |
| Components of  comprehensive income (loss):                                                                                  |       |                   |       |                              |       |   |   |   |   |   |   |   |   |
| Unrealized gain on interest rate swaps, net of tax  expense of $324 for the three months ended September 30, 2005  |       |                   | 457        |                              |       |   | — |   |   |   | — |   |   |
| Comprehensive income  (loss)                                                                                                 |       |                   | $          | 22,931                            |       |   |   | $ | 10,264 |   |   |   | $ | (42,336 | ) |   |

 

The accompanying notes are an integral part of these financial statements.

3

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**Foundation Coal Corporation and Subsidiaries(An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.)Statements ofConsolidated Operations and Comprehensive Income (Loss) (Dollars in thousands)**

| ** **                                                                                                                                                                            | ** ** | **Successor**          | ** ** | **Predecessor**                   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                                                            | ** ** | ** **             | ** ** | **For the Period**      | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                            | ** ** | ** **             | ** ** | **From**                          | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                            | ** ** | ** **             | ** ** | **February 9, 2004**    | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                            | ** ** | **Nine Months**   | ** ** | **(date of formation)** | ** ** | **Seven Month** | ** ** |
| ** **                                                                                                                                                                            | ** ** | **Ended**              | ** ** | **Through**                       | ** ** | **Ended** | ** ** |
| ** **                                                                                                                                                                            | ** ** | **September 30,** | ** ** | **September 30,**            | ** ** | **July 29,** | ** ** |
| ** **                                                                                                                                                                            | ** ** | **2005**               | ** ** | **2004**                          | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                                            | ** ** | **(Unaudited)**        | ** ** | **(Unaudited)**                   | ** ** | ** ** | ** ** |
| Revenues:                                                                                                                                                                             |       |                   |       |                              |       |   |   |   |   |   |   |   |   |
| Coal sales                                                                                                                                                                            |       |                   | $          | 958,027                           |       |   |   | $ | 180,427 |   |   |   | $ | 544,882 |   |   |
| Other revenue                                                                                                                                                                         |       |                   | 18,267     |                              |       |   | 2,793 |   |   |   | 6,153 |   |   |
| Total revenues                                                                                                                                                                        |       |                   | 976,294    |                              |       |   | 183,220 |   |   |   | 551,035 |   |   |
| Costs and  expenses:                                                                                                                                                                  |       |                   |       |                              |       |   |   |   |   |   |   |   |   |
| Cost of coal sales (excludes depreciation, depletion  and amortization)                                                                                                               |       |                   | 697,736    |                              |       |   | 147,620 |   |   |   | 484,457 |   |   |
| Selling, general and administrative expense  (excludes depreciation, depletion and amortization)                                                                                      |       |                   | 33,633     |                              |       |   | 6,693 |   |   |   | 27,375 |   |   |
| Accretion on asset retirement obligations                                                                                                                                             |       |                   | 6,203      |                              |       |   | 1,343 |   |   |   | 4,020 |   |   |
| Depreciation, depletion and amortization                                                                                                                                              |       |                   | 160,625    |                              |       |   | 26,197 |   |   |   | 61,236 |   |   |
| Amortization of coal supply agreements                                                                                                                                                |       |                   | (66,983    | )                                 |       |   | (22,453 | ) |   |   | 8,837 |   |   |
| Income (loss)  from operations                                                                                                                                                        |       |                   | 145,080    |                              |       |   | 23,820 |   |   |   | (34,890 | ) |   |
| Other income (expense):                                                                                                                                                               |       |                   |       |                              |       |   |   |   |   |   |   |   |   |
| Interest expense                                                                                                                                                                      |       |                   | (43,769    | )                                 |       |   | (8,533 | ) |   |   | (18,010 | ) |   |
| Loss on termination of hedge accounting for interest  rate swaps                                                                                                                 |       |                   | —     |                              |       |   | — |   |   |   | (48,854 | ) |   |
| Contract Settlement                                                                                                                                                                   |       |                   | —     |                              |       |   | — |   |   |   | (26,015 | ) |   |
| Mark-to-market gain on interest rate  swaps                                                                                                                                           |       |                   | —     |                              |       |   | (90 | ) |   |   | 5,804 |   |   |
| Loss on early debt extinguishment                                                                                                                                                     |       |                   | —     |                              |       |   | — |   |   |   | (21,724 | ) |   |
| Interest income                                                                                                                                                                       |       |                   | 537        |                              |       |   | 157 |   |   |   | 1,274 |   |   |
| Income (loss) before  income tax (expense) benefit                                                                                                                                    |       |                   | 101,848    |                              |       |   | 15,354 |   |   |   | (142,415 | ) |   |
| Income tax (expense)  benefit                                                                                                                                                         |       |                   | (39,949    | )                                 |       |   | (5,090 | ) |   |   | 51,824 |   |   |
| Income (loss) from  continuing operations                                                                                                                                             |       |                   | 61,899     |                              |       |   | 10,264 |   |   |   | (90,591 | ) |   |
| Income from discontinued  operations, net of income tax expense                                                                                                                  |       |                   | —     |                              |       |   | — |   |   |   | 2,315 |   |   |
| Gain on disposal of  discontinued operations, net of income tax expense                                                                                                          |       |                   | —     |                              |       |   | — |   |   |   | 20,750 |   |   |
| Net income (loss)                                                                                                                                                                     |       |                   | 61,899     |                              |       |   | 10,264 |   |   |   | (67,526 | ) |   |
| Components of comprehensive income:                                                                                                                                                   |       |                   |       |                              |       |   |   |   |   |   |   |   |   |
| Unrealized gain on interest rate swaps, net of tax  expense of $584 for the nine months ended September 30, 2005 and  $16,890 for the seven months ended July 29, 2004 |       |                   | 873        |                              |       |   | — |   |   |   | 28,820 |   |   |
| Comprehensive income  (loss)                                                                                                                                                          |       |                   | $          | 62,772                            |       |   |   | $ | 10,264 |   |   |   | $ | (38,706 | ) |   |

 

The accompanying notes are an integral part of these financial statements.

4

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**Foundation Coal Corporation and Subsidiaries(An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.)Consolidated Balance Sheets(Dollars in thousands, except share data)**

| ** **                                                                                                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                              | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| ** **                                                                                                                              | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                              |       |                   |       |                  |       |   |   |   |   |
| Current assets:                                                                                                                         |       |                   |       |                  |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                              |       |                   | $          | 11,002                |       |   |   | $ | 25,043 |   |   |
| Trade accounts  receivable, net of allowance ($217 in 2004)                                                                             |       |                   | 112,333    |                  |       |   | 66,484 |   |   |
| Inventories, net                                                                                                                        |       |                   | 78,490     |                  |       |   | 39,718 |   |   |
| Deferred income  taxes                                                                                                                  |       |                   | 18,525     |                  |       |   | 15,145 |   |   |
| Other current  assets                                                                                                                   |       |                   | 29,549     |                  |       |   | 27,821 |   |   |
| Total current  assets                                                                                                                   |       |                   | 249,899    |                  |       |   | 174,211 |   |   |
| Owned surface lands                                                                                                                     |       |                   | 29,333     |                  |       |   | 29,171 |   |   |
| Plant, equipment  and mine development costs, net                                                                                       |       |                   | 550,985    |                  |       |   | 487,495 |   |   |
| Owned and leased  mineral rights, net                                                                                                   |       |                   | 1,130,436  |                  |       |   | 1,282,989 |   |   |
| Coal supply  agreements, net                                                                                                            |       |                   | 58,852     |                  |       |   | 84,508 |   |   |
| Other noncurrent  assets                                                                                                                |       |                   | 36,648     |                  |       |   | 41,586 |   |   |
| Total assets                                                                                                                            |       |                   | $          | 2,056,153             |       |   |   | $ | 2,099,960 |   |   |
| **LIABILITIES**                                                                                                                         |       |                   |       |                  |       |   |   |   |   |
| Current  liabilities:                                                                                                                   |       |                   |       |                  |       |   |   |   |   |
| Trade accounts  payable                                                                                                                 |       |                   | $          | 31,659                |       |   |   | $ | 30,512 |   |   |
| Accrued expenses  and other current liabilities                                                                                         |       |                   | 153,699    |                  |       |   | 155,541 |   |   |
| Total current  liabilities                                                                                                              |       |                   | 185,358    |                  |       |   | 186,053 |   |   |
| Long-term debt                                                                                                                          |       |                   | 665,000    |                  |       |   | 685,000 |   |   |
| Deferred income  taxes                                                                                                                  |       |                   | 112,890    |                  |       |   | 133,828 |   |   |
| Coal supply  agreements, net                                                                                                            |       |                   | 82,736     |                  |       |   | 178,210 |   |   |
| Postretirement  benefits                                                                                                                |       |                   | 461,405    |                  |       |   | 449,683 |   |   |
| Other noncurrent  liabilities                                                                                                           |       |                   | 234,686    |                  |       |   | 211,455 |   |   |
| Total liabilities                                                                                                                       |       |                   | 1,742,075  |                  |       |   | 1,844,229 |   |   |
| Commitments and  contingencies (Note 18)                                                                                                |       |                   |       |                  |       |   |   |   |   |
| **STOCKHOLDER EQUITY**                                                                                                                  |       |                   |       |                  |       |   |   |   |   |
| Common stock,  $0.01 par value; 100 shares authorized, issued and outstanding at  September 30, 2005 and at December 31, 2004 |       |                   | —     |                  |       |   | — |   |   |
| Additional paid-in  capital                                                                                                             |       |                   | 237,677    |                  |       |   | 241,993 |   |   |
| Retained earnings                                                                                                                       |       |                   | 75,963     |                  |       |   | 14,064 |   |   |
| Unearned  restricted stock compensation                                                                                                 |       |                   | (109       | )                     |       |   | — |   |   |
| Accumulated other  comprehensive income (loss)                                                                                          |       |                   | 547        |                  |       |   | (326 | ) |   |
| Total stockholder  equity                                                                                                               |       |                   | 314,078    |                  |       |   | 255,731 |   |   |
| Total liabilities and  stockholder equity                                                                                               |       |                   | $          | 2,056,153             |       |   |   | $ | 2,099,960 |   |   |

 

The accompanying notes are an integral part of these financial statements.

5

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**Foundation Coal Corporation and Subsidiaries(An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.)Statements ofConsolidated Cash Flows(Dollars in thousands)**

| ** **                                                                                | ** ** | **Successor**                                         | ** ** | **Predecessor**                                                                                                                  | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** | **For the Period  From  February 9, 2004  (date of formation)  Through  September 30,  2004** | ** ** | **Seven Months  Ended  July 29,  2004** | ** ** |
| ** **                                                                                | ** ** | **(Unaudited)**                                       | ** ** | **(Unaudited)**                                                                                                                  | ** ** | ** ** | ** ** |
| **Operating activities:**                                                                 |       |                                                  |       |                                                                                                                             |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                         |       |                                                  | $          | 61,899                                                                                                                           |       |   |   | $ | 10,264 |   |   |   | $ | (67,526 | ) |   |
| Loss on discontinued operations                                                           |       |                                                  | —     |                                                                                                                             |       |   | — |   |   |   | (23,065 | ) |   |
| Income (loss) from  continuing operations                                                 |       |                                                  | 61,899     |                                                                                                                             |       |   | 10,264 |   |   |   | (90,591 | ) |   |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |                                                  |       |                                                                                                                             |       |   |   |   |   |   |   |   |   |
| Accretion on asset  retirement obligations                                                |       |                                                  | 6,203      |                                                                                                                             |       |   | 1,343 |   |   |   | 4,020 |   |   |
| Depreciation, depletion  and amortization                                                 |       |                                                  | 93,642     |                                                                                                                             |       |   | 3,744 |   |   |   | 70,073 |   |   |
| Amortization of deferred  financing costs                                                 |       |                                                  | 3,022      |                                                                                                                             |       |   | 99 |   |   |   | — |   |   |
| Gain on sale of assets                                                                    |       |                                                  | —     |                                                                                                                             |       |   | — |   |   |   | (960 | ) |   |
| Non-cash restricted stock  compensation                                                   |       |                                                  | 1,056      |                                                                                                                             |       |   | — |   |   |   | — |   |   |
| Non-cash mark-to-market  adjustment for interest rate swap                                |       |                                                  | —     |                                                                                                                             |       |   | 90 |   |   |   | (5,804 | ) |   |
| Non-cash expense  from termination of hedge accounting for interest rate swap             |       |                                                  | —     |                                                                                                                             |       |   | — |   |   |   | 48,854 |   |   |
| Loss on early  extinguishment of debt                                                     |       |                                                  | —     |                                                                                                                             |       |   | — |   |   |   | 21,724 |   |   |
| Deferred income taxes                                                                     |       |                                                  | 24,815     |                                                                                                                             |       |   | 5,042 |   |   |   | (46,399 | ) |   |
| Changes in operating assets and liabilities:                                              |       |                                                  |       |                                                                                                                             |       |   |   |   |   |   |   |   |   |
| Trade accounts receivable                                                                 |       |                                                  | (45,849    | )                                                                                                                                |       |   | (2,924 | ) |   |   | (9,341 | ) |   |
| Inventories, net                                                                          |       |                                                  | (38,772    | )                                                                                                                                |       |   | (7,488 | ) |   |   | (6,113 | ) |   |
| Other current assets                                                                      |       |                                                  | (7,209     | )                                                                                                                                |       |   | 513 |   |   |   | (1,679 | ) |   |
| Other noncurrent assets                                                                   |       |                                                  | 3,373      |                                                                                                                             |       |   | 12,428 |   |   |   | 2,445 |   |   |
| Trade accounts payable                                                                    |       |                                                  | 1,342      |                                                                                                                             |       |   | (4,455 | ) |   |   | 5,572 |   |   |
| Accrued expenses and  other current liabilities                                           |       |                                                  | (5,506     | )                                                                                                                                |       |   | 2,944 |   |   |   | (27,231 | ) |   |
| Noncurrent liabilities                                                                    |       |                                                  | 4,791      |                                                                                                                             |       |   | 3,358 |   |   |   | 27,386 |   |   |
| Net cash provided by  (used in) continuing operations                                     |       |                                                  | 102,807    |                                                                                                                             |       |   | 24,958 |   |   |   | (8,044 | ) |   |
| Net cash provided by  discontinued operations                                             |       |                                                  | —     |                                                                                                                             |       |   | — |   |   |   | 6,973 |   |   |
| Net cash provided by  (used in) operating activities                                      |       |                                                  | 102,807    |                                                                                                                             |       |   | 24,958 |   |   |   | (1,071 | ) |   |
| **Investing activities:**                                                                 |       |                                                  |       |                                                                                                                             |       |   |   |   |   |   |   |   |   |
| Acquisition of RAG  American Coal Holding, Inc., net of cash acquired                |       |                                                  | —     |                                                                                                                             |       |   | (912,910 | ) |   |   | — |   |   |
| Purchases of property,  plant and equipment                                               |       |                                                  | (102,203   | )                                                                                                                                |       |   | (12,740 | ) |   |   | (52,695 | ) |   |
| Proceeds from disposition  of property, plant and equipment                               |       |                                                  | 5,355      |                                                                                                                             |       |   | 1,517 |   |   |   | 2,049 |   |   |
| Net cash used in  investing activities—continuing operations                         |       |                                                  | (96,848    | )                                                                                                                                |       |   | (924,133 | ) |   |   | (50,646 | ) |   |
| Net cash provided by  investing activities—discontinued operations                   |       |                                                  | —     |                                                                                                                             |       |   | — |   |   |   | 184,954 |   |   |
| Net cash (used in)  provided by investing activities                                      |       |                                                  | (96,848    | )                                                                                                                                |       |   | (924,133 | ) |   |   | 134,308 |   |   |
| **Financing activities:**                                                                 |       |                                                  |       |                                                                                                                             |       |   |   |   |   |   |   |   |   |
| Capital contribution                                                                      |       |                                                  | —     |                                                                                                                             |       |   | 196,000 |   |   |   | — |   |   |
| Proceeds from Parent  advance                                                             |       |                                                  | —     |                                                                                                                             |       |   | — |   |   |   | 306,057 |   |   |
| Proceeds from revolving  credit facility                                                  |       |                                                  | 76,000     |                                                                                                                             |       |   | 60,000 |   |   |   | — |   |   |
| Repayment of revolving  credit facility                                                   |       |                                                  | (76,000    | )                                                                                                                                |       |   | (60,000 | ) |   |   | — |   |   |
| Proceeds from issuance of  long-term debt                                                 |       |                                                  | —     |                                                                                                                             |       |   | 770,000 |   |   |   | — |   |   |
| Payment of deferred  financing costs                                                      |       |                                                  | —     |                                                                                                                             |       |   | (27,710 | ) |   |   | — |   |   |
| Repayment of long-term  debt                                                              |       |                                                  | (20,000    | )                                                                                                                                |       |   | — |   |   |   | (614,644 | ) |   |
| Payment of expenses  resulting from early debt extinguishment                             |       |                                                  | —     |                                                                                                                             |       |   | — |   |   |   | (21,724 | ) |   |
| Repayment of capital  lease obligations                                                   |       |                                                  | —     |                                                                                                                             |       |   | — |   |   |   | (1,679 | ) |   |
| Interest rate swap  termination                                                           |       |                                                  | —     |                                                                                                                             |       |   | — |   |   |   | (48,854 | ) |   |
| Net decrease in cash pledged  on debt                                                     |       |                                                  | —     |                                                                                                                             |       |   | — |   |   |   | 20,000 |   |   |
| Net decrease in cash on  deposit with Predecessor                                         |       |                                                  | —     |                                                                                                                             |       |   | — |   |   |   | 233,023 |   |   |
| Net cash (used in)  provided by financing activities                                      |       |                                                  | (20,000    | )                                                                                                                                |       |   | 938,290 |   |   |   | (127,821 | ) |   |
| Net increase (decrease)  in cash and cash equivalents                                     |       |                                                  | (14,041    | )                                                                                                                                |       |   | 39,115 |   |   |   | 5,416 |   |   |
| Cash and cash equivalents  at beginning of period                                         |       |                                                  | 25,043     |                                                                                                                             |       |   | — |   |   |   | 7,649 |   |   |
| Cash and cash equivalents  at end of period                                               |       |                                                  | $          | 11,002                                                                                                                           |       |   |   | $ | 39,115 |   |   |   | $ | 13,065 |   |   |
| **Supplemental cash flow information:**                                                   |       |                                                  |       |                                                                                                                             |       |   |   |   |   |   |   |   |   |
| Cash paid for interest                                                                    |       |                                                  | $          | 30,552                                                                                                                           |       |   |   | $ | — |   |   |   | $ | 29,615 |   |   |
| Cash paid for income taxes                                                                |       |                                                  | $          | —                                                                                                                           |       |   |   | $ | — |   |   |   | $ | — |   |   |

 

The accompanying notes are an integral part of these financial statements.

6

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**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Dollars in thousands)**

**(1)**   Basis ofPresentation of Financial Statements

The following interim consolidated financialstatements of Foundation Coal Corporation and Subsidiaries (“FCC” or the “Company”)are unaudited and prepared in accordance with the rules and regulations ofthe Securities and Exchange Commission for Form 10-Q. Such rules andregulations allow the omission of certain information and footnote disclosuresnormally included in financial statements prepared in accordance with UnitedStates generally accepted accounting principles as long as the statements arenot misleading. In the opinion of management, these financial statementsreflect all normal and recurring adjustments necessary for a fair presentationof the results of the periods presented. These interim consolidated financialstatements should be read in conjunction with the consolidated financialstatements of the Company included in its Annual Report on Form 10-Kfor the year ended December 31, 2004, filed March 31, 2005.

The Company’s consolidated financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States of America. The preparation of the Company’s consolidatedfinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities at the date of theconsolidated financial statements and the reported amounts of revenues andexpenses during the reporting period. The more significant areas requiring theuse of management estimates and assumptions relate to coal reserves that arethe basis for future cash flow estimates and units-of-production depreciation,depletion and amortization calculations; environmental and reclamationobligations; asset impairments; post-employment, post-retirement and otheremployee benefit liabilities; valuation allowances for deferred taxes; reservesfor contingencies and litigation; and the fair value and accounting treatmentof certain financial instruments. Management bases its estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances. Accordingly, actual results may differ significantlyfrom these estimates. In addition, different assumptions or conditions couldreasonably be expected to yield different results. The operating results forthe three and nine month periods ended September 30, 2005 may notnecessarily be indicative of the results to be expected in the fourth quarteror for the year ended December 31, 2005.

Foundation Coal Holdings, Inc. and its indirectsubsidiary, Foundation Coal Corporation (“FCC”), were formed to acquire theNorth American coal mining assets of RAG American Coal Holding, Inc., awholly owned subsidiary of RAG Coal International AG (“RAG”), which acquisitionclosed on July 30, 2004 (the “acquisition”). The acquisition was accountedfor using the purchase method of accounting whereby identifiable assetsacquired and liabilities assumed were recorded at their fair market values asof the date of acquisition. The Company performed the purchase price allocationbased on the results of an independent appraisal performed by a reputableconsulting firm well known in the industry, actuarial valuations of employeebenefits performed by consulting actuaries and other internal analysis. Certainjudgments and estimates by the Company regarding future cash flows fromindividual mine sites, employee benefit assumptions and other plans wereintegral to the valuations performed by the valuation specialists. During thequarter ended September 30, 2005, the purchase price accountingallocations related to the acquisition were finalized as described in Note 3.

RAG American Coal Holding, Inc. had two primaryoperating units: Riverton Coal Production, Inc. and subsidiaries (“RCP”)and RAG American Coal Company, LLC and subsidiaries (“RACC”). On February 29,2004, RACC signed a definitive Stock Purchase Agreement to sell RAG Coal AG’sColorado 

7

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**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands)**

operations which includedTwentymile Coal Company, RAG Empire Corporation, RAG Shoshone Coal Corporationand Colorado Yampa Coal Company (collectively referred to as the RAG ColoradoBusiness Unit) to a subsidiary of Peabody Energy Corporation. This transactionclosed on April 15, 2004. Accordingly, all references to Foundation CoalCorporation, exclude the RAG Colorado Business Unit which is accounted for andpresented in the accompanying financial statements as discontinued operations.Prior period financial statements have also been restated to reflect the RAGColorado Business Unit as a discontinued operation.

The following provides a description of the basis ofpresentation during all periods presented:

“Successor”—represents the consolidated financialposition of Foundation Coal Corporation and consolidated subsidiaries as of September 30,2005 and December 31, 2004, and the consolidated results of operations andcash flows for the period from February 9, 2004 (date of formation)through September 30, 2004, and the three and nine month periods ended September 30,2005. Foundation Coal Corporation had no significant activities until theacquisition on July 30, 2004. Therefore, the results of operations andcash flows for the period from February 9, 2004 (date of formation)through September 30, 2004 reflect only the activity for the two monthperiod ended September 30, 2004.

“Predecessor”—represents the consolidated results ofoperations and cash flows of RAG American Coal Holding, Inc. andsubsidiaries for all periods prior to the acquisition. This presentationreflects the historical basis of accounting.

The consolidated financial statements as of and forthe three and nine month periods ended September 30, 2005 and year ended December 31,2004 reflect the acquisition under the purchase method of accounting, inaccordance with the Financial Accounting Standards Board (“FASB”) Statement ofFinancial Accounting Standards (“SFAS”) No. 141, *Business Combinations*.

Unless otherwiseindicated, “the Company” as used throughout the remainder of these notes to theconsolidated financial statements refers to both the Successor and thePredecessor.

*Reclassifications*

Certain amounts in theprior period have been reclassified to conform to the 2005 presentation.

**(2)**   RecentAccounting Pronouncements

In December 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 123 (revised 2004), *Share-Based Payment* (“SFAS No. 123R”),which replaces SFAS No. 123, and supersedes Accounting Principles BoardOpinion No. 25, *Accounting for StockIssued to Employees* (“APB No. 25”). SFAS No. 123R requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the financial statements based on their fair valueat the grant date. SFAS No. 123R generally requires companies to measurethe cost of employee services received in exchange for an award of equityinstruments (such as stock options and restricted stock) based on thegrant-date fair value of the award, and to recognize that cost over the periodduring which the employee is required to provide service (usually the vestingperiod of the award). FAS 123R also requires the benefits of tax deductions inexcess of recognized compensation cost to be reported as a financing cash flow,rather than 

8

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**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands)**

as an operating cash flowas required under current literature. This requirement will reduce netoperating cash flows and increase net financing cash flows in periods afteradoption. The pro forma disclosures previously permitted under SFAS No. 123no longer will be an alternative to financial statement recognition. On April 14,2005, the Securities and Exchange Commission (“SEC”) delayed the implementationof SFAS No. 123R from its original implementation date by six months formost registrants, requiring all public companies to adopt FAS 123R no laterthan the beginning of the first fiscal year beginning after June 15, 2005.The Company expects to adapt this standard on January 1, 2006. The impactof adopting SFAS No. 123R cannot be reasonably predicted at this timebecause it will depend on levels of share-based payments granted in thefuture. However, had the Company adopted SFAS No. 123R during the priorperiod, the results are expected to be consistent with the pro forma disclosureunder SFAS No. 123, except that forfeitures will be considered in thecalculation of compensation expense under SFAS No. 123R. When adopted, theCompany may elect to change the valuation method or assumptions and suchchanges could have a material impact on the amount of stock-basedcompensation the Company records.

