Table
            of Content
 
 
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 **Form
        10-Q**
 
 **(Mark
        One)**
 
 R  **QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934**
  **For
        the quarterly period ended September 30, 2006**
  **OR**
  £  **TRANSITION
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934**
  **For
        the transition period from**   **to**
 
 **Commission
        File No. 1-32423**
 **ALPHA
        NATURAL RESOURCES, INC.**
 *(Exact
        name of registrant as specified in its charter)*
 
 **Delaware**
              **02-0733940***(State
                  or other jurisdiction of*
              *(I.R.S.
                  Employer**incorporation
                  or organization)*
              *Identification
                  Number)***One
                  Alpha Place, P.O. Box 2345**
              **24212***(Address
                  of principal executive offices)*
              *(Zip
                  Code)*
 
 **Registrant’s
        telephone number, including area code:**
 **(276)
        619-4410**
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days. Yes R No £
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act.
 
 £ Large
        accelerated filer   £ Accelerated filer   R Non-accelerated filer
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). Yes £ No R
 
 Number
        of
        shares of the Registrant’s Common Stock, $0.01 par value, outstanding as of
        October 26, 2006 — 64,965,655.
 
 
  Table
            of Content
  
 **TABLE
        OF CONTENTS**
 
 **Page****PART
                  I**Item
                  1.
              Financial
                  StatementsCondensed
                  Consolidated Balance Sheet
                  (Unaudited)
              3Condensed
                  Consolidated Statement of Income
                  (Unaudited)
              4Condensed
                  Consolidated Statement of Cash Flow
                  (Unaudited)
              5Notes
                  to Condensed Consolidated Financial Statements
                  (Unaudited)
              7Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition
                  and Results of Operations
              20Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market
                  Risk
              31Item
                  4.
              Controls
                  and Procedures
              32**PART
                  II**Item
                  1A.
              Risk
                  Factors
              33Item
                5.
              Other
                Information
              33Item
                  6.
              Exhibits
              35EX-10.2:
                Letter Of AgreementEX-31.A:
                  CERTIFICATIONEX-31.B:
                  CERTIFICATIONEX-32.A:
                  CERTIFICATIONEX-32.B:
                  CERTIFICATION
 
  -2-
 Table
            of Content
  **Item
        1.*****Financial
        Statement****s*
 
 **ALPHA
                  NATURAL RESOURCES, INC. AND SUBSIDIARIES****Condensed
                  Consolidated Balance Sheets (Unaudited)****(In
                  thousands, except share and per share amounts)****September
                  30,**
              
              **December
                  31,****2006**
              
              **2005****Assets**Current
                  assets:Cash
                  and cash equivalents
              
              
              
              
              $
              11,524
              
              
              39,622Trade
                  accounts receivable, net
              
              
              
              
              
              173,134
              
              
              147,961Notes
                  and other receivables
              
              
              
              
              
              4,324
              
              
              10,330Inventories
              
              
              
              
              
              73,588
              
              
              84,885Prepaid
                  expenses and other current assets
              
              
              
              
              
              34,977
              
              
              36,117Total
                  current assets
              
              
              
              
              
              297,547
              
              
              318,915Property,
                  plant, and equipment, net
              
              640,781
              
              
              582,750Goodwill
              
              
              
              
              
              18,641
              
              
              18,641Other
                  intangibles, net
              
              8,392
              
              
              11,014Deferred
                  income taxes
              
              37,917
              
              
              38,967Other
                  assets
              
              
              
              
              
              44,381
              
              
              43,371Total
                  assets
              
              
              
              
              $
              1,047,659
              
              
              1,013,658**Liabilities
                  and Stockholders' Equity**Current
                  liabilities:Current
                  portion of long-term debt
              
              
              
              
              $
              3,239
              
              
              3,242Notes
                  payable
              
              
              
              
              
              3,537
              
              
              59,014Bank
                  overdraft
              
              
              
              
              
              35,639
              
              
              17,065Trade
                  accounts payable
              
              
              
              
              
              69,096
              
              
              99,746Deferred
                  income taxes
              
              
              
              
              
              12,544
              
              
              11,243Accrued
                  expenses and other current liabilities
              
              
              
              
              
              85,114
              
              
              93,531Total
                  current liabilities
              
              
              
              
              
              209,169
              
              
              283,841Long-term
                  debt, net of current portion
              
              421,575
              
              
              423,547Workers’
                  compensation benefits
              
              6,939
              
              
              5,901Postretirement
                  medical benefits
              
              31,144
              
              
              24,461Asset
                  retirement obligation
              
              56,387
              
              
              46,296Deferred
                  gains on sale of property interests
              
              5,017
              
              
              5,762Other
                  liabilities
              
              
              
              
              
              30,364
              
              
              11,085Total
                  liabilities
              
              
              
              
              
              760,595
              
              
              800,893Stockholder's
                  equity:Preferred
                  stock-par value $0.01 10,000,000 shares authorized,
                  none issued
              
              
              
              
              
              —
              
              
              —Common
                  stock - par value $0.01, 100,000,000 sharesauthorized,
                  64,965,655and 64,420,414  shares issued and
                  outstanding
              
              
              
              
              
              650
              
              
              644Additional
                  paid-in capital
              
              
              
              
              
              210,372
              
              
              193,608Accumulated
                  other comprehensive (loss)
              
              
              
              
              
              (7,354
              )
              
              —Retained
                  earnings
              
              
              
              
              
              83,396
              
              
              18,513Total
                  stockholder's equity
              
              
              
              
              
              287,064
              
              
              212,765Total
                  liabilities and stockholder's equity
              
              
              
              
              $
              1,047,659
              
              
              1,013,658See
                  accompanying notes to condensed consolidated financial
                  statements.
 
  -3-
 Table
            of Content
  
 **ALPHA
                  NATURAL RESOURCES, INC. AND SUBSIDIARIES****Condensed
                  Consolidated Statements of Income (Unaudited)****(In
                  thousands, except share and per share amounts)****Three
                  months ended**
              
              **Nine
                  months ended****September
                  30,**
              
              **September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Revenues:Coal
                  revenues
              
              $
              419,036
              
              $
              345,179
              
              $
              1,279,939
              
              $
              982,383Freight
                  and handling revenues
              
              
              45,805
              
              
              46,659
              
              
              143,132
              
              
              126,650Other
                  revenues
              
              
              9,877
              
              
              5,851
              
              
              29,638
              
              
              18,447Total
                  revenues
              
              
              474,718
              
              
              397,689
              
              
              1,452,709
              
              
              1,127,480Costs
                  and expenses:Cost
                  of coal sales (exclusive of items shownseparately
                  below)
              
              
              340,440
              
              
              298,522
              
              
              1,016,831
              
              
              818,299Freight
                  and handling costs
              
              
              45,805
              
              
              46,659
              
              
              143,132
              
              
              126,650Cost
                  of other revenues
              
              
              5,774
              
              
              5,943
              
              
              19,170
              
              
              16,327Depreciation,
                  depletion and amortization
              
              
              36,422
              
              
              16,277
              
              
              104,263
              
              
              45,521Selling,
                  general and administrative expenses(exclusive
                  of depreciation and amortization shown separately above)
              
              
              16,837
              
              
              12,147
              
              
              52,229
              
              
              74,924Total
                  costs and expenses
              
              
              445,278
              
              
              379,548
              
              
              1,335,625
              
              
              1,081,721Income
                  from operations
              
              
              29,440
              
              
              18,141
              
              
              117,084
              
              
              45,759Other
                  income (expense):Interest
                  expense
              
              
              (10,735
              )
              
              (6,636
              )
              
              (31,798
              )
              
              (19,400
              )Interest
                  income
              
              
              156
              
              
              197
              
              
              514
              
              
              675Miscellaneous
                  income (expense), net
              
              
              427
              
              
              50
              
              
              2,123
              
              
              40Total
                  other income (expense), net
              
              
              (10,152
              )
              
              (6,389
              )
              
              (29,161
              )
              
              (18,685
              )Income
                  from continuing operations before income taxesand
                  minority interest
              
              
              19,288
              
              
              11,752
              
              
              87,923
              
              
              27,074Income
                  tax expense
              
              
              4,744
              
              
              3,542
              
              
              23,040
              
              
              15,141Minority
                  interest
              
              
              —
              
              
              —
              
              
              —
              
              
              2,918Income
                  from continuing operations
              
              
              14,544
              
              
              8,210
              
              
              64,883
              
              
              9,015Discontinued
                  operations:Loss
                  from discontinued operations before income taxes andminority
                  interest
              
              
              —
              
              
              —
              
              
              —
              
              
              (379
              )Income
                  tax benefit
              
              
              —
              
              
              —
              
              
              —
              
              
              (93
              )Minority
                  interest
              
              
              —
              
              
              —
              
              
              —
              
              
              (72
              )Loss
                  from discontinued operations
              
              
              —
              
              
              —
              
              
              —
              
              
              (214
              )Net
                  income
              
              $
              14,544
              
              $
              8,210
              
              $
              64,883
              
              $
              8,801Net
                  income per basic and diluted share, as adjusted in 2005Income
                  from continuing operations
              
              $
              0.23
              
              
              0.13
              
              $
              1.01
              
              
              0.17Loss
                  from discontinued operations
              
              
              -
              
              
              -
              
              
              -
              
              
              (0.01
              )Net
                  income per basic and diluted share
              
              $
              0.23
              
              $
              0.13
              
              $
              1.01
              
              $
              0.16See
                  accompanying notes to condensed consolidated financial
                  statements.
 
  -4-
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            of Content
  
 **ALPHA
                  NATURAL RESOURCES, INC. AND
                  SUBSIDIARIES****Condensed
                  Consolidated Statements of Cash Flows (Unaudited)****(In
                  thousands)****Nine
                  months ended****September
                  30,****2006**
              
              **2005**Operating
                  activities:Net
                  income
              
              $
              64,883
              
              
              8,801Adjustments
                  to reconcile net income to
                  net cash provided by operating activities:Depreciation,
                  depletion and amortization
              
              
              104,263
              
              
              45,805Amortization
                  of debt issuance costs
              
              
              1,712
              
              
              1,325Accretion
                  of asset retirement obligation
              
              
              3,472
              
              
              2,463Virginia
                  tax credit
              
              
              —
              
              
              (343
              )Stock-based
                  compensation - non-cash
              
              
              15,815
              
              
              35,694Amortization
                  of deferred gains on sales of property interests
              
              
              (745
              )
              
              (595
              )Amortization
                  of deferred gain on railroad incentives
              
              
              (154
              )
              
              (478
              )Gain
                  on sale of fixed assets, net
              
              
              (621
              )
              
              (11
              )Gain
                  on sale of discontinued operations
              
              
              —
              
              
              (704
              )Loss
                  on settlement of asset retirement obligation
              
              
              322
              
              
              490Provision
                  for non-recoupable advance royalties
              
              
              469
              
              
              —Minority
                  interest
              
              
              —
              
              
              2,846Deferred
                  income taxes
              
              
              7,189
              
              
              2,668Other
              
              
              628
              
              
              44Changes
                  in operating assets and liabilities:Trade
                  accounts receivable
              
              
              (25,307
              )
              