In March 2005, the Emerging Issues Task Forcereached consensus on Issue No. 04-6, Accounting for Stripping Costsin the Mining Industry (“EITF Issue 04-6”) concluding that post-productionstripping costs are a component of mineral inventory costs subject to theprovisions of the American Institute of Certified Public Accountants AccountingResearch Bulletin No. 43, Restatement and Revision of Accounting ResearchBulletins, Chapter 4, Inventory Pricing, (“ARB No. 43”). The FASB ratifiedthe EITF consensus. Based upon this consensus, post production stripping costsare considered costs of the extracted minerals under a full absorption costingsystem and are recognized as a component of inventory to be recognized in costsof coal sales in the same period as the revenue from the sale of the inventory.In addition, capitalization of such costs would be appropriate only to theextent inventory exists at the end of a reporting period. The guidance in thisconsensus will be effective for financial statements issued for the firstreporting period in fiscal years beginning after December 15, 2005, withearly adoption permitted. At a June EITF meeting, the Task Force modifiedthe transition provisions of EITF Issue 04-6, indicating that companiesthat adopt in periods beginning after June 29, 2005 may utilize acumulative effect adjustment approach where the cumulative effect adjustment isrecorded directly to retained earnings in the year of adoption. Alternatively,a company may recognize this change in accounting by restatement of its prior-periodfinancial statements through retrospective application. The Company expects toadopt EITF Issue 04-6 on January 1, 2006 and expects to utilize thecumulative effect adjustment approach and record an adjustment directly toretained earnings upon adoption. Historically, the Company recorded strippingcosts associated with in-process production as a separate component ofinventory described as deferred overburden in Note 4. At September 30,2005, such stripping costs associated with coal that has not been extracted was$46,089. Applying the requirements of this EITF as of September 30, 2005would have resulted in a maximum decrease of $46,089 in inventory with theoff-set recorded to retained earnings, net of tax. The effect on the financialstatements upon adoption on January 1, 2006 will depend on the balance ofdeferred overburden included in the Company’s inventory at December 31,2005.

The FASB issued FASB InterpretationNo. (“FIN”) 47, “Accounting for Conditional Asset RetirementObligations” in March 2005. FIN 47 clarifies that an entity must record aliability for a conditional asset retirement obligation if the fair value ofthe obligation can be reasonably estimated. This interpretation also clarifiesthe circumstances under which an entity would have sufficient information to 

9

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**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands)**

reasonablyestimate the fair value of an asset retirement obligation. This Interpretationis effective no later than the end of fiscal years ending after December 15,2005. The Company does not expect this guidance to have a material impact onits financial statements.

**(3)   Acquisition of RAG**

On July 30, 2004, the Company, through itsindirect wholly owned subsidiary FCC, acquired 100% of the outstanding commonshares of all of the direct and indirect subsidiaries of RAG engaged in coalmining in North America for a purchase price of $986,918 including associatedtransaction costs of approximately $19,618. The purchase price along with theassociated transaction costs were funded by $196,000 of cash from FoundationCoal Holdings, Inc.’s shareholder’s equity contributed to the Parent andits subsidiaries FC2 Corp. and FCC by Foundation Coal Holdings, LLC (“LLC”);$300,000 of cash proceeds from 71¤4% Senior Notesdue 2014 issued by Foundation PA Coal Company (“Foundation PA”); and $530,000of cash proceeds from a senior secured credit facility consisting of a termloan facility and revolving credit facility (the “Senior Credit Facility”). TheSenior Credit Facility issued by Foundation PA, consisted of $470,000 from theterm loan and $60,000 draw from the revolving credit facility.

The acquisition was accounted for using the purchasemethod of accounting whereby identifiable assets acquired and liabilitiesassumed were recorded at their fair market values as of the date ofacquisition. The allocation of the purchase price for the acquisition has beenfinalized and recorded in the accompanying consolidated financial statements asof and for the period subsequent to July 30, 2005.

Thefollowing table summarizes the purchase price allocation based on the fairvalues of the assets acquired and liabilities assumed at the date ofacquisition:

| Accounts  receivable                                        |   | $          | 73,969  |   |
|-------------------------------------------------------------|--------|------------|---------|--------|
| Materials and supplies  inventories                         |   | 10,636     |    |
| Coal inventory                                              |   | 11,984     |    |
| Other current  assets                                       |   | 46,509     |    |
| Owned surface  lands                                        |   | 30,054     |    |
| Plant, equipment,  mine development, asset retirement costs |   | 490,794    |    |
| Owned and leased  mineral rights                            |   | 1,277,237  |    |
| Coal supply  agreements                                     |   | 101,081    |    |
| Other noncurrent  assets                                    |   | 14,114     |    |
| Total assets  acquired                                      |   | 2,056,378  |    |
| Accounts payable and accrued expenses                       |   | (164,764   | )       |
| Coal supply  agreements                                     |   | (255,872   | )       |
| Other noncurrent  liabilities                               |   | (730,832   | )       |
| Total liabilities  assumed                                  |   | (1,151,468 | )       |
| Total purchase price net  of cash acquired of $82,008       |   | $          | 904,910 |   |

 

The purchase price allocation was completed based uponanalysis provided by an independent appraisal performed by a reputableconsulting firm well known in the industry, actuarial valuations of employeebenefits performed by consulting actuaries and other internal analysis. Certainjudgments and 

10

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**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands)**

estimates by the Companyregarding future cash flows from individual mine sites, employee benefitassumptions and other plans were integral to the valuations performed by thevaluation specialists.

Cash and cash equivalents, accounts receivable, othercurrent assets and accounts payable and accrued expenses were stated athistorical carrying values. Given the short-term nature of these assets andliabilities, it was determined that these historical carrying valuesapproximate fair value. The Company’s projected pension, post-retirement andpost-employment benefit obligations and assets have been reflected in theallocation of purchase price at the projected benefit obligation less planassets at fair market value, based on independent actuaries engaged by theCompany. Deferred income taxes have been provided in the consolidated balancesheet based on the Company’s estimated tax versus book basis of the assetsacquired and liabilities assumed, as adjusted to estimated fair values. Ownedsurface lands, inventory, plant, equipment, mine development costs, owned andleased mineral rights and coal supply agreements have been recorded at estimatedfair value based on work performed by the independent valuation specialists asof the date of the acquisition, subsequently adjusted by management to reflectthe final accounting allocation of the purchase price.

During the quarter ended September 30, 2005, theCompany completed the purchase price allocation and recorded final purchaseaccounting adjustments that reduced the fair value of total assets acquired andliabilities assumed by $59,568, respectively, or approximately 3% of the fairvalue assigned. The most significant component of this decrease related to arevision in deferred income tax liabilities associated with projectedpost-retirement benefit obligations resulting from changes in the assumptionsregarding the impact on these obligations of the Medicare Part Dprescription drug benefits. The effect of the reduction between the preliminaryand final purchase price allocation on assets acquired was a decrease in thefair value assigned to owned and leased mineral rights assets of $59,320, a decreasein coal supply agreement assets of $4,384, offset by an increase in the fairvalue of land and other assets of $4,136. The effect of the reduction betweenthe preliminary and final purchase price allocation on assumed liabilities wasa decrease in coal supply agreement liabilities of $10,533, a decrease inaccounts payable and accrued expenses of $1,042 and a decrease in deferredincome taxes and other noncurrent liabilities of $47,993.

Coal supply agreement assets or liabilities areamortized over the term of the contracts based on the tons of coal shippedunder each contract. Based on the preliminary purchase price allocation,amortization of the asset for above market contracts was anticipated to beapproximately $20,000, $11,000, $7,000 and $6,000 for the years ended December 31,2006, 2007, 2008 and 2009, respectively. Subsequent to the final purchaseaccounting adjustments discussed above, amortization of the asset for abovemarket contracts is anticipated to decrease by approximately $1,700, $700, $600and $500 for the years ended December 31, 2006, 2007, 2008 and 2009,respectively. Based on the preliminary purchase price allocation, amortizationof the liability for below market contracts was anticipated to be approximately($42,000), ($15,000), ($4,000) and ($1,000) for the years ended December 31,2006, 2007, 2008 and 2009, respectively. Subsequent to the final purchaseaccounting adjustments discussed above, amortization of the liability for abovemarket contracts is anticipated to decrease by approximately $3,600, $1,100,$200 and $100 for the years ended December 31, 2006, 2007, 2008 and 2009,respectively.

11

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**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands)**

The following unauditedpro forma financial information reflects the consolidated results of operationsfor the periods presented as if the acquisition had taken place on January 1,2004. The pro forma information incorporates the accounting for theacquisition, including but not limited to, the application of purchaseaccounting for coal supply agreements, owned and leased mineral rights,employee benefit liabilities and property, plant and equipment. The pro formafinancial information may not necessarily be indicative of actual results.

| ** **                       | ** ** | **Pro forma  (unaudited)**                               | ** ** |
|----------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                       | ** ** | **Three Months  Ended  September 30,  2004**        | ** ** | **Nine Months  Ended  September 30,  2004** | ** ** |
| ** **                       | ** ** | **(In millions, except per  share data)** | ** ** |
| Revenues                         |       |                                                          | $          | 255.6 |   |   |   | $ | 733.3 |   |   |
| Loss from  continuing operations |       |                                                          | $          | (5.9 | ) |   |   | $ | (25.2 | ) |   |
| Net loss                         |       |                                                          | $          | (5.9 | ) |   |   | $ | (2.1 | ) |   |

 

**(4)**   Inventories

Inventoriesconsisted of the following:

| ** **                                            | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| Saleable coal                                         |       |                         | $          | 16,641                      |       |   |   | $ | 11,609 |   |   |
| Raw coal                                              |       |                         | 2,592      |                        |       |   | 2,893 |   |   |
| Work-in-process  (deferred overburden)                |       |                         | 46,089     |                        |       |   | 13,889 |   |   |
| Materials and  supplies                               |       |                         | 20,961     |                        |       |   | 18,983 |   |   |
|                                                  |       |                         | 86,283     |                        |       |   | 47,374 |   |   |
| Less materials  and supplies reserve for obsolescence |       |                         | (7,793     | )                           |       |   | (7,656 | ) |   |
|                                                  |       |                         | $          | 78,490                      |       |   |   | $ | 39,718 |   |   |

 

Saleable coal representscoal stockpiles ready for shipment to a customer. Raw coal represents coal thatrequires further processing prior to shipment. Work-in-process consists ofcosts incurred to remove overburden above an unmined coal seam as part of thesurface mining process and generally includes labor, supplies, operatingoverhead and equipment costs charged to operations as coal from the seam issold.

12

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**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands)**

**(5)**   Other CurrentAssets

Othercurrent assets consisted of the following:

| ** **                       | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| Prepaid royalties                |       |                         | $          | 2,332                       |       |   |   | $ | 3,142 |   |   |
| Prepaid longwall  move expense   |       |                         | 5,693      |                        |       |   | 7,497 |   |   |
| Prepaid SO2  emission allowances |       |                         | 1,030      |                        |       |   | 780 |   |   |
| Prepaid expenses                 |       |                         | 16,385     |                        |       |   | 12,886 |   |   |
| Other                            |       |                         | 4,109      |                        |       |   | 3,516 |   |   |
|                             |       |                         | $          | 29,549                      |       |   |   | $ | 27,821 |   |   |

 

**(6)**   Property,Plant, Equipment and Owned and Leased Mineral Rights

Property,plant, equipment and owned and leased mineral rights consisted of thefollowing:

| ** **                                        | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **Owned  surface and coal lands**                 |       |                         |       |                        |       |   |   |   |   |
| Owned surface  lands                              |       |                         | $          | 29,333                      |       |   |   | $ | 29,171 |   |   |
| Owned and leased  mineral rights                  |       |                         | $          | 1,277,858                   |       |   |   | $ | 1,336,557 |   |   |
| Less accumulated  depletion                       |       |                         | (147,422   | )                           |       |   | (53,568 | ) |   |
|                                              |       |                         | $          | 1,130,436                   |       |   |   | $ | 1,282,989 |   |   |
| **Plant,  equipment and mine development costs**  |       |                         |       |                        |       |   |   |   |   |
| Plant, equipment  and asset retirement costs      |       |                         | $          | 641,042                     |       |   |   | $ | 518,525 |   |   |
| Mine development  costs                           |       |                         | 14,164     |                        |       |   | 6,196 |   |   |
| Coal bed methane  equipment and development costs |       |                         | 3,461      |                        |       |   | 3,959 |   |   |
|                                              |       |                         | 658,667    |                        |       |   | 528,680 |   |   |
| Less accumulated  depreciation and amortization:  |       |                         |       |                        |       |   |   |   |   |
| Plant, equipment and asset retirement costs       |       |                         | (106,373   | )                           |       |   | (40,898 | ) |   |
| Mine development costs                            |       |                         | (872       | )                           |       |   | (108 | ) |   |
| Coal bed methane equipment and development costs  |       |                         | (437       | )                           |       |   | (179 | ) |   |
|                                              |       |                         | (107,682   | )                           |       |   | (41,185 | ) |   |
|                                              |       |                         | $          | 550,985                     |       |   |   | $ | 487,495 |   |   |

 

13

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**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands)**

**(7)**   OtherNoncurrent Assets

Othernoncurrent assets consisted of the following:

| ** **                                            | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| Receivables from  asset dispositions                  |       |                         | $          | 994                         |       |   |   | $ | 5,863 |   |   |
| Prepaid major  repairs                                |       |                         | 3,165      |                        |       |   | 737 |   |   |
| Unamortized debt  issuance costs, net                 |       |                         | 21,020     |                        |       |   | 24,162 |   |   |
| Advance mining  royalties                             |       |                         | 2,802      |                        |       |   | 2,620 |   |   |
| Work-in-process  coal inventory (deferred overburden) |       |                         | —     |                        |       |   | 3,576 |   |   |
| Prepaid longwall  development                         |       |                         | 1,633      |                        |       |   | 1,633 |   |   |
| Fair value of  interest rate swaps                    |       |                         | 1,987      |                        |       |   | 530 |   |   |
| Other                                                 |       |                         | 5,047      |                        |       |   | 2,465 |   |   |
|                                                  |       |                         | $          | 36,648                      |       |   |   | $ | 41,586 |   |   |

 

**(8)   AccruedExpenses and Other Current Liabilities**

Accruedexpenses and other current liabilities consisted of the following:

| ** **                                  | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| Accrued federal  and state income taxes     |       |                         | $          | 1,773                       |       |   |   | $ | 3,815 |   |   |
| Accrued sales  contract settlements         |       |                         | —     |                        |       |   | 7,431 |   |   |
| Wages and  employee benefits                |       |                         | 30,417     |                        |       |   | 27,977 |   |   |
| Pension benefits                            |       |                         | 7,712      |                        |       |   | 5,970 |   |   |
| Postretirement  benefits other than pension |       |                         | 23,000     |                        |       |   | 21,350 |   |   |
| Interest                                    |       |                         | 3,539      |                        |       |   | 9,065 |   |   |
| Royalties                                   |       |                         | 6,305      |                        |       |   | 8,657 |   |   |
| Taxes other than  income taxes              |       |                         | 27,716     |                        |       |   | 28,328 |   |   |
| Asset retirement  obligations               |       |                         | 4,411      |                        |       |   | 4,398 |   |   |
| Workers’  compensation                 |       |                         | 9,648      |                        |       |   | 9,717 |   |   |
| Other                                       |       |                         | 39,178     |                        |       |   | 28,833 |   |   |
|                                        |       |                         | $          | 153,699                     |       |   |   | $ | 155,541 |   |   |

 

14

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**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands)**

**(9)   OtherNoncurrent Liabilities**

Othernoncurrent liabilities consisted of the following:

| ** **                             | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| Post employment  benefits              |       |                         | $          | 5,823                       |       |   |   | $ | 6,365 |   |   |
| Pension benefits                       |       |                         | 40,278     |                        |       |   | 43,987 |   |   |
| Workers’  compensation            |       |                         | 17,756     |                        |       |   | 18,938 |   |   |
| Minimum royalty  obligations           |       |                         | 95         |                        |       |   | 876 |   |   |
| Black lung  reserves                   |       |                         | 5,799      |                        |       |   | 4,972 |   |   |
| Contract  settlement accrual           |       |                         | 22,421     |                        |       |   | 26,672 |   |   |
| Asset retirement  obligations          |       |                         | 111,839    |                        |       |   | 100,202 |   |   |
| Deferred  production tax               |       |                         | 10,687     |                        |       |   | 7,144 |   |   |
| Deferred credits  and other            |       |                         | 2,162      |                        |       |   | 2,299 |   |   |
| Deferred  equipment purchase agreement |       |                         | 17,826     |                        |       |   | — |   |   |
|                                   |       |                         | $          | 234,686                     |       |   |   | $ | 211,455 |   |   |

 

Duringthe quarter ended September 30, 2005, the Company’s Northern Appalachiabusiness unit took delivery of one hundred new longwall shields to remedy awarranty issue associated with shields currently used in their undergroundmining operations. The Company entered into a purchase commitment for theshields in the amount of $21,685, and in accordance with the payment termsrelated to the purchase commitment, periodic progress payments to themanufacturer are not scheduled to start until the fourth quarter of 2007, withscheduled completion within one year. As a result of this transaction, theCompany recorded a deferred purchase commitment liability of $17,826representing the present value of the future payments due in accordance withthe terms of the purchase commitment. Interest expense will be inputed andrecognized in a manner consistent with the established payment terms,ultimately increasing the liability to its full value of $21,685.

**(10)   ComprehensiveIncome (Loss)**

Accumulatedother comprehensive income (loss) consisted of the following:

| ** **                                                      | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                      | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| Changes in fair  value of hedge instruments, net of tax of $584 |       |                         | $          | 873                         |       |   |   | $ | — |   |   |
| Minimum pension  liability adjustments, net of tax of $192      |       |                         | (326       | )                           |       |   | (326 | ) |   |
|                                                            |       |                         | $          | 547                         |       |   |   | $ | (326 | ) |   |

 

15

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**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands)**

**(11)   Pensionand Postretirement Benefit Plans**

*Components of NetPeriodic Pension Costs*

Netperiodic pension costs included the following:

| ** **                                          | ** ** | **Successor**                                          | ** ** | **Predecessor**                                                                                                                  | ** ** | **Successor**                                  | ** ** | **Predecessor**                                       | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                          | ** ** | **Three Months  Ended  September 30,  2005** | ** ** | **For the Period  From  February 9, 2004  (date of formation)  Through  September 30,  2004** | ** ** | **One Month  Ended  July 29,  2004** | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** | **For the Period  From  February 9, 2004  (date of formation)  Through  September 30,  2004** | ** ** | **Seven Months  Ended  July 29,  2004** | ** ** |
| ** **                                          | ** ** | **(Unaudited)**                                        | ** ** | **(Unaudited)**                                                                                                                  | ** ** | **(Unaudited)**                                | ** ** | **(Unaudited)**                                       | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
| Service cost                                        |       |                                                   | $          | 1,130                                                                                                                            |       |                                           |       | $                                                     | 804        |   |   |   | $ | 451 |   |   |   | $ | 4,018 |   |   |   | $ | 804 |   |   |   | $ | 3,160 |   |   |
| Interest cost                                       |       |                                                   | 2,309      |                                                                                                                             |       |                                           | 1,646      |                                                  |       |   | 918 |   |   |   | 8,212 |   |   |   | 1,646 |   |   |   | 6,431 |   |   |
| Expected return  on plan assets                     |       |                                                   | (2,216     | )                                                                                                                                |       |                                           | (1,471     | )                                                     |       |   | (792 | ) |   |   | (7,883 | ) |   |   | (1,471 | ) |   |   | (5,556 | ) |   |
| Amortization of:                                    |       |                                                   |       |                                                                                                                             |       |                                           |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Prior service  cost                                 |       |                                                   | —     |                                                                                                                             |       |                                           | —     |                                                  |       |   | 3 |   |   |   | — |   |   |   | — |   |   |   | 23 |   |   |
| Actuarial losses                                    |       |                                                   | 80         |                                                                                                                             |       |                                           | —     |                                                  |       |   | 329 |   |   |   | 287 |   |   |   | — |   |   |   | 2,279 |   |   |
|                                                |       |                                                   | 1,303      |                                                                                                                             |       |                                           | 979        |                                                  |       |   | 909 |   |   |   | 4,634 |   |   |   | 979 |   |   |   | 6,337 |   |   |
| Less: amounts  allocated to discontinued operations |       |                                                   | —     |                                                                                                                             |       |                                           | —     |                                                  |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (373 | ) |   |
| Total from continuing  operations                   |       |                                                   | $          | 1,303                                                                                                                            |       |                                           |       | $                                                     | 979        |   |   |   | $ | 909 |   |   |   | $ | 4,634 |   |   |   | $ | 979 |   |   |   | $ | 5,964 |   |   |

 

16

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**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands)**

*Components of NetPeriodic Postretirement Benefit Costs*

Netperiodic postretirement medical and life insurance are as follows:

| ** **                                          | ** ** | **Successor**                                          | ** ** | **Predecessor**                                                                                                                  | ** ** | **Successor**                                  | ** ** | **Predecessor**                                       | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                          | ** ** | **Three Months  Ended  September 30,  2005** | ** ** | **For the Period  From  February 9, 2004  (date of formation)  Through  September 30,  2004** | ** ** | **One Month  Ended  July 29,  2004** | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** | **For the Period  From  February 9, 2004  (date of formation)  Through  September 30,  2004** | ** ** | **Seven Months  Ended  July 29,  2004** | ** ** |
| ** **                                          | ** ** | **(Unaudited)**                                        | ** ** | **(Unaudited)**                                                                                                                  | ** ** | **(Unaudited)**                                | ** ** | **(Unaudited)**                                       | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
| Service cost                                        |       |                                                   | $          | 1,630                                                                                                                            |       |                                           |       | $                                                     | 1,153      |   |   |   | $ | 575 |   |   |   | $ | 5,586 |   |   |   | $ | 1,153 |   |   |   | $ | 4,039 |   |   |
| Interest cost                                       |       |                                                   | 6,730      |                                                                                                                             |       |                                           | 4,722      |                                                  |       |   | 2,500 |   |   |   | 23,061 |   |   |   | 4,722 |   |   |   | 17,501 |   |   |
| Amortization of:                                    |       |                                                   |       |                                                                                                                             |       |                                           |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Prior service  cost                                 |       |                                                   | —     |                                                                                                                             |       |                                           | —     |                                                  |       |   | 49 |   |   |   | — |   |   |   | — |   |   |   | 348 |   |   |
| Actuarial losses                                    |       |                                                   | —     |                                                                                                                             |       |                                           | —     |                                                  |       |   | 1,087 |   |   |   | — |   |   |   | — |   |   |   | 7,703 |   |   |
|                                                |       |                                                   | 8,360      |                                                                                                                             |       |                                           | 5,875      |                                                  |       |   | 4,211 |   |   |   | 28,647 |   |   |   | 5,875 |   |   |   | 29,591 |   |   |
| Less: amounts  allocated to discontinued operations |       |                                                   | —     |                                                                                                                             |       |                                           | —     |                                                  |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (323 | ) |   |
| Total from continuing  operations                   |       |                                                   | $          | 8,360                                                                                                                            |       |                                           |       | $                                                     | 5,875      |   |   |   | $ | 4,211 |   |   |   | $ | 28,647 |   |   |   | $ | 5,875 |   |   |   | $ | 29,268 |   |   |

 

The Company’s postretirement medical andlife insurance plans are unfunded.

17

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**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands)**

**(12)   Pneumoconiosis(Black Lung) Expense and Trust**

Thecomponents of net periodic benefit cost are as follows:

| ** **                                          | ** ** | **Successor**                                          | ** ** | **Predecessor**                                                                                                                  | ** ** | **Successor**                                  | ** ** | **Predecessor**                                       | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                          | ** ** | **Three Months  Ended  September 30,  2005** | ** ** | **For the Period  From  February 9, 2004  (date of formation)  Through  September 30,  2004** | ** ** | **One Month  Ended  July 29,  2004** | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** | **For the Period  From  February 9, 2004  (date of formation)  Through  September 30,  2004** | ** ** | **Seven Months  Ended  July 29,  2004** | ** ** |
| ** **                                          | ** ** | **(Unaudited)**                                        | ** ** | **(Unaudited)**                                                                                                                  | ** ** | **(Unaudited)**                                | ** ** | **(Unaudited)**                                       | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
| Service cost                                        |       |                                                   | $          | 163                                                                                                                              |       |                                           |       | $                                                     | 84         |   |   |   | $ | 44 |   |   |   | $ | 331 |   |   |   | $ | 84 |   |   |   | $ | 309 |   |   |
| Interest cost                                       |       |                                                   | 409        |                                                                                                                             |       |                                           | 208        |                                                  |       |   | 108 |   |   |   | 831 |   |   |   | 208 |   |   |   | 752 |   |   |
| Expected return  on plan assets                     |       |                                                   | (281       | )                                                                                                                                |       |                                           | (163       | )                                                     |       |   | (81 | ) |   |   | (571 | ) |   |   | (163 | ) |   |   | (568 | ) |   |
| Amortization of:                                    |       |                                                   |       |                                                                                                                             |       |                                           |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Transition asset                                    |       |                                                   | —     |                                                                                                                             |       |                                           | —     |                                                  |       |   | (10 | ) |   |   | — |   |   |   | — |   |   |   | (148 | ) |   |
| Prior service  cost                                 |       |                                                   | —     |                                                                                                                             |       |                                           | —     |                                                  |       |   | 11 |   |   |   | — |   |   |   | — |   |   |   | 79 |   |   |
| Actuarial losses                                    |       |                                                   | 116        |                                                                                                                             |       |                                           | —     |                                                  |       |   | 23 |   |   |   | 236 |   |   |   | — |   |   |   | 319 |   |   |
|                                                |       |                                                   | 407        |                                                                                                                             |       |                                           | 129        |                                                  |       |   | 95 |   |   |   | 827 |   |   |   | 129 |   |   |   | 743 |   |   |
| Less: amounts  allocated to discontinued operations |       |                                                   | —     |                                                                                                                             |       |                                           | —     |                                                  |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (13 | ) |   |
| Total from continuing  operations                   |       |                                                   | $          | 407                                                                                                                              |       |                                           |       | $                                                     | 129        |   |   |   | $ | 95 |   |   |   | $ | 827 |   |   |   | $ | 129 |   |   |   | $ | 730 |   |   |

 

**(13)   Stock-BasedCompensation**

The Company records compensation expense for allemployee stock-based compensation plans using the intrinsic value methodprescribed by Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* (“APBNo. 25”) and related interpretations. Under APB No. 25, compensationexpense is recorded over the vesting period to the extent that the fair valueof the underlying stock on the date of grant exceeds the exercise oracquisition price of the stock or stock-based award. We have adopted thedisclosure-only provisions of SFAS No. 123, *Accounting for Stock-Based Compensation,*(“SFAS No. 123”),as amended by SFAS No. 148 *Accountingfor Stock-Based Compensation—Transition and Disclosure—an amendment ofFASB Statement No. 123* (“SFAS No. 148”).

18

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**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands)**

Hadcompensation expense for stock option grants been determined based on the fairvalue at the grant dates consistent with the method required by SFAS No. 123,the Company’s net income would have been changed to the pro forma amounts asindicated in the following table. The Predecessor had no stock option plans;therefore, no Predecessor information is presented.

| ** **                                                                                                                            | ** ** | **Three Months  Ended  September 30,  2005** | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                                                            | ** ** | **(Unaudited)**                                        | ** ** | **(Unaudited)**                                       | ** ** |
| Net income, as  reported                                                                                                              |       |                                                   | $          | 22,474                                                |       |   |   | $ | 61,899 |   |   |
| Add:                                                                                                                                  |       |                                                   |       |                                                  |       |   |   |   |   |
| Stock-based employee compensation included in  reported net income, net of related tax effects                                   |       |                                                   | 401        |                                                  |       |   | 636 |   |   |
| Deduct:                                                                                                                               |       |                                                   |       |                                                  |       |   |   |   |   |
| Total stock-based employee compensation expense  determined under fair value based method for all awards, net of related tax  effects |       |                                                   | (592       | )                                                     |       |   | (1,195 | ) |   |
| Pro forma net  income                                                                                                                 |       |                                                   | $          | 22,283                                                |       |   |   | $ | 61,340 |   |   |

 

The Company grantedrestricted stock performance unit awards (“performance units”) to certain keyemployees in March 2005. All of the performance units granted are subjectto continued employment and vest on each December 31, beginning December 31,2005 and ending on December 31, 2007 contingent upon the achievement ofcertain annual performance targets. Shares of common stock are then awarded in March ofthe year following the final vesting period. Compensation expense ofapproximately $655 and $1,025 (pretax) were recorded for the three andnine month periods ended September 30, 2005 for the initial year’sperformance units that management expects will vest on December 31, 2005.

**(14)**   DerivativeInstruments and Hedging Activities

The Predecessor entered into an interest rate swapagreement effective June 20, 1999 to manage its exposure to fluctuationsin interest rates relating to its outstanding variable rate debt. The interestrate swap agreement was designated as a cash flow hedge, and was designed to beentirely effective by matching the terms of the swap agreement with the debt.The base rate for both the debt and the swap is LIBOR and the instruments havethe same renewal dates over the lives of the instruments. The contract’snotional amount was $434,000 at inception, and declined semi-annually over thelife of the contract in proportion to the Predecessor’s outstanding balance onits related debt. The Predecessor paid a fixed rate of 6.55% and receivedsix-month LIBOR which reset every 180 days. The maturity date of thecontract was July 30, 2009. However, in connection with the definitiveStock Purchase Agreement for the sale of the RAG Colorado Business Unit enteredinto on February 29, 2004, the Predecessor notified the holders of thevariable rate notes of their intention to repay the notes. Accordingly, theinterest rate swaps no longer qualified for hedge accounting treatment and inthe quarter ended March 31, 2004, the full amount of unrealized lossincluded in accumulated other comprehensive income was recognized in netincome. The Predecessor settled the interest rate swaps in April 2004.Between February 29, 2004 and April 27, 2004, mark-to-marketgains on the interest rate swaps were $5,804 and were included in other income.

19

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**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands)**

On September 30,2004, the Successor entered into pay-fixed, receive-variable interestrate swap agreements on a notional amount of $85,000. The term of these swapsis for three years. Under these swaps, the Company receives a variable rate ofthree month US dollar LIBOR and pays a fixed rate of 3.26%. Settlement ofinterest payments occurs quarterly. The Company was required to enter intothese swaps in order to maintain at least 50% of its outstanding debt at afixed rate as required by the Senior Credit Facility. These swap agreementsessentially convert $85,000 of the Company’s variable rate borrowings under theSenior Credit Facility to fixed rate borrowings for a three year periodbeginning September 30, 2004. Effective January 1, 2005, the Companydesignated these interest rate swaps as cash flow hedges of the variableinterest payments due on $85,000 of its variable rate date through September 2007under SFAS No 133, *Accounting for DerivativeFinancial Instruments and Hedging Activities* upon completion of theeffectiveness testing and related documentation. As of September 30, 2005,the fair value of this cash flow hedge was $1,987 which was recorded as anoncurrent asset and the offsetting unrealized gain of $873, net of tax expensewas recorded in accumulated other comprehensive income. At December 31,2004, the fair value of these swaps was $530 which was recorded as a noncurrentasset.

**(15)   AssetRetirement Obligations**

The Company’s mining activities are subject to variousfederal and state laws and regulations governing the protection of theenvironment. These laws and regulations are continually changing and aregenerally becoming more restrictive. The Company conducts its operations so asto protect the public health and environment and believes its operations are incompliance with all applicable laws and regulations. The Company has made, andexpects to make in the future, expenditures to comply with such laws andregulations, but cannot predict the amount of such future expenditures.Estimated future reclamation costs are based principally on legal andregulatory requirements.

Thefollowing table is a reconciliation of the Company’s asset retirementobligation (“ARO”) liability from December 31, 2004 through September 30,2005:

| Asset retirement  obligation, December 31, 2004             |   | $      | 104,600 |   |
|-------------------------------------------------------------|--------|--------|---------|--------|
| Accretion expense                                           |   | 6,203  |    |
| Revisions in  estimated cash flows and liabilities incurred |   | 6,880  |    |
| Payments                                                    |   | (1,433 | )       |
| Asset retirement  obligation, September 30, 2005       |   | $      | 116,250 |   |

 

Revisions in estimated cash flows and liabilitiesincurred relate specifically to a recent annual review and increase in thefinal reclamation bond amount associated with our open pit operations in thePowder River Basin.

The current portions of the asset retirementobligation liabilities of $4,411 and $4,398 at September 30, 2005 and December 31,2004, respectively, are included in accrued expenses and other currentliabilities as illustrated in Note 8. There were no assets that were legallyrestricted for purposes of settling asset retirement obligations at September 30,2005 or December 31, 2004, respectively.

20

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**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands)**

**(16)**   SegmentInformation

The Company producesprimarily steam coal from surface and deep mines for sale to utility andindustrial customers. The Company operates only in the United States with minesin all of the major coal basins. The Company has three reportable businesssegments: Northern Appalachia, consisting of two underground mines insouthwestern Pennsylvania, Central Appalachia, consisting of six undergroundmines and two surface mines in southern West Virginia and the Powder RiverBasin, consisting of two surface mines in Wyoming. Other includes anunderground mine in Illinois, centralized sales functions, corporate overhead,business development activities, expenses for closed mines and the eliminationof intercompany transactions. The Company evaluates the performance of itssegments based on operating income.

***Successor:***

Operatingsegment results for the three months ended September 30, 2005 are asfollows:

| ** **                                | ** ** | **Powder  River  Basin** | ** ** | **Northern   Appalachia** | ** ** | **Central   Appalachia** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|--------------------------------|------------|-------------------------------|------------|-----------|------------|------------------|------------|
| Revenues                                  |       | $                        | 85,964     |                           |       | $                             | 120,707    |      |       |             | $          | 108,807 |   |   | $ | 25,832 |   |   | $ | 341,310 |   |   |
| Income (loss)  from operations            |       | 6,884                    |       |                           | 45,818     |                          |       |      | 10,781     |             |       | (11,438 | ) |   | 52,045 |   |   |
| Depreciation,  depletion and amortization |       | 15,837                   |       |                           | 20,297     |                          |       |      | 15,209     |             |       | 1,788 |   |   | 53,131 |   |   |
| Amortization of  coal supply agreements   |       | 4,974                    |       |                           | (13,337    | )                             |       |      | (10,306    | )                |       | (1,798 | ) |   | (20,467 | ) |   |
| Capital  expenditures                     |       | 16,321                   |       |                           | 12,050     |                          |       |      | 7,247      |             |       | 1,492 |   |   | 37,110 |   |   |
| Total assets                              |       | $                        | 579,263    |                           |       | $                             | 921,811    |      |       |             | $          | 468,118 |   |   | $ | 86,961 |   |   | $ | 2,056,153 |   |   |

 

Operatingsegment results for the period from February 9, 2004 (date of formation)through September 30, 2004 are as follows:

| ** **                                | ** ** | **Powder  River  Basin** | ** ** | **Northern   Appalachia** | ** ** | **Central   Appalachia** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|--------------------------------|------------|-------------------------------|------------|-----------|------------|------------------|------------|
| Revenues                                  |       | $                        | 57,483     |                           |       | $                             | 57,879     |      |       |             | $          | 42,807 |   |   | $ | 25,051 |   |   | $ | 183,220 |   |   |
| Income (loss)  from operations            |       | 3,752                    |       |                           | 20,424     |                          |       |      | 5,167      |             |       | (5,523 | ) |   | 23,820 |   |   |
| Depreciation,  depletion and amortization |       | 5,512                    |       |                           | 11,845     |                          |       |      | 8,604      |             |       | 236 |   |   | 26,197 |   |   |
| Amortization of  coal supply agreements   |       | 5,971                    |       |                           | (17,124    | )                             |       |      | (10,722    | )                |       | (578 | ) |   | (22,453 | ) |   |
| Capital expenditures                      |       | 1,589                    |       |                           | 7,359      |                          |       |      | 4,880      |             |       | (1,088 | ) |   | 12,740 |   |   |
| Total assets                              |       | $                        | 608,382    |                           |       | $                             | 765,444    |      |       |             | $          | 387,944 |   |   | $ | 377,083 |   |   | $ | 2,138,853 |   |   |

 

21

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**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands)**

***Predecessor:***

Operating segment resultsfor the one month ended July 29, 2004 are as follows:

| ** **                                | ** ** | **Powder  River  Basin** | ** ** | **Northern   Appalachia** | ** ** | **Central   Appalachia** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|--------------------------------|------------|-------------------------------|------------|-----------|------------|------------------|------------|
| Revenues                                  |       | $                        | 23,839     |                           |       | $                             | 23,949     |      |       |             | $          | 18,886 |   |   | $ | 5,899 |   |   | $ | 72,573 |   |   |
| Income (loss)  from operations            |       | 4,628                    |       |                           | (2,258     | )                             |       |      | (6,547     | )                |       | (11,126 | ) |   | (15,303 | ) |   |
| Depreciation,  depletion and amortization |       | 1,489                    |       |                           | 3,978      |                          |       |      | 2,712      |             |       | 571 |   |   | 8,750 |   |   |
| Amortization of  coal supply agreements   |       | 874                      |       |                           | 60         |                          |       |      | —     |             |       | 108 |   |   | 1,042 |   |   |
| Capital  expenditures                     |       | 944                      |       |                           | 856        |                          |       |      | 725        |             |       | (283 | ) |   | 2,242 |   |   |
| Total assets                              |       | $                        | 425,573    |                           |       | $                             | 553,504    |      |       |             | $          | 142,359 |   |   | $ | 296,932 |   |   | $ | 1,418,368 |   |   |

 

***Successor:***

Operatingsegment results for the nine months ended September 30, 2005 are asfollows:

| ** **                                | ** ** | **Powder  River  Basin** | ** ** | **Northern   Appalachia** | ** ** | **Central   Appalachia** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|--------------------------------|------------|-------------------------------|------------|-----------|------------|------------------|------------|
| Revenues                                  |       | $                        | 240,671    |                           |       | $                             | 358,863    |      |       |             | $          | 308,233 |   |   | $ | 68,527 |   |   | $ | 976,294 |   |   |
| Income (loss)  from operations            |       | 10,223                   |       |                           | 127,660    |                          |       |      | 42,970     |             |       | (35,773 | ) |   | 145,080 |   |   |
| Depreciation,  depletion and amortization |       | 52,859                   |       |                           | 57,660     |                          |       |      | 44,614     |             |       | 5,492 |   |   | 160,625 |   |   |
| Amortization of  coal supply agreements   |       | 13,982                   |       |                           | (44,237    | )                             |       |      | (33,341    | )                |       | (3,387 | ) |   | (66,983 | ) |   |
| Capital  expenditures                     |       | 33,718                   |       |                           | 33,521     |                          |       |      | 31,895     |             |       | 3,069 |   |   | 102,203 |   |   |
| Total assets                              |       | $                        | 579,263    |                           |       | $                             | 921,811    |      |       |             | $          | 468,118 |   |   | $ | 86,961 |   |   | $ | 2,056,153 |   |   |

 

Operatingsegment results for the period from February 9, 2004 (date of formation)through September 30, 2004 are as follows:

| ** **                                | ** ** | **Powder  River  Basin** | ** ** | **Northern   Appalachia** | ** ** | **Central   Appalachia** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|--------------------------------|------------|-------------------------------|------------|-----------|------------|------------------|------------|
| Revenues                                  |       | $                        | 57,483     |                           |       | $                             | 57,879     |      |       |             | $          | 42,807 |   |   | $ | 25,051 |   |   | $ | 183,220 |   |   |
| Income (loss)  from operations            |       | 3,752                    |       |                           | 20,424     |                          |       |      | 5,167      |             |       | (5,523 | ) |   | 23,820 |   |   |
| Depreciation,  depletion and amortization |       | 5,512                    |       |                           | 11,845     |                          |       |      | 8,604      |             |       | 236 |   |   | 26,197 |   |   |
| Amortization of  coal supply agreements   |       | 5,971                    |       |                           | (17,124    | )                             |       |      | (10,722    | )                |       | (578 | ) |   | (22,453 | ) |   |
| Capital  expenditures                     |       | 1,589                    |       |                           | 7,359      |                          |       |      | 4,880      |             |       | (1,088 | ) |   | 12,740 |   |   |
| Total assets                              |       | $                        | 608,382    |                           |       | $                             | 765,444    |      |       |             | $          | 387,944 |   |   | $ | 377,083 |   |   | $ | 2,138,853 |   |   |

 

22

----

**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands)**

***Predecessor:***

Operatingsegment results for the seven months ended July 29, 2004 are as follows:

| ** **                                | ** ** | **Powder  River  Basin** | ** ** | **Northern   Appalachia** | ** ** | **Central   Appalachia** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|--------------------------------|------------|-------------------------------|------------|-----------|------------|------------------|------------|
| Revenues                                  |       | $                        | 179,758    |                           |       | $                             | 160,562    |      |       |             | $          | 159,004 |   |   | $ | 51,711 |   |   | $ | 551,035 |   |   |
| Income (loss)  from operations            |       | 30,748                   |       |                           | (10,368    | )                             |       |      | (9,797     | )                |       | (45,473 | ) |   | (34,890 | ) |   |
| Depreciation,  depletion and amortization |       | 10,918                   |       |                           | 27,864     |                          |       |      | 18,761     |             |       | 3,693 |   |   | 61,236 |   |   |
| Amortization of  coal supply agreements   |       | 7,521                    |       |                           | 391        |                          |       |      | —     |             |       | 925 |   |   | 8,837 |   |   |
| Capital  expenditures                     |       | 11,483                   |       |                           | 26,549     |                          |       |      | 12,208     |             |       | 2,455 |   |   | 52,695 |   |   |
| Total assets                              |       | $                        | 425,573    |                           |       | $                             | 553,504    |      |       |             | $          | 142,359 |   |   | $ | 296,932 |   |   | $ | 1,418,368 |   |   |

 

**(17)**   Other Revenue

Otherrevenue consisted of the following:

| ** **                              | ** ** | **Successor**                                          | ** ** | **Predecessor**                                                                                                                  | ** ** | **Successor**                                  | ** ** | **Predecessor**                                       | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                              | ** ** | **Three Months  Ended  September 30,  2005** | ** ** | **For the Period  From  February 9, 2004  (date of formation)  Through  September 30,  2004** | ** ** | **One Month  Ended  July 29,  2004** | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** | **For the Period  From  February 9, 2004  (date of formation)  Through  September 30,  2004** | ** ** | **Seven Months  Ended  July 29,  2004** | ** ** |
| ** **                              | ** ** | **(Unaudited)**                                        | ** ** | **(Unaudited)**                                                                                                                  | ** ** | **(Unaudited)**                                | ** ** | **(Unaudited)**                                       | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
| Royalty income                          |       |                                                   | $          | 1,658                                                                                                                            |       |                                           |       | $                                                     | 767        |   |   |   | $ | 190 |   |   |   | $ | 2,225 |   |   |   | $ | 767 |   |   |   | $ | 1,696 |   |   |
| Synfuel fees                            |       |                                                   | 2,056      |                                                                                                                             |       |                                           | 731        |                                                  |       |   | 269 |   |   |   | 5,278 |   |   |   | 731 |   |   |   | 2,281 |   |   |
| Coalbed methane                         |       |                                                   | 1,923      |                                                                                                                             |       |                                           | 1,819      |                                                  |       |   | 539 |   |   |   | 4,632 |   |   |   | 1,819 |   |   |   | 1,639 |   |   |
| Transloading and plant  processing fees |       |                                                   | 641        |                                                                                                                             |       |                                           | 241        |                                                  |       |   | 108 |   |   |   | 2,217 |   |   |   | 241 |   |   |   | 867 |   |   |
| Gain (loss) on disposition  of assets   |       |                                                   | 458        |                                                                                                                             |       |                                           | —     |                                                  |       |   | 277 |   |   |   | 419 |   |   |   | — |   |   |   | 960 |   |   |
| Coal sales contract  settlements        |       |                                                   | —     |                                                                                                                             |       |                                           | (1,730     | )                                                     |       |   | (1,296 | ) |   |   | — |   |   |   | (1,730 | ) |   |   | (1,296 | ) |   |
| Other                                   |       |                                                   | 1,105      |                                                                                                                             |       |                                           | 965        |                                                  |       |   | 1,637 |   |   |   | 3,496 |   |   |   | 965 |   |   |   | 6 |   |   |
| Total other revenue                     |       |                                                   | $          | 7,841                                                                                                                            |       |                                           |       | $                                                     | 2,793      |   |   |   | $ | 1,724 |   |   |   | $ | 18,267 |   |   |   | $ | 2,793 |   |   |   | $ | 6,153 |   |   |

 

**(18)**   Commitments andContingencies

*Asset RetirementObligations (formerly Reclamation and Mine Closure)*

At September 30,2005, the Company’s accruals for reclamation and mine closure totaled $116,250.The portion of the costs expected to be incurred within a year of $4,411 at September 30,2005 is included in accrued expenses and other current liabilities. At September 30,2005, these regulatory obligations are secured by surety bonds in the amount of$229,176. These surety bonds are partially collateralized by letters of creditissued by the Company.

*Guarantees*

One of our former parent companies, Cyprus AmaxMinerals Company, remains a guarantor with regard to future minimum royaltiespayable under leases through the first quarter 2006 to Blackhawk Coal Company,an affiliate of American Electric Power. Under the terms of the Stock PurchaseAgreement, dated May 12, 1999 between RAG Coal International AG and CyprusAmax Minerals Company, the 

23

----

**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands)**

Predecessor guaranteedCyprus Amax performance under this obligation by issuing an irrevocable letterof credit to secure the minimum royalty payments still due. The Company assumedthis guarantee in the acquisition. The amount of this letter of credit isreduced as the Company makes the scheduled payments. At September 30, 2005and December 31, 2004, the letter of credit amount was $3,000 and $6,000,respectively.

Neweagle Industries, Inc. (“Neweagle”) is awholly-owned indirect subsidiary of the Company. Starting in early 2001,Neweagle supplied and sold coal to Arch Coal Sales Company, Inc. (“ArchSales”) pursuant to a Conditional Coal Supply Agreement dated October 1,1996 (CCSA). This coal was in turn resold by Arch Sales under a separate anddistinct Coal Sales Agreement dated October 1, 1989 (“Rocky Mount Contract”)with Cogentrix of Rocky Mount, Inc. (“Cogentrix”) as the buyer whichexpires December 31, 2013. On March 23, 2003, the Predecessor (now knownas Foundation American Coal Holding, LLC) conditionally issued to ArchSales a Guaranty and Indemnity (“Guaranty”) of Neweagle’s performance under theCCSA, and also agreed to indemnify Arch Sales and its affiliates and otherparties for any liability related to the Rocky Mount Contract. As part of aglobal settlement of litigation relating to numerous issues between affiliatesof the Predecessor and Arch Sales, a Mutual Release and Settlement Agreement (“MRSA”)was executed effective November 12, 2004. Pursuant to the MRSA, the CCSAand the Guaranty were terminated. Also pursuant to the MRSA, Neweagle agreed tocontinue selling and supplying coal to Arch in the quantities required underthe Rocky Mount Contract for re-sale by Arch to Cogentrix thereunder. The MRSAalso was executed by the Predecessor (now known as Foundation American CoalHolding, LLC) As a signatory to the MRSA, Foundation American CoalHolding, LLC and Neweagle agreed to indemnify, defend, and save harmlessArch and its affiliates from any non-performance, default or breach of (i) Neweagle’sobligation to supply coal to Arch Sales under the MSRA and (ii) for solong as the MRSA remains in force, any default, breach, or non-fulfillment ofArch Sales contract obligations under the Rocky Mount Contract as a result ofacts or omissions (other than by Cogentrix) occurring on or after November 12,2004.

Neweagle Industries, Inc., Neweagle Coal SalesCorp., Laurel Creek Co., Inc. and Rockspring Development, Inc. (“Sellers”)are wholly-owned indirect subsidiaries of the Company. The Sellers sellcoal to Birchwood Power Partners, L.P. (“Birchwood”) under a Coal SupplyAgreement dated July 22, 1993 which expires November 15, 2021 (BirchwoodContract). Laurel Creek Co., Inc. and Rockspring Development, Inc.were parties to the Birchwood Contract since its inception, at which time thoseentities were not affiliated with Neweagle Industries, Inc., Neweagle CoalSales Corp., or the Company. Effective January 31, 1994, the BirchwoodContract was assigned to Neweagle Industries, Inc. and Neweagle Coal SalesCorp. by AgipCoal Holding USA, Inc. and AgipCoal Sales USA, Inc.,which at the time were affiliates of Arch Coal, Inc. Despite thisassignment, Arch Coal, Inc. (“Arch”) and its affiliates have separatecontractual obligations to provide coal to Birchwood if Sellers fail toperform. Pursuant to an Agreement & Release dated September 30,1997, the Predecessor (now known as Foundation American Coal Holding, LLC)agreed to defend, indemnify, and hold harmless Arch and its subsidiaries fromand against any claims arising out of any failure of Sellers to perform underthe Birchwood Contract. By acknowledgement dated February 16, 2005, thePredecessor and Arch acknowledged the continuing validity and effect of theAgreement & Release dated September 30, 1997.

24

----

**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands)**

In the normal course ofbusiness, the Company is a party to guarantees and financial instruments withoff-balance sheet risk, such as bank letters of credit, performance or suretybonds and other guarantees and indemnities, which are not reflected in theaccompanying consolidated balance sheets. Such financial instruments are valuedbased on the amount of exposure under the instrument and likelihood ofperformance being required. In the Company’s past experience, no claims havebeen made against these financial instruments. Management does not expect anymaterial losses to result from these guarantees or off-balance-sheetinstruments and, therefore, is of the opinion that their fair value is zero.

*Contingencies*

Several of our subsidiaries have been named asdefendants in several separate complaints filed in Raleigh and Wyoming Counties,West Virginia, starting in late 2001, alleging personal injury and propertydamage caused by flooding on or about July 8, 2001. Similar suits may befiled in the future based on this or subsequent weather events. The generalalleged basis for the lawsuits is that coal mining, oil and gas drilling andtimbering operations altered the topography in the area to such an extent thatflooding resulting from heavy rains caused more severe damage than would haveotherwise resulted. Numerous similar complaints were filed by hundreds ofplaintiffs against over 100 defendants, in a total of seven southern WestVirginia counties. All such civil actions have been referred by the WestVirginia Supreme Court to a three-judge panel, sitting in Raleigh County,pursuant to the Court’s Mass Litigation Rule.

On December 9, 2004, the West Virginia SupremeCourt issued an opinion addressing certain questions of law certified to it bythe three-judge panel. Among other rulings, the Supreme Court decisionheld that plaintiffs may not proceed under a strict liability theory, as hadbeen asserted in their complaints. The court also held that where damages canbe shown to have been caused by an unusual act of nature combined with theconduct of a defendant, the defendant should be given an opportunity to show byclear and convincing evidence that it caused only a portion of those damages,in order to avoid incurring liability for all damages.

In March 2005 the three judge panel issued ascheduling order indicating that six different trials will be held, one foreach watershed impacted. Each trial will be held in two phases with theliability phase being held first, and then a damages phase. The first trial iscurrently scheduled to commence in March 2006. This will relate to floodingin the Upper Guyandotte River watershed in which our affiliates do haveoperations. Discovery and other pretrial proceedings associated with this firsttrial are now underway.

We believe the claims against our entities are fullycovered by insurance. Common defense counsel and experts are representingnumerous defendants and costs are being shared. While the outcome of litigationis subject to uncertainties, based on our preliminary evaluation of the issuesand the potential impact on us, we believe this matter will be resolved withouta material adverse effect on our financial condition, results of operations orcash flow.

Extensive regulation ofthe impacts of mining on the environment and related litigation has had and mayhave a significant effect on our costs of production and competitive position.Further regulations, legislation or litigation may also cause our sales orprofitability to decline by hindering our ability to continue our miningoperations, by increasing our costs, or by causing coal to become a lessattractive fuel source.