              (56,073
              )Notes
                  and other receivables
              
              
              3,664
              
              
              (1,087
              )Inventories
              
              
              15,620
              
              
              (48,294
              )Prepaid expenses and other current assets
              
              
              1,729
              
              
              13,438Other
                  assets
              
              
              (3,162
              )
              
              (5,148
              )Trade
                  accounts payable
              
              
              (33,154
              )
              
              20,868Accrued
                  expenses and other current liabilities
              
              
              (15,442
              )
              
              (4,691
              )Workers’
                  compensation benefits
              
              
              1,038
              
              
              367Postretirement
                  medical benefits
              
              
              6,683
              
              
              6,589Asset
                  retirement obligation
              
              
              (1,837
              )
              
              (2,919
              )Other
                  liabilities
              
              
              1,252
              
              
              569Net
                  cash provided by operating activities
              
              
              148,317
              
              
              21,624
  -5-
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            of Content
  
 **ALPHA
                  NATURAL RESOURCES, INC. AND SUBSIDIARIES****Condensed
                  Consolidated Statements of Cash Flows (Unaudited) -
                  (Continued)****(In
                  thousands)****Nine
                  months ended****September
                  30,****2006**
              
              **2005**Investing
                  activities:Capital
                  expenditures
              
              $
              (110,538
              )
              
              (95,919
              )Proceeds from disposition of property, plant, and
                  equipment
              
              
              1,060
              
              
              5,282Investment
                  in and advances to investee
              
              
              (228
              )
              
              (1,234
              )Purchase
                  of acquired companies
              
              
              (28,273
              )
              
              (961
              )Collections
                  on note receivable from coal supplier
              
              
              3,000
              
              
              4,442Payment
                  of additional consideration on prior acquisition
              
              
              —
              
              
              (5,000
              )Other
              
              
              (501
              )
              
              —Net
                  cash used in investing activities
              
              
              (135,480
              )
              
              (93,390
              )Financing
                  activities:Repayments
                  of notes payable
              
              
              (55,477
              )
              
              (12,413
              )Proceeds
                  from issuance of long-term debt
              
              
              287,000
              
              
              73,000Repayments
                  on long-term debt
              
              
              (289,585
              )
              
              (1,323
              )Increase
                  in bank overdraft
              
              
              18,574
              
              
              5,483Proceeds
                  from initial public offering, net of offering costs
              
              
              —
              
              
              598,066Repayment
                  of restructuring notes payable
              
              
              —
              
              
              (517,692
              )Distributions
                  to prior members of ANR Holdings, LLC subsequent to Internal
                  Restructuring
              
              
              (2,400
              )
              
              (72,335
              )Distributions
                  to prior members of ANR Holdings, LLC prior to Internal
                  Restructuring
              
              
              —
              
              
              (7,732
              )Debt
                  issuance costs
              
              
              —
              
              
              (568
              )Proceeds
                  from exercise of stock options
              
              
              953
              
              
              —Net cash provided by (used in) financing
                  activities
              
              
              (40,935
              )
              
              64,486Net (decrease) in cash and
                  cash equivalents
              
              
              (28,098
              )
              
              (7,280
              )Cash
                  and cash equivalents at beginning of period
              
              
              39,622
              
              
              7,391Cash
                  and cash equivalents at end of period
              
              $
              11,524
              
              
              111See
                  accompanying notes to condensed consolidated financial
                  statements.
 -6-
 Table
            of Content


**ALPHA
        NATURAL RESOURCES, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**
 **September 30,
        2006**
 **(In
        thousands, except percentages and share data)**
 **(1)
        Business and Basis of Presentation**
 
 ***Organization
        and Business***
 
 Alpha
        Natural Resources, Inc. and its operating subsidiaries are engaged in the
        business of extracting, processing and marketing coal from deep and surface
        mines, located in the Central and Northern Appalachian regions of the United
        States, for sale to utility and steel companies in the United States and
        in
        international markets.
 
 On
        February 11, 2005, Alpha Natural Resources, Inc., a Delaware corporation
        (Alpha)
        succeeded to the business of ANR Holdings, LLC, a Delaware limited liability
        company (ANR Holdings) in a series of internal restructuring transactions
        which
        are referred to collectively as the Internal Restructuring, and on February
        18,
        2005, Alpha completed the initial public offering of its common stock. Prior
        to
        the Internal Restructuring, ANR Fund IX Holdings, L.P. and Alpha NR Holding,
        Inc. (the FR Affiliates), entities under the common control of First Reserve
        GP
        IX, Inc., were the owners of 54.7% of the membership interests in ANR Holdings,
        and the remaining membership interests in ANR Holdings were held by affiliates
        of American Metals & Coal International, Inc. (AMCI), Alpha Coal Management,
        LLC (ACM) and Madison Capital Funding, LLC. The financial statements for
        the
        nine months ended September 30, 2005 are presented on a combined basis including
        the combined financial results for the FR Affiliates and subsidiaries for
        the
        period from January 1, 2005 to February 11, 2005, and the consolidated results
        for Alpha and subsidiaries from February 12, 2005 to September 30, 2005.
        The
        financial statements for the three and nine months ended September 30, 2006
        are
        presented on a consolidated basis. The entities included in the accompanying
        financial statements are collectively referred to as “the Company.”
 
 
 ***Basis
        of Presentation***
 
 The
        accompanying interim condensed consolidated financial statements have been
        prepared in accordance with U.S generally accepted accounting principles
        for
        interim financial reporting. Accounting measurements at interim dates inherently
        rely on estimates more than at year-end; however, in the opinion of management,
        all adjustments (consisting of normal recurring accruals) considered necessary
        for a fair presentation have been included. Results of operations for the
        nine
        months ended September 30, 2006 are not necessarily indicative of the results
        to
        be expected for the year ending December 31, 2006. These financial statements
        should be read in conjunction with the audited financial statements and related
        notes as of and for the year ended December 31, 2005 included in the Company’s
        Annual Report on Form 10-K filed with the Securities and Exchange Commission.
 
 -7-
 Table
            of Content
 In
        the
        course of preparing the second quarter 2006 financial statements, the Company
        and its independent auditors identified certain forward purchase and forward
        sale contracts that are considered derivative instruments under SFAS No.
        133, *Accounting
        for Derivative Instruments and Hedging Activities* (“SFAS
        133”) that do not qualify under the “normal purchase and normal sales”
exception. Transactions that do not qualify for this exception are required
        to
        be marked to market or accounted for as a hedge.
 
 Accordingly,
        the Company reviewed these contracts to assess the impact, if any, that
        mark-to-market adjustments would have had on previously issued financial
        statements. Upon completion of that review, the Company concluded that
        previously issued financial statements were not materially misstated.
 
 At
        the
        beginning of the second quarter of 2006, the Company recorded adjustments
        to
        mark to market all its open contracts for coal sales and purchases in the
        over-the-counter market (OTC) and certain third party purchase and sales
        contracts. These adjustments resulted in an increase in coal sales revenue
        of
        $3,057 and a decrease in cost of coal sales of $564, resulting in a net
        after-tax increase to net income in the amount of $2,656. The Company has
        assessed the impact of these adjustments and does not believe these amounts
        are
        material to any previously issued financial statements or to its expected
        annual
        results for 2006.
 
 During
        the third quarter ended September 30, 2006, the Company reduced coal sales
        revenue related to mark-to-market losses on OTC coal sales transactions in
        the
        amount of $1,789 and increased expense related to mark-to-market losses on
        OTC
        coal purchase transactions in cost of coal sales in the amount of $270,
        resulting in an after tax net income reduction of $1,496.
  At
        September 30, 2006, the Company had unrealized gains (losses) on open sales
        and
        purchases contracts in the amount of $4,119 and ($1,843), respectively. These
        amounts are recorded in prepaid expenses and other current assets and accrued
        expenses and other current liabilities, respectively.
  **(2)
        Earnings Per Share**
  Due
        to
        the Internal Restructuring on February 11, 2005 and initial public offering
        of
        common stock completed on February 18, 2005, the calculation of earnings
        per
        share for the nine months ended September 30, 2005 reflects certain adjustments,
        as described below.
 The
                  numerator for purposes of computing basic and diluted net income
                  (loss) per share, as adjusted for the nine months ended September 30,
                  2005, includes the reported net income (loss) and a pro forma
                  adjustment for income taxes to reflect the pro forma income taxes
                  for ANR
                  Fund IX Holdings, L.P.’s portion of reported pre-tax income (loss), which
                  would have been recorded if the issuance of the shares of common
                  stock
                  received by the FR Affiliates in exchange for their ownership in
                  ANR
                  Holdings in connection with the Internal Restructuring had occurred
                  as of
                  January 1, 2005. For purposes of the computation of basic and diluted
                  net income (loss) per share, as adjusted, the pro forma adjustment
                  for income taxes only applies to the percentage interest owned
                  by ANR Fund
                  IX Holding, L.P., the non-taxable FR Affiliate. No pro forma adjustment
                  for income taxes is required for the percentage interest owned
                  by Alpha NR
                  Holding, Inc., the taxable FR Affiliate, because income taxes have
                  already
                  been recorded in the historical results of operations. Furthermore,
                  no pro
                  forma adjustment to reported net income (loss) is necessary
                  subsequent to February 11, 2005 because Alpha is subject to income
                  taxes.The
                  denominator for purposes of computing basic net income (loss) per
                  share, as adjusted for the three months ended September 30, 2005
                  and the
                  nine months ended September 30, 2005, reflects the retroactive
                  impact of
                  the common shares received by the FR Affiliates in exchange for
                  their
                  ownership in ANR Holdings in connection with the Internal Restructuring
                  on
                  a weighted-average outstanding share basis as being outstanding
                  as of
                  January 1, 2005. The common shares issued to the minority interest
                  owners of ANR Holdings in connection with the Internal Restructuring,
                  including the immediately vested shares granted to management,
                  have been
                  reflected as being outstanding as of February 11, 2005 for purposes
                  of computing the basic net income (loss) per share, as adjusted. The
                  unvested shares granted to management on February 11, 2005 that
                  vest
                  monthly over the two-year period from January 1, 2005 to
                  December 31, 2006 are included in the basic net income
                  (loss) per share, as adjusted, computation as they vest on a
                  weighted-average outstanding share basis starting on February 11,
                  2005. The 33,925,000 new shares issued in connection with the initial
                  public offering have been reflected as being outstanding since
                  February 14, 2005, the date of the initial public offering, for
                  purposes of computing the basic net income (loss) per share, as
                  adjusted.The
                  unvested shares issued to management are considered options for
                  purposes
                  of computing diluted net income (loss) per share, as adjusted.
                  Therefore, for diluted purposes, all remaining unvested shares
                  granted to
                  management are added to the denominator subsequent to February 11,
                  2005 using the treasury stock method, if the effect is dilutive.
                  In
                  addition, the treasury stock method is used for outstanding stock
                  options,
                  if dilutive, beginning with the November 10, 2004 grant of options to
                  management to purchase units in ACM that were automatically converted
                  into
                  options to purchase up to 596,985 shares of Alpha Natural Resources,
                  Inc.
                  common stock at an exercise price of $12.73 per share.
 
  -8-
 Table
            of Content
  
 The
        computations of basic and diluted net income per share, as adjusted in 2005,
        are
        set forth below:
 
  **Three
                  Months Ended**
              
              **Nine
                  Months Ended****September
                  30,**
              
              **September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Numerator:Reported
                  income from continuing operations
              
              $
              14,544
              
              $
              8,210
              
              $
              64,883
              
              $
              9,015Deduct:
                  Income tax effect of ANR Fund IX Holdings, L.P.
                income
                  from continuing operations prior to InternalRestructuring
              
              
              -
              
              
              -
              
              
              -
              
              
              (91
              )Income
                  from continuing operations, as adjusted
              
              
              14,544
              
              
              8,210
              
              
              64,883
              
              
              8,924Reported
                  income (loss) from discontinued operations
              
              
              —
              
              
              —
              
              
              —
              
              
              (214
              )Deduct:
                  Income tax effect of ANR fund IX Holdings, L.P.
                loss
                  from discontinued operations prior to InternalRestructuring.
              
              
              —
              
              
              —
              
              
              —
              
              
              2Loss
                  from discontinued operations, as adjusted
              
              
              —
              
              
              —
              
              
              —
              
              
              (212
              )Net
                  income, as adjusted
              
              $
              14,544
              
              **$**
              8,210
              
              $
              64,883
              
              $
              8,712Denominator:Weighted
                  average shares - basic
              
              
              64,191,811
              
              
              61,259,314
              
              
              64,003,215
              
              
              53,184,066Dilutive
                  effect
                  of stock options and restricted stockawards
              
              
              22,921
              
              
              648,706
              
              
              105,551
              
              
              382,403Weighted
                  average shares - diluted
              
              
              64,214,732
              
              
              61,908,020
              
              
              64,108,766
              
              
              53,566,469Net
                  income per basic and diluted share, as adjusted in 2005:Income
                  from continuing operations
              
              $
              0.23
              
              $
              0.13
              
              $
              1.01
              
              $
              0.17Income
                  (loss) from discontinued operations
              
              
              —
              
              
              —
              
              
              —
              
              
              (0.01
              )Net
                  income per basic and diluted share
              
              $
              0.23
              
              $
              0.13
              
              $
              1.01
              
              $
              0.16
 
 
 **(3)
        Inventories**
  Inventories
        consisted of the following:
  **September
                  30,**
              
              **December
                  31,****2006**
              
              **2005**Raw
                  coal
              
              $
              5,876
              
              $
              6,401Saleable
                  coal
              
              
              55,447
              
              
              65,318Materials
                  and supplies
              
              
              12,265
              
              
              13,166Total
                  inventories
              
              $
              73,588
              
              $
              84,885
 
 
 
 -9-
 Table
            of Content
 
 **(4)
        Long-Term Debt**
 
 Long-term
        debt consisted of the following:
 
 **September
                  30,**
              
              **December
                  31,****2006**
              
              **2005**Term
                  loan
              
              $
              248,125
              
              $
              250,00010%
                  Senior Notes due 2012
              
              
              175,000
              
              
              175,000Variable
                  rate term notes
              
              
              —
              
              
              293Capital
                  lease obligations
              
              
              1,689
              
              
              1,496Total
                  long-term debt
              
              
              424,814
              
              
              426,789Less
                  current portion
              
              
              3,239
              
              
              3,242Long-term
                  debt,
                  net of current portion
              
              $
              421,575
              
              $
              423,547
 
 The
        Company manages its overall exposure to fluctuations in interest rates by
        entering into interest rate hedging transactions to achieve an appropriate
        mix
        of fixed and floating-rate instruments within its debt portfolio. The Company
        entered into a $233,125 (notional amount) interest rate swap, effective May
        9,
        2006 until October 21, 2012, which has been designated as a cash flow hedge.
        Under the terms of the interest rate swap, the Company receives variable
        interest rate payments based upon a 3-month LIBOR and makes fixed interest
        rate
        payments of 5.59% plus an applicable margin of 1.75% at September 30, 2006.
        When
        the hedged debt and swap are considered together, the combined cash flows
        are
        the equivalent of paying a fixed rate of interest of 5.59% on debt of $233,125
        through October 21, 2012. Settlements paid on the swap agreement for the
        three
        months ended and nine months ended September 30, 2006 were $54 and $182,
        respectively. Net amounts to be paid or received under the interest rate
        swap
        agreement are accrued as an adjustment to interest expense. Any change in
        fair
        value of the underlying hedge is recorded in accumulated other comprehensive
        income. As of September 30, 2006 the fair value of the interest rate swap
        was a
        liability of $7,354.
 
 **(5)
        Asset Retirement Obligation**
 
 At
        September 30, 2006 and December 31, 2005, the Company has recorded asset
        retirement obligation accruals for mine reclamation and closure costs totaling
        $63,001 and $53,487, respectively. The portion of the costs expected to be
        incurred within a year in the amounts of $6,614 and $7,191 at September 30,
        2006
        and December 31, 2005, respectively, are included in accrued expenses and
        other
        current liabilities. These regulatory obligations are secured by surety bonds
        in
        the amount of $134,538 at September 30, 2006 and $116,680 at December 31,
        2005.
        Changes in the reclamation obligation were as follows:
 
 Total
                    asset retirement obligation at December 31, 2005
                
                $
                53,487Accretion
                
                
                3,472Sites
                    added
                
                
                8,406Expenditures
                
                
                (2,803
                )Changes
                    in estimates
                
                
                117Settlement
                    of asset retirement obligation
                
                
                322Total
                    asset retirement obligation at September 30, 2006
                
                $
                63,001
 
 -10-
 Table
            of Content
 **(6)
        Stock-Based Compensation Awards**
 
 ***Adoption
        of New Accounting Method***
 
 Effective
        January 1, 2006, the Company adopted Statement of Financial Accounting Standards
        (SFAS) No. 123(R), “Share-Based Payment” (SFAS 123R), which requires that the
        measurement and recognition of compensation expense for all stock-based payment
        awards made to employees and directors be based on estimated fair value over
        the
        requisite service or vesting period. Prior to January 1, 2006, the Company
        measured stock-based compensation expense using the intrinsic value method
        of
        accounting in accordance with Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees,” and related interpretations (APB
        25).
 
 In
        adopting SFAS 123R, the Company has elected to use the modified prospective
        transition method and accordingly, has not restated results from prior periods.
        Under this transition method, stock-based compensation expense for the nine
        months ended September 30, 2006 includes compensation expense for all
        stock-based compensation awards granted prior to, but not yet vested as of
        January 1, 2006, based on the grant date fair value estimated in accordance
        with
        the original provisions of SFAS No. 123, “Accounting for Stock-Based
        Compensation” (SFAS 123). Stock-based compensation expense for all awards
        granted after December 31, 2005 is also based on the grant-date fair value
        estimated in accordance with the provisions of SFAS 123R.
 
 Stock-based
        compensation expense measured in accordance with SFAS 123R totaled $5,870
        ($5,138 on a net-of-tax basis, or $0.08 per basic and diluted share) for
        the
        three months ended September 30, 2006 and $15,815 ($14,143 on a net-of-tax
        basis, or $0.22 per basic and diluted share) for the nine months ended September
        30, 2006. The adoption of SFAS 123R resulted in increased expense of
        approximately $467 ($339 on a net-of-tax basis, or $0.01 per basic and diluted
        share) for the three months ended September 30, 2006 and $1,401 ($1,026 on
        a
        net-of-tax basis, or $0.02 per basic and diluted share) for the nine months
        ended September 30, 2006 as compared to the stock-based compensation expense
        that would have been recorded pursuant to APB  25.
 
 Approximately
        90% of stock-based compensation expense is reported as selling, general and
        administrative expenses and is included in the Corporate and Eliminations
        category for segment reporting purposes (Note 9). Approximately 10% of the
        stock-based compensation expense was recorded as part of the Cost of Sales
        category on the condensed consolidated statement of income. No stock-based
        compensation costs were capitalized in the condensed consolidated balance
        sheet
        for the nine months ended September 30, 2006. Under SFAS 123R the Company
        is
        required to report the benefits of income tax deductions that exceed recognized
        compensation as cash flow from financing activities. Such excess tax benefits
        were insignificant for the nine months ended September 30,
        2006.
  -11-
 Table
            of Content
  
 The
        following table illustrates the effect on the net income, as adjusted, and
        the
        net income per basic and diluted share as if the Company had applied the
        fair
        value recognition provisions of SFAS 123R to stock-based compensation for
        the
        three months and nine months ended September 30, 2005.
 
 **Three
                    months ended**
                
                **Nine
                    months ended****September
                    30,**
                
                **September
                    30,****2005**
                
                **2005**Net
                    income, as adjusted (Note 2)
                
                $
                8,210
                
                $
                8,712Add:
                    loss from discontinued operations
                
                
                —
                
                
                214Add:
                    share-based employee compensation cost,included
                    in net loss, as adjusted, net ofincome
                    taxes and minority interest
                
                
                2,362
                
                
                40,391Deduct:
                    share-based employee compensation costdetermined
                    under the fair value based method,net
                    of income taxes and minority interest
                
                
                (2,572
                )
                
                (40,945
                )Pro
                    forma net income, adjusted for effect offair
                    value of stock options
                
                $
                8,000
                
                $
                8,372Net
                    income per share - basic and diluted, adjusted for stock based
                    compensation
                
                $
                0.13
                
                $
                0.16
 
 The
        fair
        value of stock options granted during the nine months ended September 30,
        2005
        was estimated on the date of the grant using the Black-Scholes option pricing
        model with the following assumptions:
 
 Expected
                    life (years)
                
                
                4.0Expected
                    volatility
                
                
                38.0
                %Risk-free
                    interest rate
                
                
                3.38
                %Expected
                    annual dividend
                
                $
                0.10
 
 
 The
        Expected life for options represents an estimate of the period of time the
        stock
        options are expected to remain outstanding. The Company’s expected life is based
        upon a review of academic research on employee exercise behavior on comparable
        size companies with similar contractual lives and vesting periods because
        of the
        lack of history at Alpha.
 
 The
        Expected volatility assumption is based on stock price volatility of a group
        of
        publicly traded industry peers as a proxy because the Company was not publicly
        traded at the time the options were granted.
 
 The
        Risk-free interest rate assumption is based upon the yield on a U.S. Treasury
        strip (i.e., zero coupon bond) with a remaining life equal to the four-year
        expected life of the options.
 
 The
        Expected annual dividend was based upon the Company’s expected dividend policy.
        The quarterly expected dividend range is between $.02 and $.03, or $.08 and
        $.12
        per year. A mid-range was chosen to be included in the assumption above,
        however, the Company does not currently pay a dividend.
 
 No
        stock
        options have been granted during the first nine months of 2006.
 