25

----

**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands)**

*Legal Proceedings*

The Company is involved invarious claims and other legal actions arising in the ordinary course ofbusiness. In the opinion of management, the ultimate disposition of thesematters will not have a material adverse effect on the Company’s financialposition, results of operations or cash flows.

**(19)   SupplementalGuarantor and Non-Guarantor Financial Information**

On July 30,2004, the Company’s indirect wholly owned subsidiary, Foundation PA CoalCompany (the “Issuer”), issued $300,000 aggregate principal amount of 71¤4%Senior Notes (the “Notes”) that mature on August 1, 2014. In accordancewith the indenture governing the Notes, each of the direct and indirect whollyowned subsidiaries of the Company, other than the Issuer, have fully andunconditionally guaranteed the Notes, jointly and severally, on a seniorunsecured basis. Separate financial statements and other disclosures concerningthe Guarantor Subsidiaries are not presented because management believes thatsuch information is not material to holders of the Notes. The followingcondensed financial statement information is provided for theGuarantor/Non-Guarantor Subsidiaries.

26

----

**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands)**

**SuccessorUnaudited Supplemental Condensed Consolidated Statements of Operations For the Three Months Ended September 30, 2005**

| ** **                                                                                       | ** ** | **FCC** | ** ** | **Non-Guarantor  Subsidiary  (Issuer)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------|------------|-----------------------------------------|------------|-----------------------------|------------|------------------|------------|------------------|------------|
| Total revenues                                                                                   |       | $       | 12         |                                    |       | $                           | —     |             |       |             | $          | 341,298 |   |   |   | $ | — |   |   |   | $ | 341,310 |   |   |
| Costs and expenses:                                                                              |       |    |       |                                    |       |                        |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Cost of sales (excludes depreciation, depletion and  amortization)                               |       | 150     |       |                                    | 37         |                        |       |             | 241,051    |             |       |   | — |   |   |   | 241,238 |   |   |
| Selling, general and administrative expense  (excludes depreciation, depletion and amortization) |       | 9,301   |       |                                    | —     |                        |       |             | 3,943      |             |       |   | — |   |   |   | 13,244 |   |   |
| Accretion on asset retirement obligations                                                        |       | —  |       |                                    | —     |                        |       |             | 2,119      |             |       |   | — |   |   |   | 2,119 |   |   |
| Depreciation, depletion and amortization                                                         |       | 40      |       |                                    | —     |                        |       |             | 53,091     |             |       |   | — |   |   |   | 53,131 |   |   |
| Amortization of coal supply agreements                                                      |       | —  |       |                                    | —     |                        |       |             | (20,467    | )                |       |   | — |   |   |   | (20,467 | ) |   |
| Income (loss)  from operations                                                                   |       | (9,479  | )          |                                    | (37        | )                           |       |             | 61,561     |             |       |   | — |   |   |   | 52,045 |   |   |
| Other income (expense):                                                                          |       |    |       |                                    |       |                        |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Interest expense:                                                                                |       |    |       |                                    |       |                        |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Debt and other                                                                                   |       | (127    | )          |                                    | (12,148    | )                           |       |             | (2,817     | )                |       |   | — |   |   |   | (15,092 | ) |   |
| Intercompany                                                                                     |       | (1,334  | )          |                                    | 5,325      |                        |       |             | (3,991     | )                |       |   | — |   |   |   | — |   |   |
| Interest income                                                                                  |       | 172     |       |                                    | —     |                        |       |             | 63         |             |       |   | — |   |   |   | 235 |   |   |
| Income (loss)  from operations before income taxes                                               |       | (10,768 | )          |                                    | (6,860     | )                           |       |             | 54,816     |             |       |   | — |   |   |   | 37,188 |   |   |
| Income tax  expense                                                                              |       | (13,870 | )          |                                    | 817        |                        |       |             | (1,661     | )                |       |   | — |   |   |   | (14,714 | ) |   |
| Income (loss)  from continuing  operations                                                       |       | (24,638 | )          |                                    | (6,043     | )                           |       |             | 53,155     |             |       |   | — |   |   |   | 22,474 |   |   |
| Equity in earnings  of investments in issuer and guarantor subsidiaries                     |       | 47,112  |       |                                    | 41,362     |                        |       |             | —     |             |       |   | (88,474 | ) |   |   | — |   |   |
| Net income (loss)                                                                                |       | $       | 22,474     |                                    |       | $                           | 35,319     |             |       |             | $          | 53,155 |   |   |   | $ | (88,474 | ) |   |   | $ | 22,474 |   |   |

 

27

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**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands)**

**SuccessorUnaudited Supplemental Condensed Consolidated Statements of OperationsFor the Nine Months Ended September 30, 2005**

| ** **                                                                                       | ** ** | **FCC** | ** ** | **Non-Guarantor  Subsidiary  (Issuer)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------|------------|-----------------------------------------|------------|-----------------------------|------------|------------------|------------|------------------|------------|
| Total revenues                                                                                   |       | $       | 15         |                                    |       | $                           | —     |             |       |             | $          | 976,279 |   |   |   | $ | — |   |   |   | $ | 976,294 |   |   |
| Costs and  expenses:                                                                             |       |    |       |                                    |       |                        |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Cost of sales (excludes depreciation, depletion and  amortization)                               |       | 300     |       |                                    | 113        |                        |       |             | 697,323    |             |       |   | — |   |   |   | 697,736 |   |   |
| Selling, general and administrative expense  (excludes depreciation, depletion and amortization) |       | 21,270  |       |                                    | —     |                        |       |             | 12,363     |             |       |   | — |   |   |   | 33,633 |   |   |
| Accretion on asset retirement obligations                                                        |       | —  |       |                                    | —     |                        |       |             | 6,203      |             |       |   | — |   |   |   | 6,203 |   |   |
| Depreciation, depletion and amortization                                                         |       | 40      |       |                                    | —     |                        |       |             | 160,585    |             |       |   | — |   |   |   | 160,625 |   |   |
| Amortization of coal supply agreements                                                           |       | —  |       |                                    | —     |                        |       |             | (66,983    | )                |       |   | — |   |   |   | (66,983 | ) |   |
| Income (loss)  from operations                                                                   |       | (21,595 | )          |                                    | (113       | )                           |       |             | 166,788    |             |       |   | — |   |   |   | 145,080 |   |   |
| Other income  (expense):                                                                         |       |    |       |                                    |       |                        |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Interest expense:                                                                                |       |    |       |                                    |       |                        |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Debt and other                                                                                   |       | (408    | )          |                                    | (34,995    | )                           |       |             | (8,366     | )                |       |   | — |   |   |   | (43,769 | ) |   |
| Intercompany                                                                                     |       | (3,951  | )          |                                    | 15,559     |                        |       |             | (11,608    | )                |       |   | — |   |   |   | — |   |   |
| Interest income                                                                                  |       | 336     |       |                                    | —     |                        |       |             | 201        |             |       |   | — |   |   |   | 537 |   |   |
| Income (loss)  from operations before income taxes                                               |       | (25,618 | )          |                                    | (19,549    | )                           |       |             | 147,015    |             |       |   | — |   |   |   | 101,848 |   |   |
| Income tax  expense                                                                              |       | (35,644 | )          |                                    | (2,551     | )                           |       |             | (1,754     | )                |       |   | — |   |   |   | (39,949 | ) |   |
| Income (loss)  from continuing operations                                                        |       | (61,262 | )          |                                    | (22,100    | )                           |       |             | 145,261    |             |       |   | — |   |   |   | 61,899 |   |   |
| Equity in  earnings of investments in issuer and guarantor subsidiaries                          |       | 123,161 |       |                                    | 114,077    |                        |       |             | —     |             |       |   | (237,238 | ) |   |   | — |   |   |
| Net income (loss)                                                                                |       | $       | 61,899     |                                    |       | $                           | 91,977     |             |       |             | $          | 145,261 |   |   |   | $ | (237,238 | ) |   |   | $ | 61,899 |   |   |

 

28

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**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands)**

**SuccessorUnaudited Supplemental Condensed Consolidated Balance SheetsSeptember 30, 2005**

| ** **                                             | ** ** | **FCC** | ** ** | **Non-Guarantor  Subsidiary  (Issuer)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------|------------|---------|------------|-----------------------------------------|------------|-----------------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                             |       |    |       |                                    |       |                        |       |             |       |             |       |   |   |   |   |
| Current assets:                                        |       |    |       |                                    |       |                        |       |             |       |             |       |   |   |   |   |
| Cash and cash  equivalents                             |       | $       | 11,587     |                                    |       | $                           | —     |             |       | $                | (585       | ) | $ | — |   |   | $ | 11,002 |   |   |
| Trade accounts  receivable, net                        |       | (51     | )          |                                    | —     |                        |       | 112,384          |       | —           |       |   | 112,333 |   |   |
| Inventories, net                                       |       | —  |       |                                    | —     |                        |       | 78,490           |       | —           |       |   | 78,490 |   |   |
| Deferred income  taxes                                 |       | —  |       |                                    | 5,569      |                        |       | 12,956           |       | —           |       |   | 18,525 |   |   |
| Other current  assets                                  |       | 1,738   |       |                                    | 163        |                        |       | 27,648           |       | —           |       |   | 29,549 |   |   |
| Total current  assets                                  |       | 13,274  |       |                                    | 5,732      |                        |       | 230,893          |       | —           |       |   | 249,899 |   |   |
| Owned surface  lands                                   |       | —  |       |                                    | —     |                        |       | 29,333           |       | —           |       |   | 29,333 |   |   |
| Plant, equipment  and mine development costs, net |       | 1,301   |       |                                    | —     |                        |       | 549,684          |       | —           |       |   | 550,985 |   |   |
| Owned and leased  mineral rights, net                  |       | —  |       |                                    | —     |                        |       | 1,130,436        |       | —           |       |   | 1,130,436 |   |   |
| Coal supply  agreements, net                           |       | —  |       |                                    | —     |                        |       | 58,852           |       | —           |       |   | 58,852 |   |   |
| Other noncurrent  assets                               |       | 464,972 |       |                                    | 428,193    |                        |       | 566,866          |       | (1,423,383       | )          |   | 36,648 |   |   |
| Total assets                                           |       | $       | 479,547    |                                    |       | $                           | 433,925    |             |       | $                | 2,566,064  |   | $ | (1,423,383 | ) |   | $ | 2,056,153 |   |   |
| **Liabilities  and Stockholder Equity**                |       |    |       |                                    |       |                        |       |             |       |             |       |   |   |   |   |
| Current liabilities:                                   |       |    |       |                                    |       |                        |       |             |       |             |       |   |   |   |   |
| Trade accounts  payable                                |       | $       | 745        |                                    |       | $                           | —     |             |       | $                | 30,914     |   | $ | — |   |   | $ | 31,659 |   |   |
| Accrued expenses  and other current liabilities        |       | 15,233  |       |                                    | 5,460      |                        |       | 133,006          |       | —           |       |   | 153,699 |   |   |
| Total current  liabilities                             |       | 15,978  |       |                                    | 5,460      |                        |       | 163,920          |       | —           |       |   | 185,358 |   |   |
| Long-term debt                                         |       | —  |       |                                    | 665,000    |                        |       | —           |       | —           |       |   | 665,000 |   |   |
| Deferred income  taxes                                 |       | 24,815  |       |                                    | 108,284    |                        |       | (20,209          | )          | —           |       |   | 112,890 |   |   |
| Coal supply  agreements, net                           |       | —  |       |                                    | —     |                        |       | 82,736           |       | —           |       |   | 82,736 |   |   |
| Other noncurrent  liabilities                          |       | 124,676 |       |                                    | (438,097   | )                           |       | 1,615,645        |       | (606,133         | )          |   | 696,091 |   |   |
| Total liabilities                                      |       | 165,469 |       |                                    | 340,647    |                        |       | 1,842,092        |       | (606,133         | )          |   | 1,742,075 |   |   |
| Stockholder equity                                     |       | 314,078 |       |                                    | 93,278     |                        |       | 723,972          |       | (817,250         | )          |   | 314,078 |   |   |
| Total liabilities and  stockholder equity              |       | $       | 479,547    |                                    |       | $                           | 433,925    |             |       | $                | 2,566,064  |   | $ | (1,423,383 | ) |   | $ | 2,056,153 |   |   |

 

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**Foundation Coal Corporation and Subsidiaries (An Indirect Wholly Owned Subsidiary of Foundation Coal Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands)**

**SuccessorUnaudited Supplemental Condensed Consolidated Statements of Cash FlowsFor the Nine Months Ended September 30, 2005**

| ** **                                                      | ** ** | **FCC** | ** ** | **Non-Guarantor  Subsidiary  (Issuer)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------|------------|---------|------------|-----------------------------------------|------------|-----------------------------|------------|------------------|------------|
| Net cash provided  by operating activities                      |       | $       | 13,877     |                                    |       | $                           | 20,000     |             |       |   | $ | 68,930 |   |   |   | $ | 102,807 |   |   |
| Investing activities:                                           |       |    |       |                                    |       |                        |       |             |       |   |   |   |   |   |   |
| Purchases of property, plant and equipment                      |       | —  |       |                                    | —     |                        |       |             | (102,203   | ) |   |   | (102,203 | ) |   |
| Proceeds from disposition of property, plant and equipment |       | —  |       |                                    | —     |                        |       |             | 5,355      |   |   |   | 5,355 |   |   |
| Net cash used in investing activities                           |       | —  |       |                                    | —     |                        |       |             | (96,848    | ) |   |   | (96,848 | ) |   |
| Financing  activities:                                          |       |    |       |                                    |       |                        |       |             |       |   |   |   |   |   |   |
| Proceeds from revolving credit facility                         |       | —  |       |                                    | 76,000     |                        |       |             | —     |   |   |   | 76,000 |   |   |
| Repayment of revolving credit facility                          |       | —  |       |                                    | (76,000    | )                           |       |             | —     |   |   |   | (76,000 | ) |   |
| Repayment of long-term debt                                     |       |    |       |                                    | (20,000    | )                           |       |             |       |   |   |   | (20,000 | ) |   |
| Net cash used in  financing activities                          |       | —  |       |                                    | (20,000    | )                           |       |             | —     |   |   |   | (20,000 | ) |   |
| Net increase  (decrease) in cash and cash  equivalents          |       | 13,877  |       |                                    | —     |                        |       |             | (27,918    | ) |   |   | (14,041 | ) |   |
| Cash and cash  equivalents at beginning of period               |       | (2,290  | )          |                                    | —     |                        |       |             | 27,333     |   |   |   | 25,043 |   |   |
| Cash and cash  equivalents at end of period                     |       | $       | 11,587     |                                    |       | $                           | —     |             |       |   | $ | (585 | ) |   |   | $ | 11,002 |   |   |

 

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**ITEM 2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**SPECIALNOTE REGARDING FORWARD-LOOKING STATEMENTS**

This Form 10-Q contains forward-lookingstatements that are not statements of historical fact and may involve a numberof risks and uncertainties. These statements relate to analyses and otherinformation that are based on forecasts of future results and estimates ofamounts not yet determinable. These statements may also relate to our futureprospects, developments and business strategies.

We have used thewords “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,”“predict,” “project” and similar terms and phrases, including references toassumptions, in this Form 10-Q to identify forward-lookingstatements. These forward-looking statements are made based onexpectations and beliefs concerning future events affecting us and are subjectto uncertainties and factors relating to our operations and businessenvironment, all of which are difficult to predict and many of which are beyondour control, that could cause our actual results to differ materially fromthose matters expressed in or implied by these forward-lookingstatements. The factors, described below and elsewhere in this Form 10-Q,and in other documents we file with the SEC from time to time, are among thosethat may cause actual results to differ materially from our forward-lookingstatements:

·       marketdemand for coal, electricity and steel;

·       futureeconomic or capital market conditions;

·       weatherconditions or catastrophic weather-related damage;

·       ourproduction capabilities;

·       theconsummation of financing, acquisition or disposition transactions and theeffect thereof on our business;

·       ourplans and objectives for future operations and expansion or consolidation;

·       ourrelationships with, and other conditions affecting, our customers;

·       timingof reductions or increases in customer coal inventories;

·       long-termcoal supply arrangements;

·       risksin coal mining;

·       environmentallaws, including those directly affecting our coal mining and production, andthose affecting our customers’ coal usage;

·       competition;

·       railroad,barge, trucking and other transportation performance and costs;

·       ourassumptions concerning economically recoverable coal reserve estimates;

·       employeeworkforce factors;

·       regulatoryand court decisions;

·       futurelegislation and changes in regulations or governmental policies or changes ininterpretations thereof;

·       changesin postretirement benefit and pension obligations;

·       ourliquidity, results of operations and financial condition; and

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·       disruptionsin delivery or changes in pricing from third party vendors of goods andservices which are necessary for our operations, such as fuel, steel products,explosives and tires.

You should keep in mindthat any forward-looking statement made by us in this Form 10-Qor elsewhere speaks only as of the date on which we make it. New risks anduncertainties come up from time to time, and it is impossible for us to predictthese events or how they may affect us. We have no duty to, and do not intendto, update or revise the forward-looking statements in this Form 10-Qafter the date of this Form 10-Q, except as may be required by law.In light of these risks and uncertainties, you should keep in mind that anyforward-looking statement made in this Form 10-Q or elsewheremight not occur.

**Overview**

We are the fifth largest coal company in the UnitedStates operating nine mining complexes that consist of thirteen individual coalmines. Our mining operations are located in southwest Pennsylvania, southernWest Virginia, southern Illinois and the southern Powder River Basin region ofWyoming. Three of our mining complexes are surface mines, two of our complexesare underground mines using highly efficient longwall mining technology and theremaining four complexes are underground mines that utilize continuous miners.In addition to mining coal, we also purchase coal from other producers andutilize it with our own production in coal brokering and trading activities.

Our primary product is steam coal, sold primarily toelectric power generators located in the United States. Approximately 9% of ourcoal sales revenue for the nine months ended September 30, 2005 and 8% ofour pro-forma sales revenue for the nine months ended September 30, 2004was made from the sale of metallurgical coal to the domestic and exportmetallurgical coal markets where it is used to make coke for steel production.

While the majority of our revenues are derived fromthe sale of coal, we also realize revenues from coal production royalties,override royalty payments from a coal supply agreement now fulfilled by anotherproducer, fees from the processing of our production by a synfuel facility,fees to transload coal through our Rivereagle facility on the Big Sandy Riverand revenues from the sale of coalbed methane.

From July 1, 1999 through July 29, 2004, wewere a stand-alone wholly owned subsidiary of RAG Coal International AG (“RAG”)headquartered in Essen, Germany. In October 2003, RAG announced itsintention to divest its international mining subsidiaries. In addition to RAGAmerican Coal Holding, Inc., these international mining subsidiariesconsisted of operations in Australia and Venezuela. On February 29, 2004,RAG announced the sale of four of our subsidiaries, collectively known as theRAG Colorado Business Unit, to a third party. The subsidiaries comprising theRAG Colorado Business Unit owned an underground longwall mine located in RouttCounty, Colorado, an idled underground longwall mine located in Moffat County,Colorado and surface lands located in northwest Colorado and southern Wyoming.The transaction closed on April 15, 2004. In the financial statements ofthe Predecessor for the first quarter of 2004, the RAG Colorado Business Unitwas classified as a discontinued operation.

On May 24, 2004, RAG,entered into a definitive agreement with Foundation Coal Corporation, which wasowned by affiliates of First Reserve, Blackstone and AMCI, to sell all of itsoperations except the RAG Colorado Business Unit which was sold on April 15,2004. The transaction closed on July 30, 2004.

**Results of Continuing Operations**

**Basis of Presentation:**

RAG American Coal Holding, Inc. and itssubsidiaries, excluding the subsidiaries comprising the RAG Colorado BusinessUnit which were sold on April 15, 2004, were acquired by a subsidiary ofFoundation Coal Holdings, Inc. on July 30, 2004. Due to the change inownership, and the resultant 

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application of purchaseaccounting, the historical financial statements of the Predecessor and theSuccessor included in this Form 10-Q have been prepared on differentbases for the periods presented and are not comparable.

The following provides a description of the basis ofpresentation during all periods presented:

**Successor****—represents**theconsolidated financial position of Foundation Coal Holdings, Inc. as of December 31,2004 and September 30, 2005, our consolidated results of operations forthe quarter ended September 30, 2005 and our consolidated results ofoperations and cash flows for the nine months ended September 30, 2005.Foundation Coal Holdings, Inc. had no significant activities until theacquisition on July 30, 2004. Our consolidated financial position at September 30,2005, and our consolidated results of operations for the quarter and ninemonths ended September 30, 2005 reflect the final purchase price allocationbased on appraisals prepared by independent valuation specialists, employeebenefit valuations prepared by independent actuaries and other internalanalysis. Deferred income taxes have been provided in the consolidated balancesheet based on the tax versus book basis of the fair values of the assetsacquired and liabilities assumed. During the quarter ended September 30,2005, we completed the purchase price allocation, and recorded final purchaseaccounting adjustments that reduced the fair value of the total assets acquiredby approximately $60 million, or approximately 3%, of the preliminary valueassigned to the assets acquired. The most significant final purchase accountingadjustment reduced deferred income tax liabilities, with corresponding changesto the values assigned to owned and leased mineral rights and coal supplyagreements, due to a change in assumption as to how Medicare Part D willbe implemented with regard to retiree health care obligations. The preliminaryvaluation of deferred income taxes assumed that Medicare Part D would becoordinated with the Company’s retiree health care plans. Additionalinformation obtained and analysis performed prior to the finalization ofpurchase accounting caused this assumption to change to an expectation that theCompany will utilize the income tax free subsidy offered under Medicare Part D.Our consolidated financial position at December 31, 2004 reflected ourpreliminary estimates of purchase price allocation before the final purchaseaccounting adjustments described above. The application of purchase accountingto the acquired assets of RAG American Coal Holding, Inc. resulted inincreases to owned and leased mineral rights, surface lands, coal inventories,and the asset arising from recognition of asset retirement obligations. Itresulted in decreases to plant and equipment and current deferred taxes. In addition,the historical cost assigned to deferred overburden in the acquired assetbalance sheet was eliminated. The values assigned to uncovered and partiallycovered coal lands considered the stage of the mining process in which thesetwo groups of coal lands were at the acquisition date. The application ofpurchase accounting to the acquired liabilities of RAG American Coal Holding, Inc.resulted in increases to postretirement health care obligations, pensionobligations, black lung obligations, asset retirement obligations andnoncurrent deferred taxes. Separate assets or liabilities were established toreflect the valuation of above or below market coal supply agreements inrelation to market price curves. With regard to consolidated results of operationsfor the three and nine month periods ended September 30, 2005, theprincipal effects of the application of purchase accounting, in comparison toreporting for historical periods, were to decrease the cost of coal sold due tolower expenses for postretirement health care and pensions, to decrease thecost of coal sold for net deferrals of deferred overburden costs, to decreasenet amortization expense for coal supply agreements which is now a creditbecause our contracts at acquisition represented a net liability, and toincrease the cost of depletion expense for owned and leased mineral rights.

**Predecessor**—representsthe results of operations for RAG American Coal Holding, Inc. for the oneand seven months ended July 29, 2004 and cash flows for RAG American CoalHolding, Inc. for the seven months ended July 29, 2004. Theseconsolidated financial statements are based on the historical assets,liabilities, sales and expenses of the Predecessor for these periods.

**Proforma**—To facilitate the three and nine month periodcomparisons throughout management’s discussion and analysis, we discuss “proforma” results for the quarter and nine month periods ended 

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September 30,2004. The pro forma results present the third quarter and first nine months of2004 as if Foundation Coal Holdings, Inc.: (a) acquired RAG AmericanCoal Holding, Inc. on January 1, 2004; (b) completed the InitialPublic Offering on January 1, 2004; and transacted the sale of the RAGColorado Business Unit and associated repayment of Predecessor bank debt andsettlement of Predecessor interest rate swaps on December 31, 2003. Pro-formaamounts are not recognized measures under GAAP and do not purport to bealternatives to GAAP operating measures. Management believes that thediscussion of pro forma operating results is important to the readers of thefinancial statements to understand key operating trends in comparing the thirdquarter of 2005 to the third quarter of 2004 and the nine months ended September 30,2005 to the nine months ended September 30, 2004. In the followingsections tables present unaudited results of operations for the Successor forthe quarter ended September 30, 2005, unaudited results of operations forthe Predecessor on a pro forma basis as described above for the quarter ended September 30,2004, unaudited results of operations for the Successor for the nine monthsended September 30, 2005, and unaudited results of operations for thePredecessor on a pro forma basis as described above for the nine months ended September 30,2004.

***Quarter ended September 30, 2005—Successorcompared to period July 1 through July 29, 2004—Predecessor andperiod February 9(date of formation) through September 30, 2004 (twomonth operating period)—Successor***

As previously described there are significantdifferences in the basis of financial reporting between the Successor andPredecessor periods as a result of the purchase of RAG American Coal Holding, Inc.by Foundation Coal Corporation on July 30, 2004, and the resultantapplication of purchase accounting to the assets and liabilities acquired. TheSuccessor reported income from continuing operations of $22.5 million for thequarter ended September 30, 2005 whereas the Predecessor reported a lossfrom continuing operations of $42.3 million for period July 1 through July 29,2004 and the Successor reported income from continuing operations of $10.3million for the two month operating period ended September 30, 2005.

During the period July 1 through July 29,2004, the Predecessor recorded a non-cash pre-tax loss related to a coalcontact settlement in the amount of $26.0 million and $21.7 million of pre-taxexpenses for early debt extinguishment. These non-recurring charges, net ofincome tax benefits, were the main reasons for the loss from continuing operations.

During the third quarter of 2005, the Successorachieved stronger production and tons sold and enjoyed significantly higher perton sales realizations. Year-over-year increases in cost of coal sales, sellinggeneral and administrative expenses and depreciation, depletion andamortization were more than absorbed by higher coal sales revenues. Theoperating trends discussed in the following section, Historical quarter ended September 30,2005 compared to pro forma quarter ended September 30, 2004, also apply tocomparisons of the two Successor periods and the Predecessor period July 1through July 29, 2004.