 -12-
 Table
            of Content
 ***Disclosure
        of Share-Based Payment Arrangements***
 
 In
        November 2004, ACM adopted the Alpha Coal Management LLC 2004 Long-Term
        Incentive Plan (the “Alpha Coal Management Long-Term Incentive Plan”) to provide
        equity-based incentive compensation to those key employees and others who
        make
        significant contributions to the strategic and long-term performance objectives
        and growth of the Company. On November 10, 2004, ACM granted options to purchase
        800,000 units of ACM to 22 members of the Company’s management team under the
        Alpha Coal Management Long-Term Incentive Plan. These options vest over a
        period
        of five years (with accelerated vesting upon a change of control) and have
        a
        term of ten years. In connection with this grant of options, ACM entered
        into a
        letter agreement with ANR Holdings pursuant to which ANR Holdings agreed
        to
        issue to ACM additional membership interests representing sharing ratios
        in the
        aggregate amount equal to 1% of the outstanding membership interests upon
        exercise of awards granted by ACM under the Alpha Coal Management Long-Term
        Incentive Plan. In connection with the Internal Restructuring on February
        11,
        2005, this plan was amended and restated, the outstanding options to purchase
        units of ACM were automatically converted into options to purchase shares
        of
        Alpha Natural Resources, Inc. common stock and Alpha Natural Resources, Inc.
        assumed the obligations of ACM pursuant to this plan. After the Internal
        Restructuring, there were outstanding under the plan options to purchase
        an
        aggregate of 596,985 shares of common stock at an exercise price of $12.73
        per
        share. No additional options or awards will be granted under the plan.
 
 As
        part
        of the Internal Restructuring, the officers and employees who were members
        of
        ACM contributed all of their interest in ANR Holdings to Alpha in exchange
        for
        2,772,157 shares of Alpha common stock. Pursuant to the stockholder agreement,
        an aggregate of 1,344,930 shares of common stock held by the Company’s
        executives were unvested on the grant date and subject to forfeiture. The
        stockholder agreement provides that an executive holding unvested shares
        whose
        employment is terminated by us for cause, as defined in the stockholder
        agreement, or who voluntarily terminates his employment will forfeit all
        of the
        unvested shares if the termination is prior to December 31, 2005 and one
        half of
        the unvested shares if the termination is after December 31, 2005 and prior
        to
        December 31, 2006. The stockholder agreement also provides that an executive
        holding unvested shares whose employment is terminated by the Company without
        cause, or due to retirement, death or disability, will become vested upon
        termination in a percentage of the total shares initially subject to vesting
        equal to the number of full calendar months then elapsed since December 31,
        2004
        divided by 24. The stockholder agreement further provides that vesting of
        all
        unvested shares will accelerate upon a change of control of the Company,
        as
        defined in the stockholder agreement.
 
 In
        connection with the Internal Restructuring, Alpha Natural Resources, Inc.
        adopted, and its stockholders approved, the Alpha Natural Resources, Inc.
        Long-Term Incentive Plan (the “Long-Term Incentive Plan”). The principal purpose
        of the Long-Term Incentive Plan is to attract, motivate, reward and retain
        selected employees, consultants and directors through the granting of
        stock-based compensation awards. The Long-Term Incentive Plan provides for
        a
        variety of awards, including non-qualified stock options, incentive stock
        options (within the meaning of Section 422 of the Internal Revenue Code of
        1986,
        as amended), stock appreciation rights, unvested shares, dividend equivalents,
        performance-based awards and other stock-based awards. The total number of
        shares of Alpha Natural Resources, Inc. common stock initially available
        for
        issuance or delivery under the Long-Term Incentive Plan is 3,338,841 shares,
        and
        the maximum number of shares that may be subject to awards made to any one
        plan
        participant in any fiscal year will be 2,000,000 shares.
 
 On
        February 11, 2005 the Company granted certain of its executive officers,
        directors and key employees options to purchase an aggregate of 692,905 shares
        of Alpha Natural Resources, Inc. common stock at the initial public offering
        price of $19.00 per share. During the remainder of 2005, an additional 70,000
        stock options were granted as well as 12,000 nonvested shares of stock. All
        options granted during 2005 pursuant to the Long-Term Incentive Plan vest
        over a
        period of five years and have a term of ten years. The nonvested shares of
        stock
        vest over a three-year period. In the nine months ended September 30, 2006,
        all
        awards granted pursuant to the Long-Term Incentive Plan consisted of nonvested
        shares and performance shares. The nonvested shares generally vest in one-third
        increments on January 1, 2007, 2008 and 2009. The performance share awards
        entitle the grantee to receive a specified number of shares of Alpha common
        stock in the future, subject to the achievement of certain pre-established
        operating income and return on invested capital targets for the years 2006
        through 2008. The performance share awards generally vest at the end of 2008.
  -13-
 Table
            of Content
  
 Stock
        option activity for the nine months ended September 30, 2006 is summarized
        in
        the following table:
 
 **Weighted-**
                
                **Weighted-****Average**
                
                **Average****Number
                    of**
                
                **Exercise**
                
                **Remaining****Shares**
                
                **Price**
                
                **Contract
                    Life**Outstanding
                    at December 31, 2005
                
                
                1,253,593
                
                $
                16.71Granted
                
                
                —
                
                
                —Exercised
                
                
                (60,195
                )
                $
                15.86Forfeited/Canceled
                
                
                (56,000
                )
                $
                19.00Outstanding
                    at September 30, 2006
                
                
                1,137,398
                
                $
                16.64
                
                
                8.28Exercisable
                    at September 30, 2006
                
                
                174,041
                
                
                17.24
                
                
                8.31
 
 
 The
          aggregate intrinsic value of options outstanding at September 30, 2006
          was $933
          and the aggregate intrinsic value of exercisable options was $247. Cash
          received
          from the exercise of stock options during the three months and nine months
          ended
          September 30, 2006 was $0 and $953, respectively. As
          of
          September 30, 2006, $5,984 of pre-tax unrecognized compensation cost related
          to
          stock options is expected to be recognized as expense over a weighted-average
          period of 3.26 years.
 
 Nonvested
        share award activity for the nine months ended September 30, 2006 is summarized
        in the following table:
 
 **Number
                    of**
                
                **Weighted
                    Average**
                  **Grant
                    Date****Shares**
                
                **Fair
                    Value**Non-vested
                    shares outstanding at December 31, 2005
                
                
                684,465
                
                $
                19.15Granted
                
                
                519,242
                
                
                21.26Vested
                
                
                (526,965
                )
                
                19.21Forfeited
                
                
                (34,737
                )
                
                24.85Non-vested
                    shares outstanding at September 30, 2006
                
                
                642,005
                
                
                20.50
 
 The
        fair
        value of nonvested share awards is estimated based on the average of the
        high
        and low market stock price on the date of grant, and, for purposes of expense
        recognition, the total number of awards expected to vest is adjusted for
        estimated forfeitures. As of September 30, 2006, there was $8,063 of unamortized
        compensation cost related to nonvested shares which is expected to be recognized
        as expense over a weighted-average period of 2.20 years. This amount
        excludes $3,194 of unamortized costs remaining with respect to unvested shares
        issued in connection with the Internal Restructuring to certain officers
        and
        employees, which will be amortized over the remaining vesting period which
        ends
        December 31, 2006.
 
 In
        addition to the above, the Company granted 148,268 performance share awards
        in
        March 2006, of which 133,411 remain outstanding as of September 30, 2006.
        Recipients of these awards will receive shares of Alpha common stock at the
        end
        of a three-year performance period which ends on December 31, 2008, based
        on the
        Company’s actual performance against pre-established operating income and return
        on invested capital targets. In order to receive the shares, the recipient
        must
        also be employed by the Company on the vesting date. The performance share
        awards represent the number of common shares to be awarded based on the
        achievement of targeted performance, however the actual number of shares
        to be
        awarded based on performance may range from 0 percent to 200 percent of the
        targeted amount. The grant date fair value of a performance share award is
        based
        on the closing market price of Alpha’s common stock on the date of award and is
        being amortized over the performance period. The Company reassesses at each
        reporting date whether achievement of the performance conditions is probable,
        as
        well as estimated forfeitures, and adjusts the accrual of compensation expense
        as appropriate. In the three and nine month ended September 30, 2006, the
        Company expensed $267 and $558, respectively. As of September 30, 2006, there
        was $2,419 of unamortized compensation cost related to performance share
        awards
        which is expected to be recognized as expense over the next 2.25
        years.
  -14-
 Table
            of Content
 
 **(7)
        Postretirement Benefits Other Than Pensions**
 
 The
        following table details the components of the net periodic benefit cost for
        postretirement benefits other than pensions:
 
 **Three
                    Months Ended**
                
                **Nine
                    Months Ended****September
                    30,**
                
                **September
                    30,****2006**
                
                **2005**
                
                **2006**
                
                **2005**Service
                    cost
                
                $
                960
                
                $
                940
                
                $
                2,880
                
                $
                2,884Interest
                    cost
                
                
                706
                
                
                601
                
                
                2,119
                
                
                1,856Amortization
                    of net (gain) or loss
                
                
                47
                
                
                10
                
                
                140
                
                
                19Amortization
                    of prior service cost
                
                
                568
                
                
                535
                
                
                1,704
                
                
                1,841Net
                    periodic benefit cost
                
                $
                2,281
                
                $
                2,086
                
                $
                6,843
                
                $
                6,600
 
 Employer
        contributions for benefits paid for the nine months ended September 30, 2006
        and
        2005 were $0 and $11, respectively. Employee contributions are not expected
        to
        be made and the plan is unfunded.
 
 Two
        of
        the Company’s subsidiaries are required to make contributions to the 1993 UMWA
        Benefit Plan of fifty cents per signatory hour worked. The contributions
        that
        the Company made to this plan for the quarters ended September 30, 2006 and
        2005
        were $7 and $9, respectively, and $22 and $24 for the nine months ended
        September 30, 2006 and 2005, respectively.
  **(8)
        Related Party Transactions**
 
 The **** Company
        had the following receivable balances from affiliated parties as of September
        30, 2006 and December 31, 2005:
 **September
                    30,**
                
                **December
                    31,****2006**
                
                **2005**AMCI
                
                $
                48
                
                $
                10,390Robindale
                    Energy and subsidiary
                
                
                21
                
                
                63Total
                
                $
                69
                
                $
                10,453
  As
        of
        September 30, 2006, $48 of receivables from AMCI are included in notes and
        other
        receivables. As of December 31, 2005, $7,847 of receivables from AMCI were
        included in trade accounts receivable, net and $2,543 are included in notes
        and
        other receivables. The majority of the AMCI receivables at December 31, 2005
        related to coal sales transactions in the normal course of business.
 
 The **** Company
        had the following balances payable to affiliated parties as of September
        30,
        2006 and December 31, 2005:
 **September
                    30,**
                
                **December
                    31,****2006**
                
                **2005**AMCI
                
                $
                3,012
                
                $
                13,735First
                    Reserve Fund IX, L.P.
                
                
                —
                
                
                4,500Foundation
                    Energy
                
                
                —
                
                
                2,605Robindale
                    Energy and subsidiary
                
                
                —
                
                
                51Total
                
                $
                3,012
                
                $
                20,891
  At
        December 31, 2005 and September 30, 2006, the amounts payable to AMCI of
        $13,735
        and $3,012, respectively, are included in accrued expenses and other current
        liabilities. First Reserve Fund IX, L.P. is no longer a related party since
        it
        sold all of its remaining shares on January 25, 2006 and its two designees
        on
        Alpha’s Board of Directors resigned effective January 19 and 25, 2006
        respectively.
 
 -15-
 Table
            of Content
 **(9)
        Segment Information**
 
 The
        Company extracts, processes and markets steam and metallurgical coal from
        surface and deep mines for sale to electric utilities, steel and coke producers,
        and industrial customers. The Company operates only in the United States
        with
        mines in the Central Appalachian and Northern Appalachian regions. The Company
        has one reportable segment: Coal Operations, which as of September 30, 2006,
        consisted of 39 underground mines and 27 surface mines located in Central
        Appalachia and Northern Appalachia. Coal Operations also includes the Company's
        purchased coal sales function, which markets the Company's Appalachian coal
        to
        domestic and international customers. The All Other category includes the
        Company's equipment sales and repair operations, as well as other ancillary
        business activities, including terminal services, trucking services, coal
        and
        environmental analysis services, and leasing of mineral rights. In addition,
        the
        All Other category includes revenue from the operation of the Company’s highway
        construction businesses. The Corporate and Eliminations category includes
        general corporate overhead and the elimination of intercompany transactions.
        The
        revenue elimination amount represents inter-segment revenues. The Company
        evaluates the performance of its segment based on EBITDA, which the Company
        defines as net income (loss) plus interest expense, income tax expense
        (benefit), depreciation, depletion and amortization, less interest income,
        with
        EBITDA, as adjusted including minority interest where appropriate. EBITDA,
        from
        continuing operations is defined as income from continuing operations plus
        interest expense, income tax expense (benefit), depreciation, depletion and
        amortization, less interest income, with EBITDA, as adjusted including minority
        interest where appropriate.
  Operating
        segment results for continuing operations for the three months ended September
        30, 2006 and segment assets as of September 30, 2006 were as
        follows:
 **Corporate****Coal**
                    
                    **All**
                    
                    **and****Operations**
                    
                    **Other**
                    
                    **Eliminations**
                    
                    **Consolidated**Revenues
                    
                    $
                    466,936
                    
                    $
                    20,395
                    
                    $
                    (12,613
                    )
                    $
                    474,718Depreciation,
                        depletion, and amortization
                    
                    
                    34,705
                    
                    
                    1,437
                    
                    
                    280
                    
                    
                    36,422EBITDA
                    
                    
                    79,626
                    
                    
                    3,454
                    
                    
                    (16,791
                    )
                    
                    66,289Capital
                        Expenditures
                    
                    
                    26,355
                    
                    
                    183
                    
                    
                    -
                    
                    
                    26,538Total
                        assets
                    
                    $
                    1,116,413
                    
                    $
                    88,843
                    
                    $
                    (157,596
                    )
                    $
                    1,047,659
 Operating
        segment results for continuing operations for the nine months ended September
        30, 2006 and segment assets as of September 30, 2006 were as
        follows:
 
 **Corporate****Coal**
                
                **All**
                
                **and****Operations**
                
                **Other**
                
                **Eliminations**
                
                **Consolidated**Revenues
                
                $
                1,428,450
                
                $
                55,220
                
                $
                (30,961
                )
                $
                1,452,709Depreciation,
                    depletion, and amortization
                
                
                97,837
                
                
                4,851
                
                
                1,575
                
                
                104,263EBITDA
                
                
                267,337
                
                
                8,348
                
                
                (52,215
                )
                
                223,470Capital
                    Expenditures
                
                
                103,227
                
                
                6,208
                
                
                1,103
                
                
                110,538Total
                    assets
                
                $
                1,116,413
                
                $
                88,843
                
                $
                (157,596
                )
                $
                1,047,659
 
  -16-
 Table
            of Content
  
 Operating
        segment results for continuing operations for the three months ended September
        30, 2005 and segment assets as of September 30, 2005 were as
        follows:
 
 **Corporate****Coal**
                
                **All**
                
                **and****Operations**
                
                **Other**
                
                **Eliminations**
                
                **Consolidated**Revenues
                
                $
                394,331
                
                $
                9,084
                
                $
                (5,726
                )
                $
                397,689Depreciation,
                    depletion, and amortization
                
                
                15,543
                
                
                361
                
                
                373
                
                
                16,277EBITDA
                
                
                46,144
                
                
                468
                
                
                (12,144
                )
                
                34,468Capital
                    Expenditures
                
                
                29,312
                
                
                —
                
                
                86
                
                
                29,398Total
                    assets
                
                $
                536,792
                
                $
                72,019
                
                $
                13,287
                
                $
                622,098
 
 Operating
        segment results for continuing operations for the nine months ended September
        30, 2005 and segment assets as of September 30, 2005 were as follows:
 
 **Corporate****Coal**
                
                **All**
                
                **and****Operations**
                
                **Other**
                
                **Eliminations**
                
                **Consolidated**Revenues
                
                $
                1,116,447
                
                $
                29,313
                
                $
                (18,280
                )
                $
                1,127,480Depreciation,
                    depletion, and amortization
                
                
                43,037
                
                
                1,149
                
                
                1,335
                
                
                45,521EBITDA,
                    as adjusted
                
                
                162,519
                
                
                2,809
                
                
                (74,008
                )
                
                91,320Capital
                    Expenditures
                
                
                94,770
                
                
                322
                
                
                517
                
                
                95,609Total
                    assets
                
                $
                536,792
                
                $
                72,019
                
                $
                13,287
                
                $
                622,098
 
 Reconciliation
        of total segment EBITDA, as adjusted, to income from continuing operations
        follows:
 **Three
                    Months Ended**
                
                **Nine
                    Months Ended****September
                    30,**
                
                **September
                    30,****2006**
                
                **2005**
                
                **2006**
                
                **2005**Total
                    segment EBITDA, as adjusted for 2005, for continuing
                    operations
                
                $
                66,289
                
                $
                34,468
                
                $
                223,470
                
                $
                91,320Interest
                    expense
                
                
                (10,735
                )
                
                (6,636
                )
                
                (31,798
                )
                
                (19,400
                )Interest
                    income
                
                
                156
                
                
                197
                
                
                514
                
                
                675Income
                    tax expense from continuing operations
                
                
                (4,744
                )
                
                (3,542
                )
                
                (23,040
                )
                
                (15,141
                )Depreciation,
                    depletion, and amortization from
                  continuing
                    operations
                
                
                (36,422
                )
                
                (16,277
                )
                
                (104,263
                )
                
                (45,521
                )Minority
                    interest in income from continuingoperations
                
                
                —
                
                
                —
                
                
                —
                
                
                (2,918
                )Income
                    from continuing operations
                
                $
                14,544
                
                $
                8,210
                
                $
                64,883
                
                $
                9,015
  The
        Company markets produced, processed and purchased coal to customers in the
        United States and in international markets. Export revenues totaled $164,428
        and
        $522,877 or approximately 35% and 36% of total revenues for the three and
        nine
        months ended September 30, 2006, respectively. Export revenues were $156,243
        and
        $501,014 or approximately 39% and 44%, respectively, of total revenues for
        the
        three and nine months ended September 30, 2005.
 
 **(10)
        Commitment and Contingencies**
 
 ***(*** *a* ***)
        Guarantees and Financial Instruments with Off-balance Sheet
        Risk***
 
 In
        the
        normal course of business, the Company is a party to certain guarantees and
        financial instruments with off-balance sheet risk, such as bank letters of
        credit and performance or surety bonds. No liabilities related to these
        arrangements are reflected in the Company's consolidated balance sheets.
        Management does not expect any material losses to result from these guarantees
        or off-balance sheet financial instruments. The amount of bank letters of
        credit
        outstanding as of September 30, 2006 is $74,094. The amount of surety bonds
        currently outstanding related to the Company's reclamation obligations is
        presented in note 5 to the condensed consolidated financial statements. The
        Company has provided guarantees for equipment financing obtained by certain
        of
        its contract mining operators totaling approximately $684. The estimated
        fair
        value of these guarantees is not significant.
 
 -17-
 Table
            of Content
 ***(*** *b* ***)
        Litigation***
 
 The
        Company is involved in various legal proceedings from time to time in the
        normal
        course of business. In management's opinion, the Company is not currently
        involved in any legal proceeding which individually or in the aggregate could
        have a material effect on the financial condition, results of operations
        and/or
        cash flows of the Company.
 
 ****** **(11)
        Discontinued Operations**
 
 On
        April
        14, 2005, the Company sold the assets of its Colorado mining subsidiary, National
        King Coal LLC, and
        related trucking subsidiary, Gallup Transportation and Transloading Company,
        LLC
        (collectively, “NKC”), to an unrelated third party for cash in the amount of
        $4,400, plus an amount in cash equal to the fair market value of NKC’s coal
        inventory, and the assumption by the buyer of certain liabilities of NKC.
        The
        Company recorded a gain on the sale of NKC of $704 for the quarter and six
        months ended June 30, 2005. The results of operations of NKC for all periods
        have been reported in discontinued operations. National King Coal LLC was
        previously reported in the Coal Operations segment and Gallup Transportation
        and
        Transloading Company, LLC were previously reported in the All Other segment
        (note 9).
  The
        following statement of operations data reflects the activity for the
        discontinued operation for nine months ended September 30, 2005:
  **Nine
                    Months Ended****September
                    30,****2005**Total
                    revenues
                
                $
                4,523Total
                    costs and expenses
                
                
                5,607Gain
                    on sale of discontinued operations
                
                
                704Loss
                    from operations
                
                
                (380
                )Miscellaneous
                    income
                
                
                1Income
                    tax benefit from discontinuedoperations
                
                
                (93
                )Minority
                    interest in income (loss) fromdiscontinued
                    operations
                
                
                (72
                )Loss
                    from discontinued operations
                
                $
                (214
                )
 
 **(12)
        Income Taxes**
 
 The
        condensed consolidated statements of income for the nine months ended September
        30, 2005 include activity both prior to and after the Internal Restructuring
        and
        initial public offering. Accordingly, the total income tax provision for
        the
        nine months ended September 30, 2005 is the sum of the provisions for the
        pre-
        and post-restructuring periods.
 
 Prior
        to
        February 12, 2005, the minority interest owners and ANR Fund IX Holdings,
        L.P.
        owned interests in ANR Holdings, a limited liability company and pass-through
        entity for income tax purposes. As a pass-through entity, ANR Holdings provided
        information returns reflecting the allocated income (loss) to the minority
        interest owners and ANR Fund IX Holdings, L.P. based upon their respective
        ownership percentage and certain special allocations as provided by the limited
        liability company agreement and the Internal Revenue Code. The income tax
        consequences of the income (loss) allocated to these owners for the period
        from
        January 1, 2005 to February 11, 2005 is not reflected in the financial
        statements. For the 2005 period, only the income tax expense associated with
        Alpha NR Holding, Inc., a taxable entity, is included. The primary source
        of the
        income tax impact is derived from the allocated income (loss) from ANR Holdings,
        Alpha Natural Resources, LLC and its operating subsidiaries, all of which
        are
        pass-through entities for tax purposes. Subsequent to the Internal Restructuring
        and initial public offering, all of the income of ANR Holdings, and successor
        entities, is taxed to Alpha Natural Resources, Inc.
 