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**Historical and Pro FormaConsolidated CondensedStatements of Operations(Dollars in millions, except per share)**

| ** **                                                        | ** ** | **Successor**                                | ** ** | **Predecessor**                                      | ** ** | ** **                                          | ** ** | **Pro Forma**              | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                        | ** ** | **Quarter  Ended  September 30,  2005** | ** ** | **Two Months  Ended  September 30,  2004** | ** ** | **July 1  Through   July 29,  2004** | ** ** | **Pro Forma  Adjustments** | ** ** | **Quarter  Ended  September 30,  2004** | ** ** |
| ** **                                                        | ** ** | **(Unaudited)**                              | ** ** | **(Unaudited)**                                      | ** ** | **(Unaudited)**                                     | ** ** | **(Unaudited)**                 | ** ** | **(Unaudited)** | ** ** |
| Revenues                                                          |       |                                         | $          | 341.3                                                |       |                                                |       | $                               | 183.2      |   |   |   | $ | 72.5 |   |   |   | $ | (0.1 | )(a) |   |   | $ | 255.6 |   |   |
| Cost of coal  sales                                               |       |                                         | 241.2      |                                                 |       |                                                | 147.6      |                            |       |   | 71.0 |   |   |   | (8.3 | )(b) |   |   | 210.3 |   |   |
| Selling,  general & administrative expense               |       |                                         | 13.2       |                                                 |       |                                                | 6.7        |                            |       |   | 6.5 |   |   |   | (2.1 | )(c) |   |   | 11.1 |   |   |
| Accretion on  asset retirement obligations                        |       |                                         | 2.1        |                                                 |       |                                                | 1.3        |                            |       |   | 0.6 |   |   |   | — |   |   |   | 1.9 |   |   |
| Depreciation,  depletion & amortization                  |       |                                         | 53.2       |                                                 |       |                                                | 26.2       |                            |       |   | 8.7 |   |   |   | 7.0 |  (d) |   |   | 41.9 |   |   |
| Amortization of  coal supply agreements                           |       |                                         | (20.5      | )                                                    |       |                                                | (22.4      | )                               |       |   | 1.0 |   |   |   | (11.6 | )(e) |   |   | (33.0 | ) |   |
| Income (loss)  from operations                                    |       |                                         | 52.1       |                                                 |       |                                                | 23.8       |                            |       |   | (15.3 | ) |   |   | 14.9 |   |   |   | 23.4 |   |   |
| Interest expense                                                  |       |                                         | (15.1      | )                                                    |       |                                                | (8.5       | )                               |       |   | (1.7 | ) |   |   | (2.8 | )(f) |   |   | (13.0 | ) |   |
| Interest income                                                   |       |                                         | 0.2        |                                                 |       |                                                | 0.2        |                            |       |   | 0.1 |   |   |   | — |   |   |   | 0.3 |   |   |
| Loss on  termination of hedge accounting for interest rate  swaps |       |                                         | —     |                                                 |       |                                                | —     |                            |       |   | (0.1 | ) |   |   | 0.1 |  (g) |   |   | — |   |   |
| Loss on early  debt extinguishment                                |       |                                         | —     |                                                 |       |                                                | —     |                            |       |   | (21.7 | ) |   |   | 21.7 |  (g) |   |   | — |   |   |
| Contract  settlement                                              |       |                                         | —     |                                                 |       |                                                | —     |                            |       |   | (26.0 | ) |   |   | — |   |   |   | (26.0 | ) |   |
| Mark-to-market  gain on interest rate swaps                  |       |                                         | —     |                                                 |       |                                                | (0.1       | )                               |       |   | — |   |   |   | — |   |   |   | (0.1 | ) |   |
| Income (loss)  before income taxes                                |       |                                         | 37.2       |                                                 |       |                                                | 15.4       |                            |       |   | (64.7 | ) |   |   | 33.9 |   |   |   | (15.4 | ) |   |
| Income tax  (expense) benefit                                     |       |                                         | (14.7      | )                                                    |       |                                                | (5.1       | )                               |       |   | 22.4 |   |   |   | (7.8 | )(h) |   |   | 9.5 |   |   |
| Income (loss)  from continuing operations                         |       |                                         | 22.5       |                                                 |       |                                                | 10.3       |                            |       |   | (42.3 | ) |   |   | 26.1 |   |   |   | (5.9 | ) |   |
| Income from  discontinued operations, net of income tax expense   |       |                                         | —     |                                                 |       |                                                | —     |                            |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Net income (loss)                                                 |       |                                         | $          | 22.5                                                 |       |                                                |       | $                               | 10.3       |   |   |   | $ | (42.3 | ) |   |   | $ | 26.1 |   |   |   | $ | (5.9 | ) |   |

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(a)           Reflects theelimination of royalty income as a result of purchase accounting

(b)          Reflects an adjustmentof $3.1 million of overburden removal costs reflected on depreciation,depletion and amortization as a result of purchase accounting, $1.4 million ofelimination of actuarial losses on pension and other postretirement benefits asa result of purchase accounting and $3.8 million elimination of additionalcosts due to coal inventories written up to fair value in purchase accounting.

(c)           Reflects an adjustmentof $0.2 million for expense arising from a management incentive plan eliminatedwhen RAG American Coal holding, Inc. was acquired by Foundation CoalCorporation, $0.1 million of elimination of actuarial losses on pensions, otherpostretirement benefits and black lung benefits as a result of purchaseaccounting and an adjustment of $1.8 million for the cost of a 

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one-time bonus awarded tocertain employees in connection with the sale of RAG American Coal Holding, Inc.

(d)          Reflects increaseddepreciation, depletion and amortization, primarily cost depletion on mineralrights, as a result of purchase accounting.

(e)           Reflects net credit toamortization of coal supply agreements as a result of purchase accounting.

(f)             Reflects adjustmentto interest expense based on capital structure put in place by the acquisition.

(g)           Reflects adjustments toeliminate debt extinguishment charges and income from discontinued operationsarising from sale of the Colorado Business Unit.

(h)          Representsthe tax effect of the pro forma adjustments computed such that the pro formaincome tax benefit is recognized at the effective income tax rate recorded inthe Successor period of 2004.

***Historical quarter ended September 30, 2005compared to pro forma quarter ended September 30, 2004***

Coal sales realization perton sold represents the average revenue realized on each ton of coal sold. Itis calculated by dividing coal sales revenues by tons sold.

***Revenues***

| ** **                           | ** ** | **Successor**                                                                   | ** ** | **Pro Forma**                     | ** ** | ** **                   | ** ** | ** **  | ** ** |
|--------------------------------------|------------|---------------------------------------------------------------------------------|------------|----------------------------------------|------------|------------------------------|------------|-------------|------------|
| ** **                           | ** ** | **Quarter  Ended  September 30,**                                          | ** ** | **Quarter  Ended  September 30,** | ** ** | **Increase (Decrease)** | ** ** |
| ** **                           | ** ** | **2005**                                                                        | ** ** | **2004**                               | ** ** | **Amount**                   | ** ** | **Percent** | ** ** |
| ** **                           | ** ** | **(Unaudited, in millions, except per ton data)** | ** ** |
| Coal sales                           |       |                                                                            | $          | 333.5                                  |       |                         |       | $           | 251.2      |   |   |   | $ | 82.3 |   |   |   | 32.8 | % |   |
| Other revenue                        |       |                                                                            | 7.8        |                                   |       |                         | 4.4        |        |       |   | 3.4 |   |   |   | 77.3 | % |   |
| Total revenues                       |       |                                                                            | $          | 341.3                                  |       |                         |       | $           | 255.6      |   |   |   | $ | 85.7 |   |   |   | 33.5 | % |   |
| Tons sold                            |       |                                                                            | 17.9       |                                   |       |                         | 16.1       |        |       |   | 1.8 |   |   |   | 11.2 | % |   |
| Coal sales realization  per ton sold |       |                                                                            | $          | 18.66                                  |       |                         |       | $           | 15.56      |   |   |   | $ | 3.10 |   |   |   | 19.9 | % |   |

 

Coal sales revenues for the quarter ended September 30,2005 increased by 32.8% compared to the pro forma coal sales revenues for thequarter ended September 30, 2004 as a result of an 11.2% increase in tonssold and a 19.9% increase in average coal sales realization per ton.

Coal sales volumes in Northern Appalachia increased by0.6 million tons (21%) as a result of increased production from both Cumberlandand Emerald mines. During the third quarter of 2004 production from the Emeraldmine was reduced due to adverse mining conditions experienced while mining thelast portion of a longwall panel prior to a scheduled longwall move thatoccurred in the fourth quarter of 2004. Coal sales volumes in CentralAppalachia increased by 0.4 million tons (21%) primarily due to highershipments of purchased coal utilized on a steam coal contract to increase theavailability of our production for sale to higher margin industrial marketsplus additional volumes of coal purchased from an independent synfuel operation.Production was comparable between the two periods as higher production at theKingston and Pioneer/Pax complexes offset reduced production at the LaurelCreek complex and from the Rockspring mine. The Pax surface mine has beenincreasing its production as the mine becomes more fully developed. The Paxmine, which replaces the Simmons Fork mine that depleted its reserves in 2004,produced at an annualized rate of 0.7 million tons during the third quarter of2005. When fully developed in 2006, it is expected to produce approximately 1million tons per year. Coal sales volumes in the Powder River Basin increasedby 0.9 million tons (8%) to a record quarterly shipment level of 11.5 milliontons despite ongoing maintenance to the UP/BNSF joint line, a rail line that weutilize to ship coal. During the third quarter of 2004, we experienced lessthan expected levels of rail service in the 

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Powder River Basin. Therepair program on the joint line is expected to impact rail service through November 2005.Coal sales volumes from the Illinois Basin increased by 0.1 million tons (21%)reflecting shipments made to fulfill new contract obligations. Purchased coalactivities by our trading group decreased by approximately 0.2 million tons,compared to the comparable quarter of the prior year, due to the timing ofpurchased coal transactions.

Coal sales realization per ton sold in Northern andCentral Appalachia increased by 25% and 31%, respectively, in 2005 due tosubstitution of higher priced contracts which took effect in late 2004 andearly 2005 for lower priced contracts that expired. An additional factor inNorthern Appalachia was higher coal quality premiums for sulfur content as aresult of record prices for sulfur dioxide allowances and lower sulfur content ofshipped coal. In the Powder River Basin, coal sales realizations per tondeclined by 3% due to the expiration at the end of 2004 of higher pricedcontracts signed during the 2001 market increase, partly offset by highersulfur premiums. The weighted average coal sales realization per ton sold of$18.66 for the third quarter of 2005 also benefited from a larger proportion ofhigher priced Northern Appalachia and Central Appalachia tons sold relative tothe lower priced tons from the Powder River Basin.

Other revenues for thequarter ended September 30, 2005 increased by $3.4 million compared to thepro forma other revenues for the quarter ended September 30, 2004. Theincrease was mainly due to charges totaling $4.1 million during the 2004 periodfor settlement of future coal sales commitments that did not recur in 2005.

***Costs and Expenses***

| ** **                                                                                         | ** ** | **Successor**                          | ** ** | **Pro Forma**                     | ** ** | ** **                   | ** ** | ** **  | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|------------------------------|------------|-------------|------------|
| ** **                                                                                         | ** ** | **Quarter  Ended  September 30,** | ** ** | **Quarter  Ended  September 30,** | ** ** | **Increase (Decrease)** | ** ** |
| ** **                                                                                         | ** ** | **2005**                               | ** ** | **2004**                               | ** ** | **Amount**                   | ** ** | **Percent** | ** ** |
| ** **                                                                                         | ** ** | **(Unaudited, in millions)** | ** ** |
| Cost of coal  sales (excludes depreciation, depletion and amortization                             |       |                                   | $          | 241.2                                  |       |                         |       | $           | 210.3      |   |   |   | $ | 30.9 |   |   |   | 14.7 | % |   |
| Selling, general  and administrative expenses (excludes depreciation, depletion and  amortization) |       |                                   | 13.2       |                                   |       |                         | 11.2       |        |       |   | 2.0 |   |   |   | 17.9 | % |   |
| Accretion on  asset retirement obligations                                                         |       |                                   | 2.1        |                                   |       |                         | 1.9        |        |       |   | 0.2 |   |   |   | 10.5 | % |   |
| Depreciation,  depletion and amortization                                                          |       |                                   | 53.2       |                                   |       |                         | 41.9       |        |       |   | 11.3 |   |   |   | 27.0 | % |   |
| Amortization of  coal supply agreements                                                            |       |                                   | (20.5      | )                                      |       |                         | (33.1      | )           |       |   | 12.6 |   |   |   | 38.1 | % |   |
| Total costs and expenses                                                                           |       |                                   | $          | 289.2                                  |       |                         |       | $           | 232.2      |   |   |   | $ | 57.0 |   |   |   | 24.5 | % |   |

 

***Cost of coal sales.******  ***The cost of coalsales for the quarter ended September 30, 2005 increased from the proforma cost of coal sales for the quarter ended September 30, 2004 due to: (a) increasesin labor costs as a result of both compensation increases and hiring ofadditional personnel ($3.6 million); (b) increases in many categories ofmaterials and services as a result of significantly higher commodity pricesparticularly for steel products and diesel fuel ($14.7 million); (c) increasesin royalties and coal production taxes as a result of higher revenues ($7.9million); (d) increases in purchased coal costs as a result of highervolumes and prices ($7.2 million); partly offset by additional credits towork-in process inventory for uncovered coal ($2.9 million). Cost of coal salesper ton were $13.50 for the quarter ended September 30, 2005 compared to apro forma figure of $13.00 for the quarter ended September 30, 2004, anincrease of 3.8%.

***Selling, generaland administrative expenses.******  ***Selling, general andadministrative expenses for the quarter ended September 30, 2005 totaled$13.2 million compared to pro forma expense of $11.2 million for the quarterended September 30, 2004. Year-over-year increases are due to additionalexpenses incurred in the areas of: (a) directors and officers’ insurancepremiums ($0.2 million), (b) audit fees, 

37

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including Sarbanes Oxley404 compliance, ($0.8 million), (c) information technology costs($0.4 million), (d) health care costs ($0.7 million); (e) non-cashstock compensation expense ($0.3 million), and (f) various miscellaneousadministrative expenses ($0.6 million), partly offset by lower legal fees ($0.8million).

***Accretion on assetretirement obligation.******  ***Accretion on assetretirement obligation is a component of accounting for asset retirementobligations under SFAS No. 143. Accretion represents the increase in theasset retirement liability to reflect the change in the liability for thepassage of time. Higher accretion expense in the quarter ended September 30,2005 was attributable to increased production volumes particularly in thePowder River Basin.

***Depreciation,depletion and amortization.******  ***Depreciation,depletion and amortization includes depreciation of plant and equipment, costdepletion of amounts assigned to coal lands and mining rights and amortizationof mine development costs and leasehold improvements. Expense increased in thequarter ended September 30, 2005 compared to the pro forma expense for thequarter ended September 30, 2004 due to higher cost depletion ($5.3million), resulting from a combination of increased production and purchaseaccounting adjustments subsequent to September 30, 2004 which increaseddepletion of purchase accounting values assigned to partially and fullyuncovered coal at the Powder River Basin surface mines, and higher depreciationand amortization ($6.0 million) due to capital additions to plant &equipment during the fourth quarter of 2004 and the first nine months of 2005and higher production at the Northern Appalachia mines where longwall equipmentis depreciated on a units of production basis.

***Coal supply agreement amortization.******  ***Application ofpurchase accounting resulted in recognition of a significant liability forbelow market priced coal supply agreements as well as a significant asset forabove market priced coal supply agreements, both in relation to market pricesat the acquisition date. Amortization of the liability for below market pricedcoal supply agreements during the quarter ended September 30, 2005 totals$26.7 million of credit to expense. Amortization of the asset for abovemarket priced coal supply agreements during the same period totals$6.2 million of charges to expense. The decrease in the net credit foramortization of coal supply agreements compared to the pro forma amount for thequarter ended September 30, 2004 is primarily due to reduced amortizationof below market priced coal supply agreements due to the expiration of lowerpriced contracts in Northern and Central Appalachia.

38

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**Segment Analysis**

| ** **                         | ** ** | **Successor**                          | ** ** | **Pro Forma**                     | ** ** | ** **                   | ** ** | ** **  | ** ** |
|------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|------------------------------|------------|-------------|------------|
| ** **                         | ** ** | **Quarter  Ended  September 30,** | ** ** | **Quarter  Ended  September 30,** | ** ** | **Increase (Decrease)** | ** ** |
| ** **                         | ** ** | **2005**                               | ** ** | **2004**                               | ** ** | **Tons/$**                   | ** ** | **Percent** | ** ** |
| ** **                         | ** ** | **(Unaudited, in millions)** | ** ** |
| ***Powder  River Basin***          |       |                                   |       |                                   |       |                         |       |        |       |   |   |   |   |   |   |
| Tons sold                          |       |                                   | 11.5       |                                   |       |                         | 10.6       |        |       | 0.9 |   |   | 8.5 | % |   |
| Average sales  realization per ton |       |                                   | $          | 7.46                                   |       |                         |       | $           | 7.67       |   |   | $ | (0.21 | ) |   | (2.7 | )% |   |
| Revenues                           |       |                                   | $          | 86.0                                   |       |                         |       | $           | 81.3       |   |   | $ | 4.7 |   |   | 5.8 | % |   |
| Income from  operations            |       |                                   | $          | 6.9                                    |       |                         |       | $           | 4.8        |   |   | $ | 2.1 |   |   | 43.8 | % |   |
| ***Northern Appalachia***          |       |                                   |       |                                   |       |                         |       |        |       |   |   |   |   |   |   |
| Tons sold                          |       |                                   | 3.5        |                                   |       |                         | 2.9        |        |       | 0.6 |   |   | 20.7 | % |   |
| Average sales  realization per ton |       |                                   | $          | 34.39                                  |       |                         |       | $           | 27.44      |   |   | $ | 6.95 |   |   | 25.3 | % |   |
| Revenues                           |       |                                   | $          | 120.7                                  |       |                         |       | $           | 80.7       |   |   | $ | 40.0 |   |   | 49.6 | % |   |
| Income from  operations            |       |                                   | $          | 45.8                                   |       |                         |       | $           | 26.7       |   |   | $ | 19.1 |   |   | 71.5 | % |   |
| ***Central Appalachia***           |       |                                   |       |                                   |       |                         |       |        |       |   |   |   |   |   |   |
| Tons sold                          |       |                                   | 2.3        |                                   |       |                         | 1.9        |        |       | 0.4 |   |   | 21.1 | % |   |
| Average sales  realization per ton |       |                                   | $          | 45.66                                  |       |                         |       | $           | 34.85      |   |   | $ | 10.81 |   |   | 31.0 | % |   |
| Revenues                           |       |                                   | $          | 108.8                                  |       |                         |       | $           | 62.6       |   |   | $ | 46.2 |   |   | 73.8 | % |   |
| Income from operations             |       |                                   | $          | 10.8                                   |       |                         |       | $           | 5.1        |   |   | $ | 5.7 |   |   | 111.8 | % |   |

 

***Powder River Basin******—Income***fromoperations for the quarter ended September 30, 2005 was $6.9 million. Thepro forma income from operations for the quarter ended September 30, 2004was $4.8 million. The increase in operating income is primarily due to highertons sold of 0.9 million partly offset by lower average per ton salesrealizations as a result of the expiration of several above market contracts atyear-end 2004. Cost of coal sales per ton sold decreased approximately 5% yearover year as fixed operating costs were spread over more tons shipped.

***Northern Appalachia******—Income***fromoperations for the quarter ended September 30, 2005 was $45.8 millioncompared with pro forma income from operations of $26.7 million for the quarterended September 30, 2004. The significant improvement is primarily due toincreased revenues of $40.0 million resulting from a 21% increase in tons soldand a 25% increase in average sales realization per ton. Production andshipments increased from both Cumberland and Emerald mines during the thirdquarter of 2005. During the third quarter of 2004 production from the Emeraldmine was reduced due to adverse mining conditions experienced while mining thelast portion of a longwall panel prior to a scheduled longwall move thatoccurred in the fourth quarter of 2004. During the third quarter of 2004, theCumberland mine experienced periodic hard cutting on the longwall face and lostseveral shifts of longwall production due to an inability to load bargesbecause of high river levels brought on by the rains of hurricane Ivan. Higherrevenues were partly offset by increases in labor and employee benefit costs($1.7 million), materials and supplies ($3.2 million), depreciationdepletion and amortization ($3.0 million), insurance premiums($0.3 million), charged in selling, general and administrative ($0.1million) and a reduced credit for amortization of coal supply agreements($12.2 million). Cost of coal sales per ton decreased approximately 10%year over year.

***Central Appalachia******—Income***fromoperations for the quarter ended September 30, 2005 was $10.8 millioncompared with pro forma operating income of $5.1 million for the quarter ended September 30,2004. Revenues increased by $46.2 million primarily due to a 21% increase intons sold and a 31% increase in average sales realizations per ton. Tons soldincreased due to higher production from the Kingston, and Pax mines partlyoffset by lower production from the Pioneer and Laurel Creek mines. 

39

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Higher revenueswere partly offset by increased expenses for: (a) labor and fringebenefits ($2.1 million); (b) materials and supplies, led by increases forroof control materials and diesel fuel ($8.9 million); (c) purchased coal($13.7 million); (d) royalties and severance taxes driven by higher salesrevenues ($6.1 million); (e) depreciation, depletion and amortization($2.5 million); and (f) amortization of coal supply agreements,representing a smaller net credit due to the expiration of lower priced salescontracts valued in the purchase accounting ($5.7 million). Cost of coal salesper ton increased approximately 20% year over year.

***Interest Expense,Net***

| ** **                                                          | ** ** | **Successor**                          | ** ** | **Pro Forma**                           | ** ** | ** **                   | ** ** | ** **  | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|------------------------------|------------|-------------|------------|
| ** **                                                          | ** ** | **Quarter  Ended  September 30,** | ** ** | **Quarter  Ended  September 30, ** | ** ** | **Increase (Decrease)** | ** ** |
| ** **                                                          | ** ** | **2005**                               | ** ** | **2004**                                     | ** ** | **Amount**                   | ** ** | **Percent** | ** ** |
| ** **                                                          | ** ** | **(Unaudited, in millions)** | ** ** |
| Interest  expense—debt related                                 |       |                                   | $          | (11.0                                        | )          |                         |       | $           | (10.1      | ) |   |   | $ | 0.9 |   |   |   | 8.9 | % |   |
| Interest  expense—amortization of deferred financing fees |       |                                   | (1.5       | )                                            |       |                         | (0.3       | )           |       |   | 1.2 |   |   |   | 400.0 | % |   |
| Interest  expense—surety bond and letter of credit fees   |       |                                   | (2.6       | )                                            |       |                         | (2.6       | )           |       |   | — |   |   |   | — | % |   |
| Interest income                                                     |       |                                   | 0.2        |                                         |       |                         | 0.3        |        |       |   | 0.1 |   |   |   | 33.3 | % |   |
| Interest expense, net                                               |       |                                   | $          | (14.9                                        | )          |                         |       | $           | (12.7      | ) |   |   | $ | 2.2 |   |   |   | 17.3 | % |   |

 

Debt related interest expensefor the quarter ended September 30, 2005 was higher than the pro formadebt related interest expense for quarter ended September 30, 2004 due to:(a) an approximate 180 basis point increase in the interest rate onvariable rate debt and (b) an additional month of imputed interest chargesthat began in August 2004. These factors were partly offset by the impactof repaying approximately $39 million of variable rate debt from cash on handat December 31, 2004. The remaining portion of the $85 million prepaymentmade on December 31, 2004 was funded by proceeds from the Initial PublicOffering (“IPO”) and has been considered in calculating the pro forma interestexpense for the quarter ended September 30, 2004. Amortization of deferredfinancing fees for the quarter ended September 30, 2005 increased from thepro forma amortization of deferred financing fees for the corresponding prioryear quarter due to a charge-off of deferred financing fees because of aprepayment of $20 million of bank term debt on August 4, 2005. Surety bondand letter of credit fees were comparable between the two quarters.

***Income Tax (Expense)Benefit***

| ** **                    | ** ** | **Successor**                          | ** ** | **Pro Forma**                     | ** ** | ** **                   | ** ** | ** **  | ** ** |
|-------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|------------------------------|------------|-------------|------------|
| ** **                    | ** ** | **Quarter  Ended  September 30,** | ** ** | **Quarter  Ended  September 30,** | ** ** | **Increase (Decrease)** | ** ** |
| ** **                    | ** ** | **2005**                               | ** ** | **2004**                               | ** ** | **Amount**                   | ** ** | **Percent** | ** ** |
| ** **                    | ** ** | **(Unaudited, in millions)** | ** ** |
| Income tax  (expense) benefit |       |                                   | $          | (14.7                                  | )          |                         |       | $           | 9.5        |   |   |   | $ | 24.2 |   |   |   | 254.7 | % |   |
|                               |            |                                        |            |                                        |            |                              |            |             |            |  |  |  |  |  |  |  |  |  |  |  |

 

For the quarter ended September 30,2005, income taxes are provided at an effective rate of 40.9% based onprojected full year taxable income and projected full year temporarydifferences. We are providing a full valuation allowance against deferred taxassets attributable to AMT tax credits which has the effect of significantlyincreasing the effective book income tax rate. For the quarter ended September 30,2004, pro forma income tax benefit was recognized at an effective rate ofapproximately 62% which is the combined mathematical result of recognizing proforma income tax benefits on the pro 

40

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formaloss from continuing operations for the period July 1 through July 29,2004 at an effective income tax rate of 48.3% and recognizing income taxexpense for the two month operating period ended September 30, 2004 at thesame effective income tax rate of 48.3%. The prior year effective income taxrate of 48.3% is the same rate used to provide income taxes on the Successor’spre-tax income for the five month operating period ended December 31,2004.