 The
        income tax provision from continuing operations and discontinued operations
        for
        the three and nine months ended September 30, 2005 was as follows:
  **Three
                    Months**
                
                **Nine
                    Months****Ended**
                
                **Ended****2005**
                
                **2005**Continuing
                    Operations
                
                $
                3,542
                
                $
                15,141Discontinued
                    Operations
                
                
                0
                
                
                (93
                )$
                3,542
                
                $
                15,048
 
  -18-
 Table
            of Content
  Income
        tax expense of $4,744 was recorded for the three months ended September 30,
        2006
        on pre-tax income of $19,288, which equates to an effective tax rate of 24.6%.
        This rate is lower than the federal statutory rate of 35% due primarily to
        the
        tax benefits associated with percentage depletion and the extraterritorial
        income exclusion, partially offset by state income taxes, change in the
        valuation allowance, and the portion of the stock-based compensation charge
        associated with the issuance of common stock to management in connection
        with
        the Internal Restructuring and initial public offering which is not deductible
        for tax purposes. Income tax expense of $3,542 was recorded for the three
        months
        ended September 30, 2005 on pre-tax income of $11,752, which equates to an
        effective rate of 30.1%. This rate is lower than the federal statutory rate
        of
        35% due primarily to the tax benefits associated with percentage depletion
        and
        the extra territorial income exclusion, partially offset by state income
        taxes
        and the portion of the stock-based compensation charge associated with the
        issuance of common stock to management in connection with the Internal
        Restructuring and initial public offering which is not deductible for tax
        purposes.
 
 Income
        tax expense of $23,040 was recorded for the nine months ended September 30,
        2006
        on pre-tax income of $87,923 which equates to an effective tax rate of 26.2%.
        This rate is lower than the federal statutory rate of 35% due primarily to
        the
        tax benefits associated with percentage depletion and the extraterritorial
        income exclusion, partially offset by state income taxes, change in the
        valuation allowance, and the portion of the stock-based compensation charge
        associated with the issuance of common stock to management in connection
        with
        the Internal Restructuring and initial public offering, which is not deductible
        for tax purposes. Income tax expense of $15,141 was recorded for the nine
        months
        ended September 30, 2005 on pre-tax income from continuing operations of
        $27,074, which equates to an effective tax rate of 55.9%. This rate is higher
        than the federal statutory rate of 35% due primarily to the majority of the
        stock-based compensation charge associated with the issuance of common stock
        to
        management in connection with the Internal Restructuring and initial public
        offering not being deductible for tax purposes. The increase in expected
        income
        tax expense related to the stock-based compensation charge is offset in part
        by
        the tax benefits associated with percentage depletion, the extraterritorial
        income exclusion, and taxes not being provided for on the minority interest
        and
        pass-through entity owners’ respective shares for the period prior to the
        restructuring.
 
 A
        reconciliation of the statutory federal income tax expense at 35% to income
        from
        continuing operations before income taxes and minority interest, and the
        actual
        income tax expense is as follows:
 
 **Three
                    Months Ended**
                
                **Nine
                    Months Ended****September
                    30,**
                
                **September
                    30,****2006**
                
                **2005**
                
                **2006**
                
                **2005**Federal
                    statutory income tax expense
                
                $
                6,750
                
                $
                4,114
                
                $
                30,773
                
                $
                9,476Increases
                    (reductions) in taxes due to:Percentage
                    depletion allowance
                
                
                (5,728
                )
                
                (1,137
                )
                
                (15,669
                )
                
                (7,700
                )Extraterritorial
                    income exclusion
                
                
                (536
                )
                
                (541
                )
                
                (1,418
                )
                
                (1,246
                )Deduction
                    for
                    domestic production activities
                
                
                133
                
                
                (68
                )
                
                (133
                )
                
                (347
                )State
                    taxes, net of federal tax impact
                
                
                840
                
                
                342
                
                
                2,611
                
                
                1,398Stock-based
                    compensation
                
                
                1,369
                
                
                1,031
                
                
                3,598
                
                
                14,385Change
                    in valuation allowance
                
                
                1,472
                
                
                (260
                )
                
                2,461
                
                
                137Taxes
                    not provided for minority interest
                
                
                —
                
                
                —
                
                
                —
                
                
                (1,001
                )Taxes
                    not provided for pass-through entity
                
                
                —
                
                
                —
                
                
                —
                
                
                (133
                )Other,
                    net
                
                
                444
                
                
                61
                
                
                817
                
                
                172Actual
                    income tax expense
                
                $
                4,744
                
                $
                3,542
                
                $
                23,040
                
                $
                15,141
 
 The
          Company has not been in business long enough to develop a strong earnings
          history (objective evidence to be considered under generally accepted accounting
          principles to support realization of its deferred tax assets), and it is
          likely
          that the alternative minimum tax will exceed the regular tax for the foreseeable
          future. Accordingly, the Company has recorded a valuation allowance for
          its net
          deferred tax assets of $109,312 and $93,525 as of September 30, 2006 and
          December 31, 2005, respectively. The Company monitors the valuation allowance
          each quarter and makes adjustments to the allowance as appropriate based
          primarily upon projected future earnings and the projected utilization
          of
          deferred tax assets for a limited period of time.
 
 Alpha
          continues to develop an earnings history which will be considered significant
          objective positive evidence when assessing the need for a valuation allowance.
          The Company expects that by the end of the fourth quarter of 2006, it will
          have
          three consecutive years of positive earnings history. Accordingly, during
          the
          fourth quarter, the Company will perform a comprehensive analysis of its
          ability
          to realize its deferred tax asset. The analysis will include consideration
          of
          its ability to place reliance on future income projections for a longer
          period
          into the future, due to the fact that it likely will have a three-year
          earnings
          history at that point. Based upon that analysis, the Company may conclude
          that a
          substantial portion of its valuation allowance may be reversed to net
          income.
 
 -19-
 Table
            of Content
 
 **(13)
        Progress Acquisition**
 
 On
        May 1,
        2006, the Company completed the acquisition of certain coal mining operations
        in
        eastern Kentucky from Progress Fuels Corp, a subsidiary of Progress Energy
        for
        $28,273, including a preliminary adjustment for working capital. The purchase
        price is subject to a post-closing adjustment based on actual working capital
        levels. The Progress acquisition consisted of the purchase of the outstanding
        capital stock of White Diamond May Coal Co. and Progress Land Corp. and the
        assets of Kentucky May Coal Co., Inc. The operations acquired are adjacent
        to
        Alpha’s Enterprise business unit and have been integrated with
        Enterprise.
 
 **(14)
        Comprehensive Income**
 
 Total
        comprehensive income is as follows:
  **Three
                    Months Ended**
                
                **Nine
                    Months Ended****September
                    30,**
                
                **September
                    30,****2006**
                
                **2006**Net
                    income
                
                $
                14,544
                
                
                64,883Other
                    comprehensive income (loss)
                
                
                (6,829
                )
                
                (7,354
                )Total
                    comprehensive income
                
                $
                7,715
                
                $
                57,529
 Other
          comprehensive income (loss) includes the unrealized loss on interest rate
          swaps,
          which are accounted for as cash flow hedges.
  **(15)
        New Accounting Pronouncements**
 
 In
        July
        2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
        No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB
        Statement No. 109 (FIN 48), which clarifies the accounting for
        uncertainty in tax positions. FIN 48 requires that the Company recognize
        in its
        financial statements the impact of a tax position if it is more likely than
        not
        the position will be sustained on audit, based on the technical merits of
        the
        position. The provisions of FIN 48 are effective as of the beginning of Alpha’s
        2007 fiscal year, with the cumulative effect of the change in accounting
        principle recorded as an adjustment to opening retained earnings. The Company
        is
        currently evaluating the impact of adopting FIN 48 on its financial statements.
 
 In
        September 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (“SFAS
        157”). SFAS 157 defines fair value, establishes a framework for measuring fair
        value and enhances disclosures about fair value measures required under other
        accounting pronouncements, but does not change existing guidance as to whether
        or not an instrument is carried at fair value. SFAS No. 157 is effective
        for
        fiscal years beginning after November 15, 2007. The Company is currently
        reviewing the provisions of SFAS 157 to determine the impact on the Company’s
        financial statements.
  In
        September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
        Benefit Pension and Other Postretirement Plans” (“SFAS 158”). SFAS 158 amends
        SFAS 87, “Employers’ Accounting for Pensions” (“SFAS 87”), SFAS 88, “Employers’
Accounting for Settlements and Curtailments of Defined Benefit Plans and
        for
        Termination Benefits” (“SFAS 88”), SFAS 106, “Employers’ Accounting for
        Postretirement Benefits Other Than Pensions” (“SFAS 106”) and SFAS 132(R),
“Employers’ Disclosures about Pensions and Other Postretirement Benefits.”
Effective for fiscal years ending after December 15, 2006, SFAS 158 requires
        balance sheet recognition of the funded status for all pension and
        postretirement benefit plans. The impact of initial adjustment shall be recorded
        as an adjustment of other accumulated comprehensive income. Subsequent changes
        in funded status shall be recognized as a component of other comprehensive
        income to the extent they have not yet been recognized as a component of
        net
        periodic benefit cost pursuant to SFAS 87, SFAS 88 or SFAS 106. As further
        described in Note 7, the Company has postretirement benefit plans that will
        be
        subject to the provisions of SFAS 158. At this time, we have not yet determined
        what the funded status of these plans will be at December 31, 2006, the end
        of
        our fiscal year. We are currently evaluating the impact of adopting FASB
        No. 158
        on our financial statements.
  In
        September 2006, the Securities and Exchange Commission issued Staff Accounting
        Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when
        Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”),
        which provides interpretive guidance on the consideration of the effects
        of
        prior year misstatements in quantifying current year misstatements for the
        purpose of a materiality assessment. SAB 108 is effective as of the end of
        our
        2006 fiscal year, allowing a one-time transitional cumulative effect adjustment
        to beginning retained earnings as of January 1, 2006 for errors that were
        not
        previously deemed material, but are material under the guidance in SAB 108.
        We
        are currently evaluating the impact of adopting SAB 108 on our financial
        statements.
  **Item
          2.** ***Management’sDiscussion and Analysis of Financial Condition and
          Results of Operations***
 
 You
          should read the following discussion and analysis in conjunction with our
          financial statements and related notes included elsewhere in this report.
          The
          combined historical financial information discussed below for all periods
          prior
          to the completion of our Internal Restructuring on February 11, 2005, is
          for ANR
          Fund IX Holdings, L.P. and Alpha NR Holding, Inc. and subsidiaries, which
          prior
          to the completion of our Internal Restructuring were the owners of a majority
          of
          the membership interests of ANR Holdings, and for all periods after our
          Internal
          Restructuring is for Alpha Natural Resources, Inc., the owner of 100% of
          the
          membership interests of ANR Holdings after our Internal Restructuring.
 
 
 -20-
 Table
              of Content
 
 **Cautionary
          Note Regarding Forward Looking Statements**
 
 This
          report includes statements of our expectations, intentions, plans and beliefs
          that constitute “forward-looking statements” within the meaning of Section 27A
          of the Securities Act of 1933 and Section 21E of the Securities Exchange
          Act of
          1934 and are intended to come within the safe harbor protection provided
          by
          those sections. These statements, which involve risks and uncertainties,
          relate
          to analyses and other information that are based on forecasts of future
          results
          and estimates of amounts not yet determinable and may also relate to our
          future
          prospects, developments and business strategies. We have used the words
          “anticipate,” “believe,” “could,”, “estimate,” “expect,” “intend,” “may,”
“plan,” “predict,” “project”, “should” and similar terms and phrases, including
          references to assumptions, in this report to identify forward-looking
          statements. These forward-looking statements are made based on expectations
          and
          beliefs concerning future events affecting us and are subject to uncertainties
          and factors relating to our operations and business environment, all of
          which
          are difficult to predict and many of which are beyond our control, that
          could
          cause our actual results to differ materially from those matters expressed
          in or
          implied by these forward-looking statements.
 
 The
          following factors are among those that may cause actual results to differ
          materially from our forward-looking statements:
 
 •  market
          demand for coal, electricity and steel;
 
 •  future
          economic or capital market conditions;
 
 •  weather
          conditions or catastrophic weather-related damage;
 
 •  our
          production capabilities;
 
 •  the
          consummation of financing, acquisition or disposition transactions and
          the
          effect thereof on our business;
 
 •  our
          ability to successfully integrate the operations we acquired in the Nicewonder
          and Progress acquisitions with our existing operations, and to successfully
          operate the highway construction business we acquired in the Nicewonder
          acquisition, as well as our ability to successfully integrate operations
          we may
          acquire in the future;
 
 •  our
          plans
          and objectives for future operations and expansion or
          consolidation;
 
 •  our
          relationships with, and other conditions affecting, our customers;
 
 •  timing
          of
          changes in customer coal inventories;
 
 •  long-term
          coal supply arrangements;
 
 •  inherent
          risks of coal mining beyond our control;
 
 •  environmental
          laws, including those directly affecting our coal mining and production,
          and
          those affecting our customers’ coal usage;
 
 •  competition
          in coal markets;
 
 •  railroad,
          barge, truck and other transportation performance and costs;
 
 •  availability
          of mining and processing equipment and parts;
 
 •  the
          geological characteristics of Central and Northern Appalachian coal
          reserves;
 
 •  our
          assumptions concerning economically recoverable coal reserve
          estimates;
 
 •  availability
          of skilled employees and other employee workforce factors;
 
 •  regulatory
          and court decisions;
 
 •  future
          legislation and changes in regulations, governmental policies or
          taxes;
 
 •  changes
          in postretirement benefit obligations;
 
 •  our
          liquidity, results of operations and financial condition; and
 
 •  other
          factors, including the other factors discussed in “Overview - Coal Pricing
          Trends and Uncertainties” and “Outlook” below, and the factors discussed in Part
          I, Item 1A “Risk Factors” section of our annual report on Form 10-K for the year
          ended December 31, 2005.
 
 -21-
 Table
              of Content
 When
          considering these forward-looking statements, you should keep in mind the
          cautionary statements in this report and the documents incorporated by
          reference. We do not undertake any responsibility to release publicly any
          revisions to these forward-looking statements to take into account events
          or
          circumstances that occur after the date of this report. Additionally, we
          do not
          undertake any responsibility to update you on the occurrence of any
          unanticipated events which may cause actual results to differ from those
          expressed or implied by the forward-looking statements contained in this
          report.
 
 **Overview**
 
 We
          produce, process and sell steam and metallurgical coal from eight regional
          business units, which, as of  September 30, 2006, are supported by 39
          active underground mines, 27 active surface mines and 11 preparation plants
          located throughout Virginia, West Virginia, Kentucky, and Pennsylvania.
          We also
          sell coal produced by others through third-party purchase contracts or
          in the
          over-the-counter market, the majority of which we process and/or blend
          with coal
          produced from our mines prior to resale, providing us with a higher overall
          margin for the blended product than if we had sold the coals separately.
          For the
          three months ended September 30, 2006 and nine months ended September 30,
          2006,
          sales of steam coal were 5.1 and 14.3 million tons, respectively, which
          accounted for approximately 69% and 65%, respectively, of our coal sales
          volume
          during each of these periods. For the three months ended September 30,
          2006 and
          nine months ended September 30, 2006, sales of metallurgical coal, which
          generally sells at a premium over steam coal, were 2.3 and 7.7 million
          tons,
          respectively, which accounted for approximately 31% and 35%, respectively,
          of
          our coal sales volume during each of these periods. Our sales of steam
          coal
          during the first three quarters of 2006 were made primarily to large utilities
          and industrial customers in the Eastern region of the United States, and
          our
          sales of metallurgical coal during the period were made primarily to steel
          companies in the Northeastern and Midwestern regions of the United States
          and in
          several countries in Europe, Asia and South America. Approximately 37%
          of our
          coal sales revenue including freight and handling in the first nine months
          of
          2006 was derived from sales made outside the United States, primarily in
          Canada,
          Italy, Romania, India, Brazil and Turkey.
 
 In
          addition, we generate other revenues from highway construction, equipment
          and
          parts sales, equipment repair income, rentals, royalties, commissions,
          coal
          handling, terminal and processing fees, and coal and environmental analysis
          fees. We also record revenue for freight and handling charges incurred
          in
          delivering coal to our customers, which we treat as being reimbursed by
          our
          customers. However, these freight and handling revenues are offset by equivalent
          freight and handling costs and do not contribute to our
          profitability.
 
 Our
          business is seasonal, with operating results varying from quarter to quarter.
          We
          generally experience lower sales and hence build coal inventory during
          the
          winter months primarily due to the freezing of lakes that we use to transport
          coal to some of our customers. In the first quarter of this year, the lakes
          opened for shipments earlier than normal due to milder weather, which lessened
          the impact of this lake effect on our operations in the first quarter of
          this
          year.
 
 Our
          primary expenses are wages and benefits, supply costs, repair and maintenance
          expenditures, cost of purchased coal, royalties, freight and handling costs,
          and
          taxes incurred in selling our coal. Historically, our cost of coal sales
          per ton
          is lower for sales of our produced and processed coal than for sales of
          purchased coal that we do not process prior to resale.
 
 We
          have
          one reportable segment, Coal Operations, which includes all of our revenues
          and
          costs from coal production and sales, freight and handling, rentals, commissions
          and coal handling and processing operations and coal recovery incidental
          to our
          highway construction operations. These revenues and costs included in our
          Coal
          Operations segment are reported by us in our coal revenues and cost of
          coal
          sales, except for the revenues and costs from rentals, commissions, and
          coal
          handling, processing operations and highway construction, which we report
          in our
          other revenues and cost of other revenues, respectively.
 
 In
          the
          course of preparing the second quarter 2006 financial statements, the Company
          and its independent auditors identified certain forward purchase and forward
          sale contracts that are considered derivative instruments under SFAS No.
          133, *Accounting
          for Derivative Instruments and Hedging Activities* (“SFAS
          133”) that do not qualify under the “normal purchase and normal sales”
exception. Transactions that do not qualify for this exception are required
          to
          be marked to market or accounted for as a hedge.
 
 Accordingly,
          the Company has reviewed these contracts to assess the impact, if any,
          that
          mark-to-market adjustments would have had on previously issued financial
          statements. Upon completion of that review, the Company concluded that
          previously issued financial statements were not materially misstated.
 
 At
          the
          beginning of the second quarter of 2006, the Company recorded adjustments
          to
          mark to market all its open contracts coal sales and purchases in the
          over-the-counter market (OTC) and certain third party purchase and sales
          contracts. These adjustments resulted in an increase in coal sales revenue
          of
          $3.1 million and a decrease in cost of coal sales of $0.6 million, resulting
          in
          a net after-tax increase to net income in the amount of $2.7 million. The
          Company has assessed the impact of these adjustments and does not believe
          these
          amounts are material to any previously issued financial statements or to
          its
          expected annual results for 2006.
 
 During
          the third quarter ended September 30, 2006, the Company reduced coal sales
          revenue related to mark-to-market losses on open OTC coal sales contracts
          in the
          amount of $1.8 million and increased expense related to mark-to-market
          losses on
          open OTC coal purchase contracts as cost of coal sales in the amount of
          $0.3
          million, resulting in a reduction in earnings of $1.5 million for the
          quarter.
  At
          September 30, 2006, the Company had unrealized gains (losses) on open sales
          and
          purchases contracts in the amount of $4.1 million and ($1.8 million),
          respectively. These amounts are recorded in prepaid expenses and other
          current
          assets and accrued expenses and other current liabilities, respectively.
  -22-
 Table
              of Content
 
 ***Coal
          Pricing Trends and Uncertainties.*** ** During
          the three months and nine months ended September 30, 2006 when compared
          to the
          corresponding periods in 2005, prices for our coal increased 10% and 12%,
          respectively, due to a combination of conditions in the United States and
          internationally, including an improving U.S. economy, strong growth in
          the steel
          sector, relatively low customer stockpiles, limited availability of high-quality
          coal from competing producers in Central Appalachia, capacity constraints
          of
          U.S. nuclear-powered electricity generators, and increased international
          demand
          for U.S. coal. This strong coal pricing environment has contributed to
          our
          growth in revenues during the three months and nine months ended September
          30,
          2006. While our outlook on coal pricing remains positive as noted below
          under
“—Outlook,” future coal prices are subject to factors beyond our control and we
          cannot predict with certainty the future market environment. As of October
          18,
          2006, less than 20% and 65% of our expected production for 2007 and 2008
          respectively, including the operations we acquired in the Progress acquisition,
          was uncommitted and was not yet priced.
 
 During
          the first nine months of 2006, we continued to experience increased costs
          for
          purchased coal which have risen with coal prices generally, and increased
          operating costs for employee wages, salaries and benefits, diesel fuel,
          steel
          and rubber products, explosives, trucking and variable sales related costs
          such
          as royalties and severance taxes. We also experienced some disruptions
          in
          railroad service during the first nine months of 2006, which caused delays
          in
          delivering products to customers, lowered sales volume, and increased our
          internal coal handling costs.
 