***Ninemonths ended September 30, 2005—Successor compared to period January 1through July 29, 2004—Predecessor and period February 9 (date offormation) through September 30, 2004 (two month operating period)—Successor***

As previously described there are significantdifferences in the basis of financial reporting between the Successor andPredecessor periods as a result of the purchase of RAG American Coal Holding, Inc.by Foundation Coal Corporation on July 30, 2004, and the resultantapplication of purchase accounting to the assets and liabilities acquired. TheSuccessor reported income from continuing operations of $61.9 million for thenine months ended September 30, 2005 whereas the Predecessor reported aloss from continuing operations of $90.6 million for period January 1through July 29, 2004 and the Successor reported income from continuingoperations of $10.3 million for the two month operating period ended September 30,2004.

During the period January 1 through July 29the Predecessor incurred approximately $26.7, net of income taxes, of non-cashcharges related to termination of hedge accounting for interest rate swaps,partly offset by a net mark-to-market gain on the interest rate swaps Thepredecessor also incurred charges for early extinguishment of debt of $18.8million, net of income taxes and a coal contract settlement of $16.5 million,net of income taxes. These one-time charges total $62.0 million, net of incometaxes. These charges in combination with below normal coal production from ourNorthern Appalachia mines were the primary reason for the significant loss fromcontinuing operations.

During the nine months ended September 30, 2005,the Successor achieved stronger production and tons sold, enjoyed significantlyhigher per ton sales realizations and received the benefit of a net credit fromamortization of coal supply agreements, reflecting amortization of a liabilityestablished for below market contracts in purchase accounting. Year-over-yearincreases in cost of coal sales, selling, general and administrative expenses anddepreciation, depletion and amortization were more than absorbed by higher coalsales revenues. The operating trends discussed in the following section, *Historical nine months ended September 30, 2005 compared to proforma nine months ended September30, 2004*, also apply to comparisonsof the two Successor periods and the Predecessor period January 1 through July 29,2004.

41

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**Historicaland Pro FormaConsolidated Condensed Statements of Operations(Dollars in millions, except per share)**

| ** **                                                                 | ** ** | **Successor**                                         | ** ** | **Predecessor**                                      | ** ** | ** **                                       | ** ** | **Pro Forma**              | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                 | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** | **Two Months  Ended  September 30,  2004** | ** ** | **January 1  Through  July 29,  2004** | ** ** | **Pro Forma  Adjustments** | ** ** | **Nine Months  Ended  September 30,  2004** | ** ** |
| ** **                                                                 | ** ** | **(Unaudited)**                                       | ** ** | **(Unaudited)**                                      | ** ** | **(Unaudited)**                                  | ** ** | **(Unaudited)**                 | ** ** | **(Unaudited)** | ** ** |
| Revenues                                                                   |       |                                                  | $          | 976.3                                                |       |                                             |       | $                               | 183.2      |   |   |   | $ | 551.0 |   |   |   | $ | (0.9 | )(a) |   |   | $ | 733.3 |   |   |
| Cost of coal  sales                                                        |       |                                                  | 697.8      |                                                 |       |                                             | 147.6      |                            |       |   | 484.5 |   |   |   | (31.3 | )(b) |   |   | 600.8 |   |   |
| Selling, general &  administrative expense                             |       |                                                  | 33.6       |                                                 |       |                                             | 6.7        |                            |       |   | 27.4 |   |   |   | (4.7 | )(c) |   |   | 29.4 |   |   |
| Accretion on  asset retirement obligations                                 |       |                                                  | 6.2        |                                                 |       |                                             | 1.3        |                            |       |   | 4.0 |   |   |   | 0.6 |  (d) |   |   | 5.9 |   |   |
| Depreciation,  depletion & amortization                      |       |                                                  | 160.6      |                                                 |       |                                             | 26.2       |                            |       |   | 61.2 |   |   |   | 58.0 |  (e) |   |   | 145.4 |   |   |
| Amortization of  coal supply agreements                                    |       |                                                  | (67.0      | )                                                    |       |                                             | (22.4      | )                               |       |   | 8.8 |   |   |   | (92.6 | )(f) |   |   | (106.2 | ) |   |
| Income (loss)  from operations                                             |       |                                                  | 145.1      |                                                 |       |                                             | 23.8       |                            |       |   | (34.9 | ) |   |   | 69.1 |   |   |   | 58.0 |   |   |
| Interest expense                                                           |       |                                                  | (43.8      | )                                                    |       |                                             | (8.5       | )                               |       |   | (18.0 | ) |   |   | (15.0 | )(g) |   |   | (41.5 | ) |   |
| Interest income                                                            |       |                                                  | 0.5        |                                                 |       |                                             | 0.2        |                            |       |   | 1.3 |   |   |   | — |   |   |   | 1.5 |   |   |
| Loss on  termination of hedge accounting for interest rate swaps           |       |                                                  | —     |                                                 |       |                                             | —     |                            |       |   | (48.9 | ) |   |   | 48.9 |  (h) |   |   | — |   |   |
| Loss on early  debt extinguishment                                         |       |                                                  |       |                                                 |       |                                             |       |                            |       |   | (21.7 | ) |   |   | 21.7 |  (h) |   |   |   |   |   |
| Contract  settlement                                                       |       |                                                  |       |                                                 |       |                                             |       |                            |       |   | (26.0 | ) |   |   |   |   |   |   | (26.0 | ) |   |
| Mark-to-market  gain on interest rate swaps                                |       |                                                  | —     |                                                 |       |                                             | (0.1       | )                               |       |   | 5.8 |   |   |   | (5.8 | )(h) |   |   | (0.1 | ) |   |
| Income (loss)  before income taxes                                         |       |                                                  | 101.8      |                                                 |       |                                             | 15.4       |                            |       |   | (142.4 | ) |   |   | 118.9 |   |   |   | (8.1 | ) |   |
| Income tax  (expense) benefit                                              |       |                                                  | (39.9      | )                                                    |       |                                             | (5.1       | )                               |       |   | 51.8 |   |   |   | (40.7 | )(i) |   |   | 6.0 |   |   |
| Income (loss)  from continuing operations                                  |       |                                                  | 61.9       |                                                 |       |                                             | 10.3       |                            |       |   | (90.6 | ) |   |   | 78.2 |   |   |   | (2.1 | ) |   |
| Income from  discontinued operations, net of income tax expense  |       |                                                  | —     |                                                 |       |                                             | —     |                            |       |   | 23.1 |   |   |   | (23.1 | )(h) |   |   | — |   |   |
| Net income (loss)                                                          |       |                                                  | $          | 61.9                                                 |       |                                             |       | $                               | 10.3       |   |   |   | $ | (67.5 | ) |   |   | $ | 55.1 |   |   |   | $ | (2.1 | ) |   |

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(a)           Reflects theelimination of royalty income as a result of purchase accounting.

(b)          Reflects an adjustmentof $21.4 million of overburden removal costs reflected on depreciation,depletion and amortization as a result of purchase accounting and $9.9 millionof elimination of actuarial losses on pension and other postretirement benefitsas a result of purchase accounting.

(c)           Reflects an adjustmentof $2.4 million for expense arising from a management incentive plan eliminatedwhen RAG American Coal holding, Inc. was acquired by Foundation CoalCorporation, $0.4 million of elimination of actuarial losses on pensions, otherpostretirement benefits and black lung benefits as a result of purchaseaccounting and an adjustment of $1.8 million for the cost of a one-time bonusawarded to certain employees in connection with the sale of RAG American CoalHolding, Inc.

42

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(d)          Reflects accretionexpense on the additional asset retirement obligation recognized in purchaseaccounting.

(e)           Reflects increaseddepreciation, depletion and amortization, primarily cost depletion on mineralrights, as a result of purchase accounting.

(f)             Reflects net creditto amortization of coal supply agreements as a result of purchase accounting.

(g)           Reflects adjustment tointerest expense based on capital structure put in place by the acquisition.

(h)          Reflects adjustments toeliminate debt extinguishment charges and income from discontinued operationsarising from sale of the Colorado Business Unit.

(i)             Representsthe tax effect of the pro forma adjustments computed such that the pro formaincome tax benefit is recognized at the effective income tax rate recorded inthe Successor period of 2004.

***Historical nine months ended September 30, 2005compared to pro forma nine months ended September 30, 2004***

Coal sales realization perton sold represents the average revenue realized on each ton of coal sold. Itis calculated by dividing coal sales revenues by tons sold.

***Revenues***

| ** **                           | ** ** | **Successor**                                                                   | ** ** | **Pro Forma**           | ** ** | ** **                   | ** ** | ** **  | ** ** |
|--------------------------------------|------------|---------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|-------------|------------|
| ** **                           | ** ** | **Nine Months**                                                            | ** ** | **Nine Months**         | ** ** | ** **                   | ** ** | ** **  | ** ** |
| ** **                           | ** ** | **Ended**                                                                       | ** ** | **Ended**                    | ** ** | ** **                   | ** ** | ** **  | ** ** |
| ** **                           | ** ** | **September 30,**                                                          | ** ** | **September 30, ** | ** ** | **Increase (Decrease)** | ** ** |
| ** **                           | ** ** | **2005**                                                                        | ** ** | **2004**                     | ** ** | **Amount**                   | ** ** | **Percent** | ** ** |
| ** **                           | ** ** | **(Unaudited, in millions, except per ton data)** | ** ** |
| Coal sales                           |       |                                                                            | $          | 958.0                        |       |                         |       | $           | 725.3      |   |   |   | $ | 232.7 |   |   |   | 32.1 | % |   |
| Other revenue                        |       |                                                                            | 18.3       |                         |       |                         | 8.0        |        |       |   | 10.3 |   |   |   | 128.8 | % |   |
| Total revenues                       |       |                                                                            | $          | 976.3                        |       |                         |       | $           | 733.3      |   |   |   | $ | 243.0 |   |   |   | 33.1 | % |   |
| Tons sold                            |       |                                                                            | 51.3       |                         |       |                         | 47.4       |        |       |   | 3.9 |   |   |   | 8.2 | % |   |
| Coal sales realization  per ton sold |       |                                                                            | $          | 18.68                        |       |                         |       | $           | 15.30      |   |   |   | $ | 3.38 |   |   |   | 22.1 | % |   |

 

Coal sales revenues for the nine months ended September 30,2005 increased by 32.1% compared to the pro forma coal sales revenues for thenine months ended September 30, 2004 as a result of an 8.2% increasein tons sold and a 22.1% increase in average coal sales realization per ton.

Coal sales volumes in Northern Appalachia increased by2.3 million tons (29%) primarily as a result of increased production from theCumberland Mine. Coal sales volumes in Northern Appalachia in the nine monthsof 2004 were decreased by interruptions to operations caused by the idling ofthe Cumberland Mine longwall for approximately eleven weeks during the prioryear period, an extended duration longwall move at the Emerald Mine during thefirst quarter of 2004 and adverse mining conditions at Emerald during the thirdquarter of 2004. The scheduled longwall move at Emerald during the secondquarter of 2005 was of shorter duration than the move during the first quarterof 2004. From February 17 through May 7, 2004, the longwall miningequipment at the Cumberland Mine was idled due to alleged violations resultingfrom a revised interpretation of regulations issued by MSHA regarding theventilation system at the Mine. In response, we revised the ventilation systemto minimize any future business disruption and on May 7, 2004 we resumedlongwall operations at the Cumberland Mine. There was no interruption ofproduction due to ventilation issues during the first nine months of 2005.

Coal sales volumes in Central Appalachia increased by0.8 million tons (14%) due to higher production at the Kingston, Rockspring andPax Mines plus increased sales of purchased coal partly offset by lowerproduction from the Laurel Creek complex. Production capacity at Kingston wasexpanded in 

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early 2005 by the additionof a continuous miner unit. Production from the Pioneer/Pax surface minecomplex increased the prior year as the closure of the Simmons Fork Mine wasmore than offset by production from the developing Pax Mine. The Pax Mineproduced at an annualized rate of 0.7 million tons during the third quarter of2005. When fully developed in 2006, it is expected to produce approximately onemillion tons of coal per year. Coal sales volumes in the Powder River Basinincreased by 1.2 million tons (4%) as a higher level of committed sales waspartly offset by worse than expected levels of rail service brought on byunusually inclement weather during May and resultant repairs to the raillines, particularly the UP/BNSF joint line south of Gillette. The repairprogram on the joint line is expected to impact rail service through November 2005.However, our Powder River Basin mines shipped at a record level in the thirdquarter of 2005 and made up part of the shortfall from the second quarter. Coalsales volumes from the Illinois Basin increased by 0.2 million tons (15%)reflecting shipments made to fulfill new contract obligations. Purchased coalactivities by our trading group decreased by approximately 0.6 million tons,compared to the comparable nine months of the prior year due to the timing ofpurchased coal transactions.

Coal sales realization per ton sold in Northern andCentral Appalachia increased by 27% and 33%, respectively, in 2005 due tosubstitution of higher priced contracts which took effect in late 2004 andearly 2005 for lower priced contracts that rolled off. An additional factor inNorthern Appalachia was higher coal quality premiums for sulfur content as aresult of record prices for sulfur dioxide allowances and lower sulfur contentof shipped coal. In the Powder River Basin, coal sales realizations per tondeclined by 2% due to the expiration at the end of 2004 of higher pricedcontracts signed during the 2001 market increase, partly offset by highersulfur premiums. The weighted average coal sales realization per ton sold of $18.68for the nine months of 2005 also benefited from a larger proportion of higherpriced Northern Appalachia and Central Appalachia tons sold relative to thelower priced tons from the Powder River Basin.

All of our 2005 projected production is committed andpriced. As of October 25, 2005, uncommitted and unpriced tonnage was 5%,26% and 51% of planned production in 2006, 2007 and 2008, respectively. Easterncoals account for the majority of uncommitted tonnage as 12%, 36% and 62% ofthe Company’s planned eastern production remains uncommitted and unpriced in2006, 2007 and 2008, respectively.

In2006 through 2008, Foundation Coal expects coal production within the followingranges:

**Expected Coal Production (Millions of Tons)**

| ** **         | ** ** | **2006**       | ** ** | **2007**       | ** ** | **2008**       | ** ** |
|--------------------|------------|----------------|------------|----------------|------------|----------------|------------|
| East               |       | 21.5—23.5 |       | 21.5—23.5 |       | 21.5—23.5 |       |
| West               |       | 49.0—51.0 |       | 49.0—51.0 |       | 54.0—56.0 |       |
| Total Consolidated |       | 70.5—74.5 |       | 70.5—74.5 |       | 75.5—79.5 |       |

 

Based on its committed and priced planned productionas of October 25, 2005, the Company expects its committed and pricedproduction from its Eastern mines, encompassing Northern Appalachia, CentralAppalachia and the Illinois Basin, to realize in the range of $39.32 to $39.72per ton in 2006. The Company also expects its committed and priced productionfrom the Powder River Basin to realize in the range of $7.90 to $8.10 per tonin 2006. These ranges of expected per ton average realizations include forecastsulfur dioxide and btu premiums based on contract terms, projected coalqualities and historical realized premiums. The above tonnages and expected perton average realizations exclude coal that may be purchased and resold during2006. 

Other revenues for thenine months ended September 30, 2005 increased by $10.3 million comparedto the pro forma other revenues for the nine months ended September 30,2004. The increase was partly due to charges totaling $7.9 million during the2004 period for settlement of future coal sales commitments 

44

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comparedto $0.7 million of such charges in 2005, combined with higher revenues forsynfuel fees ($2.3 million) and higher coal bed methane sales ($1.2 million)during the 2005 period.

***Costs and Expenses***

| ** **                                                                                        | ** ** | **Successor**                          | ** ** | **Pro Forma**           | ** ** | ** **                   | ** ** | ** **  | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|------------------------------|------------|------------------------------|------------|-------------|------------|
| ** **                                                                                        | ** ** | **Nine Months**                   | ** ** | **Nine Months**         | ** ** | ** **                   | ** ** | ** **  | ** ** |
| ** **                                                                                        | ** ** | **Ended**                              | ** ** | **Ended**                    | ** ** | ** **                   | ** ** | ** **  | ** ** |
| ** **                                                                                        | ** ** | **September 30, **           | ** ** | **September 30, ** | ** ** | **Increase (Decrease)** | ** ** |
| ** **                                                                                        | ** ** | **2005**                               | ** ** | **2004**                     | ** ** | **Amount**                   | ** ** | **Percent** | ** ** |
| ** **                                                                                        | ** ** | **(Unaudited, in millions)** | ** ** |
| Cost of coal  sales (excludes depreciation, depletion and amortization)                           |       |                                   | $          | 697.8                        |       |                         |       | $           | 600.8      |   |   |   | $ | 97.0 |   |   |   | 16.1 | % |   |
| Selling, general  and administrative expenses (excludes depreciation, depletion and amortization) |       |                                   | 33.6       |                         |       |                         | 29.4       |        |       |   | 4.2 |   |   |   | 14.3 | % |   |
| Accretion on  asset retirement obligations                                                        |       |                                   | 6.2        |                         |       |                         | 5.9        |        |       |   | 0.3 |   |   |   | 5.1 | % |   |
| Depreciation,  depletion and amortization                                                         |       |                                   | 160.6      |                         |       |                         | 145.4      |        |       |   | 15.2 |   |   |   | 10.5 | % |   |
| Amortization of  coal supply agreements                                                           |       |                                   | (67.0      | )                            |       |                         | (106.2     | )           |       |   | 39.2 |   |   |   | 36.9 | % |   |
| Total costs and expenses                                                                          |       |                                   | $          | 831.2                        |       |                         |       | $           | 675.3      |   |   |   | $ | 155.9 |   |   |   | 23.1 | % |   |

 

***Cost of coal sales.******  ***The cost of coalsales for the nine months ended September 30, 2005 increased from the proforma cost of coal sales for the nine months ended September 30, 2004 dueto: (a) increases in labor costs as a result of both compensationincreases and hiring of additional personnel ($26.3 million); (b) increasesin many categories of materials and services as a result of significantlyhigher commodity prices particularly for steel products and diesel fuel ($48.8million); (c) increases in royalties and coal production taxes as a resultof higher revenues ($13.5 million); (d) increases in purchased coal costsdue to both higher prices and higher volumes ($13.0 million) partly offset byadditional credits to work-in-process inventory for uncovered coal ($3.4million). Cost of coal sales per ton were $13.61 for the nine months ended September 30,2005 compared to a pro forma figure of $12.57 for the nine months ended September 30,2004, an increase of 8.3%.

***Selling, generaland administrative expenses.******  ***Selling, general andadministrative expenses for the nine months ended September 30, 2005totaled $33.6 million compared to pro forma expense of $29.4 million for thenine months ended September 30, 2004. Year-over-year increases in thefirst nine months of 2005 are due to additional expenses incurred in the areasof: (a) directors and officers’ insurance premiums ($1.1 million), (b) auditfees, including Sarbanes Oxley 404 compliance, ($1.8 million), (c) informationtechnology costs ($0.8 million), (d) salaries and cash incentivecompensation ($2.1 million) (e) non-cash stock compensation expense ($0.5million), and (f) various miscellaneous administrative expenses ($0.2million), partly offset by lower legal fees ($1.6 million) and reduced healthcare costs ($.7 million).

***Accretion on assetretirement obligation.******  ***Accretion on assetretirement obligation is a component of accounting for asset retirementobligations under SFAS No. 143. Accretion represents the increase in theasset retirement liability to reflect the change in the liability for thepassage of time. Higher accretion expense in the quarter ended September 30,2005 was attributable to increased production volumes.

***Depreciation,depletion and amortization.******  ***Depreciation,depletion and amortization includes depreciation of plant and equipment, costdepletion of amounts assigned to coal lands and mining rights and amortizationof mine development costs and leasehold improvements. Expense increased in thenine months ended September 30, 2005 compared to the pro forma expense forthe nine months ended September 30, 2004 due to higher cost depletion($8.9 million) resulting from a combination of increased production andpurchase accounting adjustments subsequent to September 30, 2004 whichincreased depletion of purchase accounting values assigned to partially andfully uncovered coal at the Powder River 

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Basin surface mines, andhigher depreciation and amortization ($6.2 million) due to capital additions toplant & equipment during the fourth quarter of 2004 and the first ninemonths of 2005 and higher production at the Northern Appalachia mines wherelongwall equipment is depreciated on a units of production basis.

***Coal supply agreement amortization.******  ***Application ofpurchase accounting resulted in recognition of a significant liability forbelow market priced coal supply agreements as well as a significant asset forabove market priced coal supply agreements, both in relation to market pricesat the acquisition date. Amortization of the liability for below market pricedcoal supply agreements during the nine months ended September 30, 2005totals $86.3 million of credit to expense. Amortization of the asset forabove market priced coal supply agreements during the same period totals$19.3 million of charges to expense. The decrease in the net credit foramortization of coal supply agreements compared to the pro forma amount for thenine months ended September 30, 2004 is primarily due to reduced amortizationof below market priced coal supply agreements due to the expiration of lowerpriced contracts in Northern and Central Appalachia.

**Segment Analysis**

| ** **                         | ** ** | **Successor**                          | ** ** | **Pro Forma**     | ** ** | ** **                   | ** ** | ** **  | ** ** |
|------------------------------------|------------|----------------------------------------|------------|------------------------|------------|------------------------------|------------|-------------|------------|
| ** **                         | ** ** | **Nine Months**                   | ** ** | **Nine Months**   | ** ** | ** **                   | ** ** | ** **  | ** ** |
| ** **                         | ** ** | **Ended**                              | ** ** | **Ended**              | ** ** | ** **                   | ** ** | ** **  | ** ** |
| ** **                         | ** ** | **September 30,**                 | ** ** | **September 30,** | ** ** | **Increase (Decrease)** | ** ** |
| ** **                         | ** ** | **2005**                               | ** ** | **2004**               | ** ** | **Tons/$**                   | ** ** | **Percent** | ** ** |
| ** **                         | ** ** | **(Unaudited, in millions)** | ** ** |
| ***Powder  River Basin***          |       |                                   |       |                   |       |                         |       |        |       |   |   |   |   |   |   |
| Tons sold                          |       |                                   | 32.4       |                   |       |                         | 31.2       |        |       | 1.2 |   |   | 3.8 | % |   |
| Average sales  realization per ton |       |                                   | $          | 7.38                   |       |                         |       | $           | 7.55       |   |   | $ | (0.17 | ) |   | (2.3 | )% |   |
| Revenues                           |       |                                   | $          | 240.7                  |       |                         |       | $           | 237.2      |   |   | $ | 3.5 |   |   | 1.5 | % |   |
| Income from  operations            |       |                                   | $          | 10.2                   |       |                         |       | $           | 6.1        |   |   | $ | 4.1 |   |   | 67.2 | % |   |
| ***Northern  Appalachia***         |       |                                   |       |                   |       |                         |       |        |       |   |   |   |   |   |   |
| Tons sold                          |       |                                   | 10.3       |                   |       |                         | 8.0        |        |       | 2.3 |   |   | 28.8 | % |   |
| Average sales  realization per ton |       |                                   | $          | 34.45                  |       |                         |       | $           | 27.14      |   |   | $ | 7.31 |   |   | 26.9 | % |   |
| Revenues                           |       |                                   | $          | 358.9                  |       |                         |       | $           | 217.3      |   |   | $ | 141.6 |   |   | 65.2 | % |   |
| Income from  operations            |       |                                   | $          | 127.7                  |       |                         |       | $           | 60.5       |   |   | $ | 67.2 |   |   | 111.1 | % |   |
| ***Central  Appalachia***          |       |                                   |       |                   |       |                         |       |        |       |   |   |   |   |   |   |
| Tons sold                          |       |                                   | 6.7        |                   |       |                         | 5.9        |        |       | 0.8 |   |   | 13.5 | % |   |
| Average sales  realization per ton |       |                                   | $          | 45.00                  |       |                         |       | $           | 33.97      |   |   | $ | 11.03 |   |   | 32.5 | % |   |
| Revenues                           |       |                                   | $          | 308.2                  |       |                         |       | $           | 197.6      |   |   | $ | 110.6 |   |   | 56.0 | % |   |
| Income from operations             |       |                                   | $          | 43.0                   |       |                         |       | $           | 29.1       |   |   | $ | 13.9 |   |   | 47.8 | % |   |

 

***Powder River Basin******—Income***fromoperations for the nine months ended September 30, 2005 was $10.2 millioncompared to pro forma income from operations of $6.1 million for the ninemonths ended September 30, 2004. The increase in operating income isprimarily due to higher revenues as increased shipments and higher coal qualitypremiums were partly offset by lower sales realizations per ton reflecting theexpiration of several above market contracts at year end 2004. Loweramortization of coal supply agreements ($16.9 million) as a result of theexpiration of above market contracts was largely offset by a 4% year-over-yearincrease in per ton cost of coal sales and higher depreciation, depletion andamortization. During the nine months ended September 30, 2005, the Companyestimates that worse than expected levels of rail service, during the secondquarter, resulted in reduced shipments of approximately 1.0 million tons andreduced income from operations in the range of $0.8 million to$1.3 million.

***Northern Appalachia******—Income*** fromoperations for the nine months ended September 30, 2005 was$127.7 million compared to pro forma income from operations of $60.5million for the nine months ended 

46

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September 30, 2004.The significant improvement is primarily due to increased revenues of $141.6million resulting from a 29% increase in tons sold and a 27% increase inaverage sales realization per ton. Production from the Cumberland Mineincreased substantially during the first nine months of 2005. During the firsthalf of 2004, Cumberland’s longwall was idle from February 17 to May 7for reasons previously described. Emerald had longwall moves in both nine monthperiods, but the 2005 longwall move was of shorter duration and its impact onrevenues was mitigated by shipments from inventories. Higher revenues werepartly offset by increases in labor and employee benefit expenses($17.1 million), materials and supplies ($20.1 million), coalproduction taxes ($2.1 million), depreciation, depletion and amortization($5.9 million) and a reduced credit for amortization of coal supply agreements($31.5 million). Cost of coal sales per ton decreased approximately 7% yearover year.

***Central Appalachia******—Income***fromoperations for the nine months ended September 30, 2005 was$43.0 million compared to pro forma operating income of $29.1 million forthe nine months ended September 30, 2004. Revenues increased by $110.6million primarily due to a 14% increase in tons sold, driven by higherproduction at the Kingston, Rockspring and Pax mines, and a 33% increase inaverage sales realizations per ton. Higher revenues were partly offset byincreased expenses for: (a) labor and fringe benefits ($8.7 million);(b) materials and supplies, led by increases for roof control materialsand diesel fuel ($18.6 million); (c) purchased coal ($32.8 million); (d) royaltiesand severance taxes driven by higher sales revenues ($9.8 million); (e) depreciation,depletion and amortization ($4.4 million); and (f) amortization of coalsupply agreements, representing a smaller net credit due to the expiration oflower priced sales contracts valued in the purchase accounting ($24.0 million).Also, the pro forma operating income for the nine months ended September 30,2004 included a $1.5 million charge for settlement of litigation. Cost of coalsales per ton increased approximately 21% year over year.

***Interest Expense,Net***

| ** **                                                     | ** ** | **Successor**                          | ** ** | **Pro Forma**     | ** ** | ** **                   | ** ** | ** **  | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------|------------|------------------------|------------|------------------------------|------------|-------------|------------|
| ** **                                                     | ** ** | **Nine Months**                   | ** ** | **Nine Months**   | ** ** | ** **                   | ** ** | ** **  | ** ** |
| ** **                                                     | ** ** | **Ended**                              | ** ** | **Ended**              | ** ** | ** **                   | ** ** | ** **  | ** ** |
| ** **                                                     | ** ** | **September 30,**                 | ** ** | **September 30,** | ** ** | **Increase (Decrease)** | ** ** |
| ** **                                                     | ** ** | **2005**                               | ** ** | **2004**               | ** ** | **Amount**                   | ** ** | **Percent** | ** ** |
| ** **                                                     | ** ** | **(Unaudited, in millions)** | ** ** |
| Interest  expense—debt related                            |       |                                   | $          | (33.3                  | )          |                         |       | $           | (29.9      | ) |   |   | $ | 3.4 |   |   |   | 11.4 | % |   |
| Interest  expense—amortization of deferred financing fees |       |                                   | (3.0       | )                      |       |                         | (3.8       | )           |       |   | (0.8 | ) |   |   | (21.1 | )% |   |
| Interest  expense—surety bond and letter of credit fees   |       |                                   | (7.5       | )                      |       |                         | (7.8       | )           |       |   | (0.3 | ) |   |   | (3.8 | )% |   |
| Interest income                                                |       |                                   | 0.5        |                   |       |                         | 1.5        |        |       |   | 1.0 |   |   |   | 66.7 | % |   |
| Interest expense, net                                          |       |                                   | $          | (43.3                  | )          |                         |       | $           | (40.0      | ) |   |   | $ | 3.3 |   |   |   | 8.3 | % |   |

 

Debt related interestexpense for the nine months ended September 30, 2005 was higher than thepro forma debt related interest expense for nine months ended September 30,2004 due to: (a) about a 160 basis point increase in the interest rate onvariable rate debt; (b) imputed interest charges that began in the secondhalf of 2004 and (c) greater utilization of the revolving creditagreement. These factors were partly offset by the impact of repayingapproximately $39 million of variable rate debt from cash on hand at December 31,2004 and an additional $20 million from cash on hand at August 4, 2005. Theremaining portion of the $105 million of total prepayments since July 30,2004 was funded by proceeds from the Initial Public Offering (“IPO”) and hasbeen considered in calculating the pro forma interest expense for the ninemonths ended September 30, 2004. Pro forma amortization of deferredfinancing fees for the nine months ended September 30, 2004 includes $1.7million of accelerated amortization from the repayment of variable rate debtwith IPO proceeds; there is $0.7 million of accelerated amortization fromrepayment of variable rate debt in the nine months ended September 30,2005. The decrease in surety bond and letter of 

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creditfees in the nine month period of 2005 is due to reductions in the amounts ofthese financial assurance instruments compared to the period immediatelyfollowing the purchase of RAG American Coal Holding, Inc. The reduction ininterest income between nine month periods is primarily due to lower cashbalances available for investment in the nine months ended September 30,2005.

***Income Tax (Expense)Benefit***

| ** **                    | ** ** | **Successor**                     | ** ** | **Pro Forma**     | ** ** | ** **                   | ** ** | ** **  | ** ** |
|-------------------------------|------------|-----------------------------------|------------|------------------------|------------|------------------------------|------------|-------------|------------|
| ** **                    | ** ** | **Nine Months**              | ** ** | **Nine Months**   | ** ** | ** **                   | ** ** |
| ** **                    | ** ** | **Ended**                         | ** ** | **Ended**              | ** ** | ** **                   | ** ** | ** **  | ** ** |
| ** **                    | ** ** | **September 30,**            | ** ** | **September 30,** | ** ** | **Increase (Decrease)** | ** ** |
| ** **                    | ** ** | **2005**                          | ** ** | **2004**               | ** ** | **Amount**                   | ** ** | **Percent** | ** ** |
| ** **                    | ** ** | **(Unaudited, in millions)** | ** ** |
| Income tax (expense)  benefit |       |                              | $          | (39.9                  | **)**      |                         |       | $           | 6.0        | ** ** |   |   | $ | 45.9 | ** ** |   |   | 765.0 | % |   |
|                               |            |                                   |            |                        |            |                              |            |             |            |  |  |  |  |  |  |  |  |  |  |  |

 

For the nine months endedSeptember 30, 2005, income taxes are provided at an effective rate of39.8% based on projected full year taxable income and projected full yeartemporary differences. Current tax expense, which represents taxes currentlypayable on operations, was approximately 29% of pre-tax income. We areproviding a full valuation allowance against deferred tax assets attributableto AMT tax credits. For the nine months ended September 30, 2004, proforma income tax expense was recognized at an effective rate of 48.3%, the sameeffective rate used to provide taxes on the Successor’s pre-tax income for thefive months ended December 31, 2004.

**Liquidity and Capital Resources**

Our primary sources of cash have been sales of ourcoal production and purchased coal to customers, plus cash from sales ofnon-core assets and miscellaneous revenues.

Our primary uses of cash have been our cash costs ofcoal production, the cash cost of purchased coal, capital expenditures,interest costs, cash payments for employee benefit obligations such as definedbenefit pensions and retiree health care benefits, cash outlays related to postmining asset retirement obligations and support of working capital requirementssuch as coal inventories and trade accounts receivable. Our ability to serviceour debt (principal and interest) and acquire new productive assets for use inour operations has been and will be dependent upon our ability to generate cashfrom our operations. We normally fund all of our capital expenditurerequirements with cash generated from operations. Historically, we have engagedin minimal financing of assets such as through operating leases.

In the Predecessor periods, cash balances in excess ofour day-to-day operating requirements were placed on deposit with RAG wherecash balances could be aggregated to earn better investment returns. This cashon deposit was available to us on a one day turn-around. Increases in the cashon deposit with RAG have been classified under financing activities as uses ofcash in the consolidated cash flow statements. Decreases in cash on depositwith RAG have been classified under financing activities as cash provided.

48

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Thefollowing is a summary of cash provided by or used in each of the indicatedcategories of activities during nine months ended September 30, 2005 and2004, respectively.

| ** **                                                 | ** ** | **Successor**                          | ** ** | **Predecessor**                  | ** ** |
|------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------|------------|
| ** **                                                 | ** ** | **Nine Months  Ended**            | ** ** | **Two Months  Ended**       | ** ** | **Seven Months  Ended** | ** ** |
| ** **                                                 | ** ** | **September 30, 2005**       | ** ** | **September 30, 2004** | ** ** | **July 29, 2004** | ** ** |
| ** **                                                 | ** ** | **(Unaudited, in millions)** | ** ** |
| Cash provided by  (used in):                               |       |                                   |       |                             |       |   |   |   |   |   |   |   |   |
| Operating  activities—continuing operations           |       |                                   | $          | 102.8                            |       |   |   | $ | 24.9 |   |   |   | $ | (8.0 | ) |   |
| Operating  activities—discontinued operations         |       |                                   | —     |                             |       |   | — |   |   |   | 7.0 |   |   |
| Investing  activities—continuing operations           |       |                                   | (96.8      | )                                |       |   | (924.1 | ) |   |   | (50.7 | ) |   |
| Investing  activities—discontinued operations         |       |                                   | —     |                             |       |   | — |   |   |   | 185.0 |   |   |
| Financing  activities—borrowings(2)                   |       |                                   | 76.0       |                             |       |   | 830.0 |   |   |   | 306.0 |   |   |
| Financing  activities—repayments(2)                   |       |                                   | (96.0      | )                                |       |   | (60.0 | ) |   |   | (686.9 | ) |   |
| Financing  activities—sales of equity securities      |       |                                   | —     |                             |       |   | 196.0 |   |   |   | — |   |   |
| Financing  activities—dividends on common stock  |       |                                   | —     |                             |       |   | — |   |   |   | — |   |   |
| Financing  activities—other                           |       |                                   | —     |                             |       |   | (27.7 | ) |   |   | — |   |   |
| Financing  activities—pledged cash                    |       |                                   | —     |                             |       |   | — |   |   |   | 20.0 |   |   |
| Financing  activities—on deposit with RAG(1)          |       |                                   | —     |                             |       |   | — |   |   |   | 233.0 |   |   |
| Change in cash and cash  equivalents                       |       |                                   | $          | (14.0                            | )          |   |   | $ | 39.1 |   |   |   | $ | 5.4 |   |   |

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(1)          Represents the decreasein the balance of cash on deposit with RAG.

(2)          The borrowings andrepayments during the nine months ended September 30, 2005 in the amountof $76.0 million represent use of the Revolving Credit facility to maintainday-to-day liquidity and a $20.0 million repayment of long term debt in advanceof maturity in August 2005.

(3)          Cash used in investingactivities by the Successor for the two months ended September 30, 2004include $912.9 million, net of cash acquired to acquire RAG American CoalHolding, Inc. and subsidiaries from RAG Coal International AG.

Cash provided by operating activities from continuingoperations increased in the nine months ended September 30, 2005 ascompared to the pro forma combined results of the Successor for the two monthsended September 30, 2004 and the Predecessor for the seven months ended July 29,2004 are primarily due to higher net income from continuing operations partlyoffset by increases in working capital, mainly trade accounts receivable andinventories.

Cash used in investing activities for continuingoperations, excluding the purchase of RAG American Coal Holding, Inc.,increased in the nine months ended September 30, 2005 as compared to thecombined pro forma results of the Successor for the two months ended September 30,2004 and the Predecessor for the seven months ended July 29, 2004 due tohigher capital expenditures in the 2005 period. Capital expenditures for thenine months ended September 30, 2005 totaled $102.2 million, including$42.3 million of expenditures related to the expansion of the Belle Ayr Mine inthe Powder River Basin, development of the Pax surface mine and related railloading facility in Central Appalachia, addition of a continuous mining unit tothe Kingston Mine in Central Appalachia, the widening of the Emerald Minelongwall face to 1,450 feet from 1,250 feet and upgrades to the rail loadingfacility at Emerald. Pro forma combined capital expenditures of the Successorfor the two months ended September 30, 2004 and for the Predecessor forthe seven months ended July 29, 2004 of $65.4 million were mainly forreplacement of equipment and other expenditures necessary to sustain mineoperations.

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Cash used in financing activities of the Predecessorfor the seven months ended July 29, 2004 represents repayment of alllong-term debt of the Predecessor including cash prepayment penalties coupledwith the settlement of the Predecessor’s interest rate swaps. These repaymentsutilized the proceeds from the sale of the RAG Colorado Business Unit, cashpreviously reported as cash on deposit with Parent, cash pledged and $306.0 ofcash advanced by RAG Coal International AG that the Predecessor repaid from aportion of the cash acquisition price that Foundation Coal paid to RAG.

The cash acquisition price including transaction costsof $912.9 million paid by Foundation for RAG American Coal Holding, Inc andsubsidiaries, net of cash acquired, was funded by $830.0 million of Successorlong-term debt, consisting of $470.0 of senior secured term Loan B, $300.0million of senior unsecured long-term notes, $60.0 of drawings under the $350.0million revolving credit facility and $196.0 million of cash equity contributedby the shareholders. The $60.0 million of drawings under the revolving creditfacility were fully repaid on the first business day after the Transactionsutilizing cash of the acquired subsidiaries. The $27.7 million other cash usedin financing activities was for costs associated with arranging long-term debtused to fund the acquisition which are accounted for as deferred financing feesand amortized over the lives of the senior secured Loan B and the seniorunsecured long-term notes.

Our primary source of liquidity will continue to becash from sales of our coal production and purchased coal to customers. We haveborrowing availability under our revolving credit facility, subject to certainconditions.

As of September 30, 2005, we have outstanding$665.0 million in aggregate indebtedness, with an additional$165.0 million of available borrowings under our revolving credit facility(after giving effect to $185.0 million of letters of credit outstanding asof September 30, 2005). Our liquidity requirements will be significant,primarily due to debt service requirements. Of the $43.1 million ofinterest expense, net of interest income, for the nine months ended September 30,2005, approximately $39.0 million has or will be paid in cash.

Based on our current levels of operations, we believethat remaining cash on hand, cash flow from operations and available borrowingsunder the revolving credit portion of our Senior Credit Facilities will enableus to meet our working capital, capital expenditure, debt service and otherfunding requirements for at least the next twelve months.

As a regular part of ourbusiness, we review opportunities for, and engage in discussions and negotiationsconcerning, the acquisition of coal mining assets, including LBA bids, andacquisitions of, or combinations with, coal mining companies. When we believethat these opportunities are consistent with our growth plans and ouracquisition criteria, we will make bids or proposals and/or enter into lettersof intent and other similar agreements, which may be binding or nonbinding,that are customarily subject to a variety of conditions and usually permit usto terminate the discussions and any related agreements if, among other things,we are not satisfied with the results of our due diligence investigation. Anyacquisition opportunities we pursue could materially affect our liquidity andcapital resources and may require us to incur indebtedness, seek equity capitalor both.

**Covenant Compliance**

We believe that our Senior Credit Facilities and theindenture governing our outstanding 71¤4% Senior Notesare material agreements, that the covenants are material terms of theseagreements and that information about the covenants is material to an investor’sunderstanding of our financial condition and liquidity. The breach of covenantsin the Senior Credit Facilities that are tied to ratios based on AdjustedEBITDA, as defined below, could result in a default under the Senior CreditFacilities and the lenders could elect to declare all amounts borrowed due andpayable. Any such acceleration would also result in a default under ourindenture. Additionally, under the Senior Credit Facilities and indenture, our abilityto 

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engage in activities suchas incurring additional indebtedness, making investments and paying dividendsis also tied to ratios based on Adjusted EBITDA.

Covenantlevels and Adjusted EBITDA ratios for the four quarters ended September 30,2005 are as follows:

| ** **                                                                                                          | ** ** | **Covenant  Level** | ** ** | **Adjusted EBITDA  September 30,  2005 Ratios** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|----------------------------------------------------------------|------------|
| **Senior  Credit Facilities(1)**                                                                                    |       |                |       |                                                           |       |   |   |   |   |
| Minimum Adjusted  EBITDA to cash interest ratio                                                                     |       |                | 1.875      | X                                                              |       |   | 5.2 | X |   |
| Maximum total  debt to Adjusted EBITDA ratio                                                                        |       |                | 5.75       | X                                                              |       |   | 2.5 | X |   |
| **Indenture(2)**                                                                                                    |       |                |       |                                                           |       |   |   |   |   |
| Minimum Adjusted EBITDA  to fixed charge ratio required to incur additional debt pursuant to  ratio provisions |       |                | 2.0        | X                                                              |       |   | 5.2 | X |   |

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(1)          TheSenior Credit Facilities require us to maintain an Adjusted EBITDA to cashinterest ratio starting at a minimum of 1.75x and a total debt to AdjustedEBITDA ratio starting at a maximum of 6.0x in each case for the most recentfour quarter period. Failure to satisfy these ratio requirements wouldconstitute a default under the Senior Credit Facilities. If lenders under theSenior Credit Facilities failed to waive any such default, repaymentobligations under the Senior Credit Facilities could be accelerated, whichwould also constitute a default under the indenture.

(2)          Ourability to incur additional debt and make certain restricted payments under ourindenture, subject to specified exceptions, is tied to an Adjusted EBITDA tofixed charge ratio of at least 2.0 to 1.

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Adjusted EBITDA is definedas EBITDA further adjusted to exclude non-recurring items, non-cash items andother adjustments permitted in calculating covenant compliance under theindenture, and the Senior Credit Facilities, as shown in the table below. Webelieve that the inclusion of supplementary adjustments to EBITDA applied inpresenting Adjusted EBITDA is appropriate to provide additional information toinvestors to demonstrate compliance with financing covenants.

| ** **                        | ** ** | ** **                                             | ** ** | **Deduct:**                                              | ** ** | **Deduct:**                                                                                   | ** ** | **Add:**                                              | ** ** | ** **                                              | ** ** |
|-----------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                        | ** ** | **Four Quarters  Ended  December 31,  2004** | ** ** | **Period  January 1  Through  July 29,  2004** | ** ** | **Period  February 9  (date of formation)  Through  September 30,  2004** | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** | **Four Quarters  Ended  September 30,  2005** | ** ** |
| ** **                        | ** ** | **(Unaudited, in millions)**                 | ** ** |
| EBITDA(1)                         |       |                                                   | $          | 15.6                                                     |       |                                                                                          |       | $                                                     | (55.7      | )                                                       |       |   | $ | 27.4 |   |   |   | $ | 238.6 |   |   |   | $ | 282.5 |   |   |
| Non-cash charges (income)(2)      |       |                                                   | 70.4       |                                                     |       |                                                                                          | 79.1       |                                                  |       |                                                    | 5.2        |   |   |   | (8.9 | ) |   |   | (22.8 | ) |   |
| Unusual or non-recurring items(3) |       |                                                   | 35.9       |                                                     |       |                                                                                          | 32.1       |                                                  |       |                                                    | 0.8        |   |   |   | — |   |   |   | 3.0 |   |   |
| Cumberland Mine force majeure(4)  |       |                                                   | 31.1       |                                                     |       |                                                                                          | 31.1       |                                                  |       |                                                    | —     |   |   |   | — |   |   |   | — |   |   |
| Other adjustments(5)              |       |                                                   | (0.5       | )                                                        |       |                                                                                          | (1.4       | )                                                     |       |                                                    | (0.4       | ) |   |   | 0.6 |   |   |   | 1.9 |   |   |
| Adjusted EBITDA                   |       |                                                   | $          | 152.5                                                    |       |                                                                                          |       | $                                                     | 85.2       |                                                    |       |   | $ | 33.0 |   |   |   | $ | 230.3 |   |   |   | $ | 264.6 |   |   |

----

(1)   EBITDAis calculated in the table below:

| ** **                               | ** ** | ** **                                             | ** ** | **Deduct:**                                              | ** ** | **Deduct:**                                                                                   | ** ** | **Add:**                                              | ** ** | ** **                                              | ** ** |
|------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                               | ** ** | **Four Quarters  Ended  December 31,  2004** | ** ** | **Period  January 1  Through  July 29,  2004** | ** ** | **Period  February 9  (date of formation)  Through  September 30,  2004** | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** | **Four Quarters  Ended  September 30,  2005** | ** ** |
| ** **                               | ** ** | **(Unaudited, in millions)**                 | ** ** |
| Income (loss) from continuing operations |       |                                                   | $          | (76.1                                                    | )          |                                                                                          |       | $                                                     | (90.6      | )                                                       |       |   | $ | 10.3 |   |   |   | $ | 61.9 |   |   |   | $ | 66.1 |   |   |
| Interest expense                         |       |                                                   | 44.7       |                                                     |       |                                                                                          | 18.0       |                                                  |       |                                                    | 8.5        |   |   |   | 43.8 |   |   |   | 62.0 |   |   |
| Interest income                          |       |                                                   | (2.3       | )                                                        |       |                                                                                          | (1.3       | )                                                     |       |                                                    | (0.2       | ) |   |   | (0.6 | ) |   |   | (1.4 | ) |   |
| Income tax expense (benefit)             |       |                                                   | (38.2      | )                                                        |       |                                                                                          | (51.8      | )                                                     |       |                                                    | 5.1        |   |   |   | 39.9 |   |   |   | 48.5 |   |   |
| Depreciation, depletion and amortization |       |                                                   | 146.0      |                                                     |       |                                                                                          | 61.2       |                                                  |       |                                                    | 26.2       |   |   |   | 160.6 |   |   |   | 219.2 |   |   |
| Amortization of coal supply agreements   |       |                                                   | (58.5      | )                                                        |       |                                                                                          | 8.8        |                                                  |       |                                                    | (22.5      | ) |   |   | (67.0 | ) |   |   | (111.8 | ) |   |
| EBITDA                                   |       |                                                   | $          | 15.6                                                     |       |                                                                                          |       | $                                                     | (55.7      | )                                                       |       |   | $ | 27.4 |   |   |   | $ | 238.6 |   |   |   | $ | 282.6 |   |   |

 

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(2)   We are required to adjustEBITDA, as defined above, for the following non-cash charges (income):

| ** **                                                                  | ** ** | ** **                                             | ** ** | **Deduct:**                                              | ** ** | **Deduct:**                                                                                   | ** ** | **Add:**                                              | ** ** | ** **                                              | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Four Quarters  Ended  December 31,  2004** | ** ** | **Period  January 1  Through  July 29,  2004** | ** ** | **Period  February 9  (date of formation)  Through  September 30,  2004** | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** | **Four Quarters  Ended  September 30,  2005** | ** ** |
| ** **                                                                  | ** ** | **(Unaudited, in millions)**                 | ** ** |
| Interest rate  swaps(a)                                                     |       |                                                   | $          | 42.6                                                     |       |                                                                                          |       | $                                                     | 43.1       |                                                    |       |   | $ | 0.1 |   |   |   | $ | — |   |   |   | $ | (0.6 | ) |   |
| Early  extinguishment of debt                                               |       |                                                   | 21.7       |                                                     |       |                                                                                          | 21.7       |                                                  |       |                                                    | —     |   |   |   | — |   |   |   | — |   |   |
| Profit in  inventory(b)                                                     |       |                                                   | 3.8        |                                                     |       |                                                                                          | —     |                                                  |       |                                                    | 3.8        |   |   |   | — |   |   |   | — |   |   |
| Overburden  removal included in depreciation, depletion and amortization(c) |       |                                                   | (15.3      | )                                                        |       |                                                                                          | —     |                                                  |       |                                                    | —     |   |   |   | (16.1 | ) |   |   | (31.4 | ) |   |
| Accretion on  asset retirement obligations/reclamation expense         |       |                                                   | 7.3        |                                                     |       |                                                                                          | 4.0        |                                                  |       |                                                    | 1.3        |   |   |   | 6.2 |   |   |   | 8.2 |   |   |
| Stock based  compensation expense(d)                                        |       |                                                   | —     |                                                     |       |                                                                                          | —     |                                                  |       |                                                    | —     |   |   |   | 1.0 |   |   |   | 1.0 |   |   |
| Asset impairment  charges                                                   |       |                                                   | —     |                                                     |       |                                                                                          | —     |                                                  |       |                                                    | —     |   |   |   | — |   |   |   | — |   |   |
| Amortization  included in  benefits expense(e)                              |       |                                                   | 10.3       |                                                     |       |                                                                                          | 10.3       |                                                  |       |                                                    | —     |   |   |   | — |   |   |   | — |   |   |
| Total                                                                       |       |                                                   | $          | 70.4                                                     |       |                                                                                          |       | $                                                     | 79.1       |                                                    |       |   | $ | 5.2 |   |   |   | $ | (8.9 | ) |   |   | $ | (22.8 | ) |   |

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(a)           Includes$48.9 million of expense resulting in the four quarters ended December 31,2004 from loss on termination of hedge accounting for interest rate swaps less$6.3 million mark-to-market adjustment.

(b)          Represents incrementalcost of sales recorded in the period arising from the preliminary estimate of manufacturingprofit added to inventory in purchase accounting.

(c)           In purchase accounting,the fair value of partially and fully uncovered coal included consideration ofthe effort spent prior to the purchase date to remove overburden and get thecoal to its partially or fully uncovered state. Therefore, the fair valueassigned to partially or fully uncovered coal reserves was higher than thatassigned to other coal reserves. Depletion of coal reserves, including theincremental fair value related to pre-acquisition overburden removalefforts, is included in depreciation, depletion and amortization. Subsequent tothe acquisition date, the costs associated with removal of overburden touncover coal reserves is inventoried as work-in-process until therelated coal is mined and the inventoried cost charged to cost of coal saleswhen the coal is sold. Until coal valued as partially or fully uncovered at theacquisition date is fully depleted, depreciation, depletion and amortizationwill include the value of overburden removal performed prior to the acquisitiondate which if incurred subsequent to the acquisition date would have beenincluded in cost of coal sales.

(d)          Represents an accrualfor compensation expense attributable to restricted stock performance units andrestricted stock awarded to certain directors.

(e)           Represents the portionof pension, other postretirement and black lung expense resulting from theamortization of unrecognized actuarial losses, prior service costs andtransition obligations. Unrecognized actuarial losses, prior service costs andtransition obligations were eliminated when the pension, other postretirementand black lung obligations were fair valued in purchase accounting.

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(3)   We are also required by thecredit agreement to adjust EBITDA, as defined above, for the following unusual(income) expense:

| ** **                                           | ** ** | ** **                                             | ** ** | **Deduct:**                                              | ** ** | **Deduct:**                                                                                   | ** ** | **Add:**                                              | ** ** | ** **                                              | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                           | ** ** | **Four Quarters  Ended  December 31,  2004** | ** ** | **Period  January 1  Through  July 29,  2004** | ** ** | **Period  February 9  (date of formation)  Through  September 30,  2004** | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** | **Four Quarters  Ended  September 30,  2005** | ** ** |
| ** **                                           | ** ** | **(Unaudited, in millions)**                 | ** ** |
| Litigation/arbitration/contract  settlements, net(a) |       |                                                   | $          | 28.9                                                     |       |                                                                                          |       | $                                                     | 28.9       |                                                    |       |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Transaction  bonus(b)                                |       |                                                   | 1.8        |                                                     |       |                                                                                          | 1.8        |                                                  |       |                                                    | —     |   |   |   | — |   |   |   | — |   |   |
| Long-term  incentive plan expense(c)                 |       |                                                   | 2.4        |                                                     |       |                                                                                          | 2.4        |                                                  |       |                                                    | —     |   |   |   | — |   |   |   | — |   |   |
| Gain on asset  sales                                 |       |                                                   | (1.0       | )                                                        |       |                                                                                          | (1.0       | )                                                     |       |                                                    | —     |   |   |   | — |   |   |   | — |   |   |
| Other(d)                                             |       |                                                   | 3.8        |                                                     |       |                                                                                          | —     |                                                  |       |                                                    | 0.8        |   |   |   | — |   |   |   | 3.0 |   |   |
| Total                                                |       |                                                   | $          | 35.9                                                     |       |                                                                                          |       | $                                                     | 32.1       |                                                    |       |   | $ | 0.8 |   |   |   | $ | — |   |   |   | $ | 3.0 |   |   |

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(a)          Represents arbitrationawards, litigation and contract settlements, net of related legal and tax fees.

(b)         Representsthe cost of a one-time bonus awarded to certain employees in connection withthe sale of RAG American Coal Holding, Inc.

(c)          Representsthe cost of a long-term incentive plan instituted by RAG American Coal Holding, Inc.in 2001 that was terminated prior to closing as required by the change incontrol provisions in the plan agreement. We have implemented a managementequity program that will not result in a cash cost to us.

(d)         Represents$2.0 million from a sponsor monitoring fee and $1.8 million from atax allowance related to the IPO in the four quarters ended December 31,2004.

(4)   Representsthe adjustment required for the estimated impact of the temporary idling of ourCumberland Mine in the first half of 2004 as a result of a revisedinterpretation of mine ventilation laws by MSHA. See “Management’s Discussionand Analysis of Financial Condition and Results of Operations” for additionalinformation.

(5)   Weare also required to make adjustments to EBITDA for items such as incrementalinsurance costs and franchise taxes not included in income tax expense.

Pro-formacash interest for the four quarters ended September 30, 2005 is calculatedas follows (unaudited, in millions):

| Cash interest  expense for nine months ended September 30, 2005 |                                                                                               | $      | 37.9   |   |
|----------------------------------------------------------------------|----------------------------------------------------------------------------------------------------|--------|--------|--------|
| Interest expense  for three months ended September 30, 2005     |                                                                                               | 15.0   |   |
| Less:                                                                | Amortization of deferred debt issuance costs for  three month period ended September 30, 2005 |   | (1.5   | )      |
| Less:                                                                | Cash interest income for the three month period  ended September 30, 2005                     |   | (0.2   | )      |
| Less:                                                                | Other non cash interest expense for three months  ended September 30, 2005                    |   | (0.4   | )      |
|                                                                 |                                                                                               | $      | 50.8   |   |

 

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In future periods, adjustments to EBITDA that could beused to calculate compliance with the debt covenants are: (a) accretion onasset retirement obligations, (b) credits from deferral of overburdenremoval costs, (c) any non-cash expenses or charges arising as a result ofthe application of purchase accounting in acquisitions, (d) businessoptimization expenses or other restructuring charges, (e) non-cashimpairment charges resulting from the application of SFAS No. 142 orSFAS No. 144, (f) amortization of intangibles pursuant to SFAS No. 141,and (g) any long term incentive plan accruals or any non-cash compensationexpense realized from grants of stock appreciation or similar rights, stockoptions or other rights to officers, directors and employees.

In future periods, cashinterest is expected to be calculated by adding back amortization of deferreddebt issuance costs and deducting cash interest income from the interestexpense reported in the Statement of Operations.

**Contractual Obligations**

Thefollowing is a summary of our significant future contractual obligations byyear as of December 31, 2004 updated for the repayment of $20 million ofbank debt in August 2005. In addition to the amounts shown in the table,we are committed to: (a) forward contracts to purchase approximately$22.9 million of diesel fuel for 2006 delivery at our Powder River Basinmines; (b) forward contracts to purchase approximately $5.4 million ofdiesel fuel for 2006 delivery at our Pioneer/Pax mines in Central Appalachia; (c) purchaseorders and construction contracts covering approximately $12.0 million of 2006capital expenditures. 

| ** **                                      | ** ** | **2005**                               | ** ** | **2006-2007** | ** ** | **2008-2009** | ** ** | **After 2009** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|---------------|------------|---------------|------------|---------------------|------------|-----------|------------|
| ** **                                      | ** ** | **(Unaudited, in millions)** | ** ** |
| Long-term  debt and capital leases              |       | $                                      | —     |          |       | $             | —     |                |       |      | $          | — |   |   |   | $ | 665.0 |   |   | $ | 665.0 |   |
| Cash interest on  long term debt                |       | 41.3                                   |       |          | 81.4       |          |       |                | 73.6       |      |       |   | 123.7 |   |   | 320.0 |   |
| Cash payments for  asset retirement obligations |       | 3.7                                    |       |          | 5.6        |          |       |                | 3.5        |      |       |   | 197.0 |   |   | 209.8 |   |
| Unconditional  purchase commitments             |       | 56.0                                   |       |          | 7.4        |          |       |                | 17.2       |      |       |   | — |   |   | 80.6 |   |
| Operating leases                                |       | 5.8                                    |       |          | 9.8        |          |       |                | 3.5        |      |       |   | 1.1 |   |   | 20.2 |   |
| Minimum royalties                               |       | 4.0                                    |       |          | 1.0        |          |       |                | —     |      |       |   | — |   |   | 5.0 |   |
| Total                                           |       | $                                      | 110.8      |          |       | $             | 105.2      |                |       |      | $          | 97.8 |   |   |   | $ | 986.8 |   |   | $ | 1,300.6 |   |

 

We expect to invest in therange of $150.0 to $160.0 million in capital expenditures during calendaryear 2005 of which approximately $100.0 million is to maintain productionand replace mining equipment. The additional $50.0 to $60.0 million isexpected to be directed toward selective expansions of production andimprovements in productivity. Approximately $34 million of expected 2005capital expenditures are included in unconditional purchase commitments shownabove. The remaining 2005 unconditional purchase commitments and$3 million of the 2006-2007 unconditional purchase commitmentsrelate to forward contracts to purchase diesel fuel and explosives in normalquantities for use at our surface mines. The remaining unconditional purchasecommitments, totaling $4.4 million in 2006-2007 and$17.2 million in 2008-2009, relate to a contractual commitment topurchase underground mining equipment. We expect to contribute approximately$7.7 million to our defined benefit retirement plans and to payapproximately $23.0 million of retiree health care benefits in calendaryear 2005. We also expect to incur approximately $9.0 million per year forsurety bond premiums and letters of credit fees. We believe that cash balancesplus cash generated by operations will be sufficient to meet these obligationsplus fund requirements for working capital and capital expenditures withoutincurring additional borrowings.

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**Off-Balance SheetArrangements**

In the normal course of business, we are a party tocertain off-balance sheet arrangements. These arrangements include guarantees,indemnifications and financial instruments with off-balance sheet risk, such asbank letters of credit and performance or surety bonds. Liabilities related tothese arrangements are not reflected in our consolidated balance sheets.However, the underlying obligations that they secure, such as asset retirementobligations, self-insured workers’ compensation liabilities, royaltyobligations and certain retiree medical obligations, are reflected in ourconsolidated balance sheets.

We are required to provide financial assurance inorder to perform the post-mining reclamation required by our mining permits,pay our federal production royalties, pay workers’ compensation claims underself-insured workers’ compensation laws in the various states, pay federalblack lung benefits, pay retiree health care benefits to certain retired UMWAemployees and perform certain other obligations.

In order to provide the required financial assurance,we generally use surety bonds for post-mining reclamation and royalty paymentobligations and bank letters of credit for self-insured workers’ compensationobligations and UMWA retiree health care obligations. Federal black lungbenefits are paid from a dedicated trust fund that has sufficient assets tofund these obligations for the next several years. Bank letters of credit arealso used to collateralize a portion of the surety bonds.

We had outstanding suretybonds with a total face amount of $251.8 million as of September 30,2005, of which $229.2 million secured reclamation obligations,$10.7 million secured coal lease obligations and $9.6 million securedself-insured workers’ compensation obligations. In addition, we had$185.0 million of letters of credit in place for the following purposes:$33.4 million for workers’ compensation, including collateral for workers’compensation bonds; $23.4 million for UMWA retiree health careobligations; $121.5 million for collateral for reclamation surety bonds,$3.0 million for minimum royalty payment obligations for a closed mine inUtah; and $3.7 million for other miscellaneous obligations. Recently,surety bond costs have increased, while the market terms under which suretybonds can be obtained have generally become less favorable to all miningcompanies. In the event that additional surety bonds become unavailable, wewould seek to secure our obligations with letters of credit, cash deposits orother suitable forms of collateral.

**Certain Trends andUncertainties**

Our revenues depend on theprice at which we are able to sell our coal. The current pricing environmentfor United States coal is strong. Any decrease in coal prices due to, amongother reasons, the supply of domestic and foreign coal, the demand forelectricity and the price and availability of alternative fuels for electricitygeneration could adversely affect our revenues and our ability to generate cashflows. In addition, our results of operations depend on the cost of coalproduction. We are experiencing increased operating costs for fuel andexplosives, steel products, health care, wages, salaries, contract labor, andincreased interest expenses for surety bonds and letters of credit. Inaddition, historically low interest rates have had a negative impact onexpenses related to our actuarially determined employee-relatedliabilities.

**Recent AccountingPronouncements**

In December 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 123 (revised 2004), *Share-Based Payment* (“SFASNo. 123R”), which replaces SFAS No. 123, and supersedes AccountingPrinciples Board Opinion No. 25, *Accounting for StockIssued to Employees*(“APB No. 25”).**SFASNo. 123R requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the financial statementsbased on their fair value at the grant date. SFAS No. 123R generallyrequires companies to measure the cost of employee services received inexchange for an award of equity instruments (such as stock options andrestricted stock) based on the grant-date fair value of the award, and torecognize that cost over the period during which the employee is required to 

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provide service (usuallythe vesting period of the award). FAS 123R also requires the benefits of taxdeductions in excess of recognized compensation cost to be reported as afinancing cash flow, rather than as an operating cash flow as required undercurrent literature. This requirement will reduce net operating cash flows andincrease net financing cash flows in periods after adoption. The pro formadisclosures previously permitted under SFAS No. 123 no longer will be analternative to financial statement recognition. On April 14, 2005, theSecurities and Exchange Commission (“SEC”) delayed the implementation of SFASNo. 123R from its original implementation date by six months for mostregistrants, requiring all public companies to adopt FAS 123R no later than thebeginning of the first fiscal year beginning after June 15, 2005. Theimpact of adopting SFAS No. 123R cannot be predicted at this time becauseit will depend on levels of share-based payments granted in the future.However, had the Company adopted SFAS No. 123R during the prior period,the results are expected to be consistent with the pro forma disclosure underSFAS No. 123, except that forfeitures will be considered in thecalculation of compensation expense under SFAS No. 123R. When adopted, theCompany may elect to change the valuation method or assumptions and suchchanges could have a material impact on the amount of stock-basedcompensation the Company records.

In March 2005, the Emerging Issues Task Forcereached consensus on Issue No. 04-6, *Accounting for Stripping Costs in the Mining Industry* (“EITFIssue 04-6”) concluding that post-production stripping costs are acomponent of mineral inventory costs subject to the provisions of the AmericanInstitute of Certified Public Accountants Accounting Research BulletinNo. 43, *Restatement and Revision ofAccounting Research Bulletins,* Chapter 4, *Inventory Pricing*, (“ARB No. 43”). The FASB ratifiedthe EITF consensus. Based upon this consensus, post production stripping costsare considered costs of the extracted minerals under a full absorption costingsystem and are recognized as a component of inventory to be recognized in costsof coal sales in the same period as the revenue from the sale of the inventory.In addition, capitalization of such costs would be appropriate only to theextent inventory exists at the end of a reporting period. The guidance in thisconsensus will be effective for financial statements issued for the firstreporting period in fiscal years beginning after December 15, 2005, withearly adoption permitted. At a June EITF meeting, the Task Force modifiedthe transition provisions of EITF Issue 04-6, indicating that companiesthat adopt in periods beginning after June 29, 2005 may utilize acumulative effect adjustment approach where the cumulative effect adjustment isrecorded directly to retained earnings in the year of adoption. Alternatively,a company may recognize this change in accounting by restatement of itsprior-period financial statements through retrospective application. The Companyexpects to adopt EITF Issue 04-6 on January 1, 2006 and expects toutilize the cumulative effect adjustment approach and record an adjustmentdirectly to retained earnings upon adoption. Historically, the Company recordedstripping costs associated with in-process production as a separate componentof inventory described as deferred overburden in Note 4. At September 30,2005, such stripping costs associated with coal that has not been extracted was$46,089. Applying the requirements of this EITF would have resulted in amaximum decrease of $46,089 in inventory with the off-set recorded to retainedearnings, net of tax. The effect on the financial statements upon adoption onJanuary 1, 2006 will depend on the balance of deferred overburden includedin the Company’s inventory at December 31, 2005

The FASB issued FASBInterpretation No. (“FIN”) 47, “Accounting for Conditional AssetRetirement Obligations” in March of 2005. FIN 47 clarifies that an entitymust record a liability for a conditional asset retirement obligation if thefair value of the obligation can be reasonably estimated. This interpretationalso clarifies the circumstances under which an entity would have sufficientinformation to reasonably estimate the fair value of an asset retirement obligation.This Interpretation is effective no later than the end of fiscal years endingafter December 15, 2005. The Company does not expect this guidance to havea material impact on its financial statements.

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**ITEM 3.**               QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

**Commodity Price Risk**

We manage our commodity price risk for coal salesthrough the use of long-term coal supply agreements rather than through the useof derivative instruments. As of September 30, 2005, we had salescommitments for approximately 100% of our planned 2005 production. As ofOctober 25, 2005, uncommitted and unpriced tonnage was 5%, 26% and 51% ofplanned production in 2006, 2007 and 2008, respectively. Eastern coals accountfor the majority of uncommitted tonnage as 12%, 36% and 62% of the Company’splanned eastern production remains uncommitted and unpriced in 2006, 2007 and2008, respectively.

Some of the products usedin our mining activities, such as diesel fuel, explosives, steel products andelectricity, are subject to price volatility. Through our suppliers, we utilizeforward purchase contracts to manage the exposure related to this volatility.As of November 14, 2005, the Company has entered into forward purchasecommitments for approximately 90% of the diesel fuel that it expects to consumeduring calendar year 2006 at prices ranging from $1.73 per gallon for ourPowder River Basin mines to $2.04 per gallon for our Central Appalachian mines.The Company has designated these contracts as normal purchase normal salecontracts, and, therefore, they are not deemed to be derivative financialinstruments for financial reporting purposes. During the nine months endedSeptember 30, 2005, the cost of diesel fuel represents approximately 3% ofthe Company’s consolidated cost of coal sales.

**Credit Risk**

Our credit risk is primarily with electric powergenerators and, to a lesser extent, steel producers. Most electric powergenerators to whom we sell have investment grade credit ratings. Our policy isto independently evaluate each customer’s creditworthiness prior to enteringinto transactions and to constantly monitor outstanding accounts receivableagainst established credit limits. When appropriate (as determined by ourcredit management function), we have taken steps to reduce our credit exposureto customers that do not meet our credit standards or whose credit hasdeteriorated. These steps include obtaining letters of credit or cashcollateral, requiring prepayments for shipments or establishing customer trustaccounts held for our benefit in the event of a failure to pay.

Counterparty risk withrespect to interest rate swaps is not considered to be significant based uponthe creditworthiness of the participating financial institutions.

**Interest Rate Risk**

Historically, we have had exposure to changes ininterest rates on a portion of our existing level of indebtedness under thePredecessor. This exposure had been completely hedged for the life of the debtusing pay-fixed, receive-variable interest rate swaps. From July 30,2004 forward, we have exposure to changes in interest rates through our bankterm loan and our revolving credit facility. As described below, we have usedinterest rate swaps to manage this risk.

Weentered into swap contracts for the purpose of complying with certain financialcovenants in our senior secured credit facility that require fixing theinterest rate for at least three years on a minimum of 50% of our totaloutstanding debt. The swap contracts cover $85 million throughSeptember 2007. The following table summarizes our outstanding swapcontracts at June 30, 2004.

| **Notional Amount** | ** ** | ** **                                      | ** ** | **Term**      | ** ** | **Floating Rate** | ** ** | **Fixed Rate** | ** ** |
|--------------------------|------------|-------------------------------------------------|------------|---------------|------------|------------------------|------------|---------------------|------------|
| $20 million              |       | September 2004 –  September 2007 |       | 3-month LIBOR |       |                   | 3.26       | %                   |       |
| $25 million              |       | September 2004 –  September 2007 |       | 3-month LIBOR |       |                   | 3.26       | %                   |       |
| $20 million              |       | September 2004 –  September 2007 |       | 3-month LIBOR |       |                   | 3.26       | %                   |       |
| $20 million              |       | September 2004 – September 2007  |       | 3-month LIBOR |       |                   | 3.26       | %                   |       |

 

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As of September 30,2005, after giving effect to the $85 million of interest rate swaps thatwere entered into, we had $280 million of variable rate indebtedness,representing approximately 44% of our outstanding indebtedness. A 1% change ininterest rates would affect the interest expense on such indebtedness by$2.8 million per year. At September 30, 2005, the fair value of theseswap agreements was an unrealized gain of $2.0 million. EffectiveJanuary 1, 2005, these swaps were designated as hedges. The increase inthe unrealized gain of $1.5 million pre-tax ($0.9 million, net of tax) for thenine months ended September 30, 2005 was reported as a component ofcomprehensive income (loss).

**ITEM 4.**                CONTROLSAND PROCEDURES.

*Evaluation ofDisclosure Controls and Procedures*

We maintain disclosure controls and procedures andinternal controls designed to ensure that information required to be disclosedin our filings under the Securities Exchange Act of 1934, as amended, isrecorded, processed, evaluated, summarized and reported accurately within thetime periods specified in the Securities and Exchange Commission’s (SEC) rules andforms. In designing and evaluating the disclosure controls and procedures, ourmanagement recognized that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives and management necessarily was required to apply itsjudgment in evaluating the cost-benefit relationship of possible controlsand procedures. An evaluation was performed under the supervision and with theparticipation of management, including the Chief Executive Officer (CEO) andChief Financial Officer (CFO), of the effectiveness of the design andoperations of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.Based upon that evaluation as of the end of the period covered by this report,the CEO and CFO concluded that our disclosure controls and procedures areeffective in timely alerting them to material information required to beincluded in our periodic SEC filings. The conclusions of the CEO and CFO fromthis evaluation were communicated to the Audit Committee. In connection withthis evaluation, there were no breaches of such controls that would requiredisclosure to the Audit Committee or our auditors.

In conjunction with the September 1,2005 implementation of our sales and revenue system, changes were made to theCompany’s internal controls in order to adapt to the SAP environment. Managementbelieves that the new controls are equally effective as those that were inplace prior to the implementation.

*Changes inDisclosure Controls*

There were no significantchanges in our disclosure controls or in other factors that could significantlyaffect these disclosure controls in the fiscal quarter ended September 30,2005. Management is not aware of any material weaknesses; therefore, there wereno corrective actions to be taken.

*Sarbanes-OxleyAct of 2002 Section 404*

During the year ended December 31,2004, we did not meet the definition of an Accelerated Filer because we havebeen a public company subject to the reporting requirements of Sections 13(a) and15(d) of the Securities Exchange Act of 1934, as amended, for less thantwelve months and we have not previously filed an Annual Report on Form 10-K.We are required to comply with the final Section 404 Rule of theSarbanes-Oxley Act of 2002 in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2005.

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**PART II—OTHER INFORMATION**

**Item 1.**                        LegalProceedings.

Information required bythis Item is contained in Note 18, “Commitments and Contingencies,” to theconsolidated financial statements contained in this Report and is incorporatedherein by reference.

**Item 2.**                        UnregisteredSales of Equity Securities and Use of Proceeds.

None.

**Item 3.**                        DefaultsUpon Senior Securities.

None.

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

None.

**Item 5.**                        OtherInformation.

None.

**Item 6.**                        Exhibits.

The exhibits to this report are listed in the Exhibit Index.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

| Date: November 14, 2005 | FOUNDATION  COAL CORPORATION |
|------------------------------|-----------------------------------|
|                         | (Registrant)                      |

 

|                      | **Name** | ** **                                        | ** ** |  | **Title** | ** ** |
|----------------------|----------|---------------------------------------------------|------------|--|-----------|------------|
| /s/ JAMES F. ROBERTS |     | President,  Chief Executive Officer and Director  |
| James  F. Roberts    |     | (Principal  Executive Officer)                    |
| /s/ FRANK J.  WOOD   |     | Senior Vice President and Chief Financial Officer |
| Frank J. Wood        |     | (Principal  Financial and Accounting Officer)     |

 

 

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**EXHIBIT INDEX**

| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                        | ** ** | **Description   of Exhibit** |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|
| 3.1*             |       | Amended and Restated  Certificate of Incorporation of Foundation Coal Holdings, Inc.                                                                                                                                                                                                                                                                         |
| 3.2*             |       | Amended and  Restated By-laws of Foundation Coal Holdings, Inc.                                                                                                                                                                                                                                                                                              |
| 4.1*             |       | Form of certificate  of Foundation Coal Holdings, Inc. common stock                                                                                                                                                                                                                                                                                     |
| 4.2*             |       | Amended and  Restated Stockholders Agreement, dated as of October 4, 2004, by and  among Foundation Coal Holdings, Inc., Blackstone FCH Capital Partners  IV, L.P., Blackstone Family Investment Partnership IV-A L.P., First  Reserve Fund IX, L.P., AMCI Acquisition, LLC and the management stockholders  parties thereto                            |
| 10.1**           |       | Amendment Number  1 to Employment Agreement, dated as of November 1, 2005 by and among  Klaus-Dieter Beck and Foundation Coal Corporation.                                                                                                                                                                                                                   |
| 10.2**           |       | Amendment Number  1 to Employment Agreement, dated as of November 1, 2005 by and among  James J. Bryja and Foundation Coal Corporation.                                                                                                                                                                                                                      |
| 10.3**           |       | Amendment Number  1 to Employment Agreement, dated as of November 1, 2005 by and among  James A. Olsen and Foundation Coal Corporation.                                                                                                                                                                                                                      |
| 10.4**           |       | Amendment Number  1 to Employment Agreement, dated as of November 1, 2005 by and among  James F. Roberts and Foundation Coal Corporation.                                                                                                                                                                                                                    |
| 10.5**           |       | Amendment Number  1 to Employment Agreement, dated as of November 1, 2005 by and among  Michael R. Peelish and Foundation Coal Corporation.                                                                                                                                                                                                                  |
| 10.6**           |       | Amendment Number  1 to Employment Agreement, dated as of November 1, 2005 by and among  John R. Tellmann and Foundation Coal Corporation.                                                                                                                                                                                                                    |
| 10.7**           |       | Amendment Number  1 to Employment Agreement, dated as of November 1, 2005 by and among  Greg A. Walker and Foundation Coal Corporation.                                                                                                                                                                                                                      |
| 10.8**           |       | Amendment Number  1 to Employment Agreement, dated as of November 1, 2005 by and among  Frank J. Wood and Foundation Coal Corporation.                                                                                                                                                                                                                       |
| 10.9**           |       | Form of  Executive Officer Non-Qualified Stock Option Agreement.                                                                                                                                                                                                                                                                                             |
| 10.10**          |       | Form of  Amendment Number 1 to Executive Officer Non-Qualified Stock Option Agreement.                                                                                                                                                                                                                                                                       |
| 10.11**          |       | Supplement Number  1 dated as of September 2, 2005 (this “*Supplement*”),  to the Guarantee and Collateral Agreement dated as of July 30, 2004,  among FC2 Corp., Foundation coal Corporations, Foundation PA Coal Company,  LLC as Borrower, the Subsidiary Parties thereto and Citicorp North America, Inc.  as Collateral Agent. |
| 10.12**          |       | Supplemental Indenture  dated as of September 6, 2005 among Foundation Mining LP, a subsidiary  of Foundation Coal Corporation, Foundation PA Coal Company, LLC and The Bank  of New York, as Trustee.                                                                                                                                                       |
| 31.1**           |       | Certification of  periodic report by Foundation Coal Corporation’s Chief Executive Officer  pursuant to Rule 13a-14(a) under the Securities Exchange Act  of 1934, as amended pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                     |
| 31.2**           |       | Certification of  periodic report by Foundation Coal Corporation’s Chief Financial Officer  pursuant to Rule 13a-14(a) under the Securities Exchange Act  of 1934, as amended pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                     |
| 32.1**           |       | Certification of  periodic report by Foundation Coal Corporation’s Chief Executive Officer  pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                |

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| 32.2** |   | Certification of periodic report by Foundation Coal Corporation’s  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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*                    Incorporatedby reference to the same numbered exhibit previously filed with Foundation CoalHoldings, Inc.’s registration statement on Form S-1 (SEC File No. 333-118427).

**             Filed herewith.

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