 We
          continued to experience a tight market for supplies of mining and processing
          equipment and parts during this quarter, due to increased demand by coal
          producers attempting to increase production in response to the strong market
          demand for coal. Although we are attempting to obtain adequate supplies
          of
          mining and processing equipment and parts to meet our production forecasts,
          continued limited availability of equipment and parts could prevent us
          from
          meeting those forecasts. The supply of mining and processing equipment
          and parts
          is subject to factors beyond our control and we cannot predict whether
          and for
          how long this supply market will remain limited.
  During
            the third quarter, a small number of our deep mines experienced adverse
            geological conditions which resulted in lower yields of coal and higher
            costs.
            Geological conditions are beyond our control.
  We
            are
            also experiencing a tight market for skilled mining employees ,
            due to
            increased demand by coal producers attempting to increase production
            in response
            to the strong market demand for coal, and demographic changes as existing
            miners
            in Appalachia retire at a faster rate than new miners are added to the
            Appalachian mining workforce .
            Although we have initiated training programs to develop new skilled miners
            and
            raise the skill levels of existing miners, continued limited availability
            of
            skilled miners could prevent us from being able to meet our production
            and sales
            forecasts. The
            supply of skilled mining employees is subject to factors beyond our control
            and
            we cannot predict whether and for how long this employee market will
            remain
            limited. In addition, there is a learning curve for new inexperienced
            miners and
            we may not continue to achieve our historical levels of productivity
            particularly in our underground mines which has a direct effect on our
            production costs..
  The
            MINER
            Act may have a significant impact on our productivity and costs. We can
            not, at
            this time, predict the total impact of the new legislation nor the delivery
            of
            rescue devises or other newly required equipment such as tracking
            devices.
 **Reconciliation
          of Non-GAAP Measures**
 
 The
          following unaudited table reconciles EBITDA and EBITDA, as adjusted, to
          net
          income, the mostly directly comparable GAAP measure.
  **Three
                    months ended**
                  **September
                    30,**
                
                **Nine
                    months ended**
                  **September
                    30,****2006**
                
                **2005**
                
                **2006**
                
                **2005****(in
                    thousands)**Net
                    income
                
                $
                14,544
                
                $
                8,210
                
                $
                64,883
                
                $
                8,801Interest
                    expense
                
                
                10,735
                
                
                6,636
                
                
                31,798
                
                
                19,400Interest
                    income
                
                
                (156
                )
                
                (197
                )
                
                (514
                )
                
                (675
                )Income
                    tax expense
                
                
                4,744
                
                
                3,542
                
                
                23,040
                
                
                15,048Depreciation,
                    depletion and amortization
                
                
                36,422
                
                
                16,277
                
                
                104,263
                
                
                45,804EBITDA
                    (1)
                
                
                66,289
                
                
                34,468
                
                
                223,470
                
                
                88,378Minority
                    interest
                
                
                —
                
                
                —
                
                
                —
                
                
                2,846EBITDA,
                    as adjusted (1)
                
                $
                66,289
                
                $
                34,468
                
                $
                223,470
                
                $
                91,224
 
 (1)
          EBITDA is defined as net income plus interest expense, income tax expense
          (benefit), depreciation, depletion, and amortization, less interest income.
          EBITDA, as adjusted, includes EBITDA plus minority interest. EBITDA and
          EBITDA,
          as adjusted, are used by management to measure operating performance, and
          management also believes they are useful indicators of our ability to meet
          debt
          service and capital expenditure requirements. Because EBITDA and EBITDA,
          as
          adjusted, are not calculated identically by all companies, our calculation
          may
          not be comparable to similarly titled measures of other companies. In addition,
          the amounts presented for EBITDA and EBITDA, as adjusted, differ from the
          amounts calculated under the definition of EBITDA used in our debt covenants.
          The definition of EBITDA used in our debt covenants is further adjusted
          for
          certain cash and non-cash charges and is used to determine compliance with
          financial covenants and our ability to engage in certain activities such
          as
          incurring debt and making certain payments. Adjusted EBITDA as it is used
          and
          defined in our debt covenants is described and reconciled to net income
          (loss)
          in “— Analysis of Material Debt Covenants” below.
 
 -23-
 Table
              of Content
 
 **Results
          of Operations**
 
 ***Three
          months Ended September 30, 2006 Compared to the Three months Ended September
          30,
          2005***
 
 **** *Summary*
  For
          the
          quarter ended September 30, 2006, we recorded revenues of $474.7 million
          compared to $397.7 million for the quarter ended September 30, 2005, an
          increase
          of $77.0 million. Net income increased from $8.2 million ($0.13 per diluted
          share) in the third quarter of 2005 to $14.5 million ($0.23 per diluted
          share)
          for the third quarter of 2006. EBITDA, as adjusted, in 2005 and as reconciled
          to
          our net income in the table above, was $66.3 million and $34.5 million
          in the
          third quarter 2006 and 2005, respectively, including the non-cash portion
          of our
          stock-based compensation, related to the Company’s initial public offering
          (IPO), charges of $3.2 million and $3.4 million in the third quarter of
          2006 and
          2005, respectively.
 
 We
          sold
          7.4 million tons of coal during the third quarter of 2006, 0.7 million
          more than
          the comparable period in 2005. Our Callaway business unit and our recently
          acquired Progress mines contributed 1.0 million and 0.6 tons, respectively,
          for
          the quarter. Coal margin, which we define as coal revenues less cost of
          coal
          sales, divided by coal revenues, increased from 13.5% in 2005 to 18.8%
          in 2006.
          Coal margin per ton was $10.57 in the third quarter 2006, a 52.1% increase
          from
          the third quarter 2005. Coal margin per ton is calculated as coal sales
          realization (sales price) per ton less cost of coal sales per ton excluding
          depreciation, depletion, and amortization.
 
 *Revenues*
 
 **Three
                    months Ended**
                  **September
                    30,**
                
                **Increase**
                  **(Decrease)****2006**
                
                **2005**
                
                **$
                    or Tons**
                
                %**(in
                    thousands, except per ton data)**Coal
                    revenues
                
                $
                419,036
                
                $
                345,179
                
                $
                73,857
                
                
                21
                %Freight
                    and handling revenues
                
                
                45,805
                
                
                46,659
                
                
                (854
                )
                
                (2
                )%Other
                    revenues
                
                
                9,877
                
                
                5,851
                
                
                4,026
                
                
                69
                %Total
                    revenues
                
                $
                474,718
                
                $
                397,689
                
                $
                77,029
                
                
                19
                %Tons
                    Sold:Steam
                
                
                5,097
                
                
                4,589
                
                
                508
                
                
                11
                %Metallurgical
                
                
                2,336
                
                
                2,125
                
                
                211
                
                
                10
                %Total
                
                
                7,433
                
                
                6,714
                
                
                719
                
                
                11
                %Coal
                    sales realization per ton:Steam
                
                $
                48.21
                
                $
                41.66
                
                
                6.55
                
                
                16
                %Metallurgical
                
                
                74.19
                
                
                72.49
                
                
                1.70
                
                
                2
                %Total
                
                $
                56.37
                
                $
                51.41
                
                $
                4.96
                
                
                10
                %
 
 *Coal
          Revenues.* Coal
          revenues increased by $73.9 million (21%) for the quarter ended September
          30,
          2006 over the comparable period of 2005 mainly driven by an 10% increase
          in coal
          sales realization per ton from $51.41 per ton in the third quarter of 2005
          to
          $56.37 per ton in the third quarter of 2006. Our Callaway (acquired in
          October
          2005) and Progress (acquired in May 2006) operations contributed $53.6
          million
          and $27.8 million, respectively, to coal revenues for the quarter ended
          September 30, 2006. The change in the mark-to-market open positions for
          forward
          sales contracts on the OTC market decreased revenues by $1.8 million or
          $0.24
          per ton. Our metallurgical coal (met coal) realization per ton increased
          from
          $72.49 per ton in the third quarter of 2005 to $74.19 per ton in the third
          quarter of 2006, or 2%, and steam coal realization per ton increased from
          $41.66
          per ton to $48.21 per ton or 16%, for the reasons discussed in the section
          titled “Coal Pricing Trends and Uncertainties” above. The mark-to-market
          adjustment for forward sales contracts on the OTC market decreased coal
          sales
          realization per ton for steam coal by $0.35. Met coal sales accounted for
          31% of
          our coal sales volume in the third quarter of 2006 compared with 32% in
          the
          third quarter of 2005. Total tons sold during the third quarter of 2006
          were 7.4
          million, including 2.3 million tons of met coal and 5.1 million of steam
          coal.
          Sales volume for the third quarter of 2005 was 6.7 million tons of which
          2.1
          million tons were met coal and 4.6 million were steam coal.
 
 *Freight
          and Handling Revenues.* Freight
          and handling revenues decreased to $45.8 million for the three months ended
          September 30, 2006, a decrease of $0.9 million compared with the three
          months
          ended September 30, 2005 due to the change in the mix of steam customers
          shipped
          which resulted in a $1.55 lower average freight rates per ton which was
          partially offset by an average increase in the freight rate of $0.93 per
          ton for
          metallurgical customers. The balance is attributable to higher freight
          rates
          experienced during the three months ended September 30, 2006. However,
          these
          revenues are offset by equivalent costs and do not contribute to our
          profitability.
 
 *Other
          Revenues.* Other
          revenues increased by $4.0 million mainly due to $6.0 million of road
          construction revenues and sales commissions of $1.0 million primarily related
          to
          the net settlement of various OTC transactions in the current period, partially
          offset by a decrease in revenues from our Maxxim Rebuild operation ($1.2
          million) and revenues from coal processing fees ($1.9 million). We expect
          that
          other revenues generated by Maxxim Rebuild and coal processing fees during
          the
          rest of 2006 will also be below last year’s levels. Maxxim Rebuild has
          concentrated its efforts on Company operations in 2006. In addition, a
          contract
          for coal processing terminated at the end of 2005.
  -24-
 Table
              of Content
   *Costs
          and Expenses*
 
 **Three
                    months ended**
                  **September
                    30.**
                
                **Increase**
                  **(Decrease)****2006**
                
                **2005**
                
                $
                
                **%****(in
                    thousands, except per ton data)**Cost
                    of coal sales (exclusive of items shown separately below)
                
                $
                340,440
                
                $
                298,522
                
                $
                41,918
                
                
                14
                %Freight
                    and handling costs
                
                
                45,805
                
                
                46,659
                
                
                (854
                )
                
                (2
                )%Cost
                    of other revenues
                
                
                5,774
                
                
                5,943
                
                
                (169
                )
                
                (3
                )%Depreciation,
                    depletion and amortization
                
                
                36,422
                
                
                16,277
                
                
                20,145
                
                
                124
                %Selling,
                    general and administrative expenses (exclusive of depreciation
                    and
                    amortization shown separately above and including stock-based
                    compensationexpense
                    in the amount of $5,053 in 2006 and $3,381 in 2005)
                
                
                16,837
                
                
                12,147
                
                
                4,690
                
                
                39
                %Total
                    costs and expenses
                
                $
                445,278
                
                $
                379,548
                
                $
                65,730
                
                
                17
                %Cost
                    of coal sales per ton:Company
                    mines
                
                $
                43.13
                
                $
                38.07
                
                $
                5.06
                
                
                13
                %Contract
                    mines (including purchased and processed)
                
                
                51.70
                
                
                51.34
                
                
                0.36
                
                
                1
                %Total
                    produced and processed
                
                
                44.46
                
                
                40.77
                
                
                3.69
                
                
                9
                %Purchased
                    and sold without processing
                
                
                54.54
                
                
                56.14
                
                
                (1.60
                )
                
                (3
                )%Cost
                    of
                    coal sales per ton
                
                $
                45.80
                
                $
                44.46
                
                $
                1.34
                
                
                3
                %
 
 
 *Cost
            of Coal Sales.* Our
            cost
            of coal sales increased by $41.9 million, from $298.5 million, or $44.46
            per
            ton, in the third quarter 2005 to $340.4 million, or $45.80 per ton,
            in the
            third quarter of 2006. The change in the mark-to-market open positions
            forward
            purchase contracts on the OTC market increased cost of sales by $0.3
            million or
            $0.04 per ton for the third quarter of 2006. Approximately $37.3 million
            and
            $28.4 million, respectively, of this quarter’s costs were associated with our
            Callaway (acquired in October 2005) and Progress (acquired in May 2006)
            operations, respectively. Our cost of coal sales per ton for our produced
            and
            processed coal was $44.46 per ton in the three months ended September
            30, 2006
            as compared to $40.77 per ton in the comparable period in 2005. This
            $3.69 per
            ton increase is due to a number of factors. Poorer geological conditions
            and an
            inexperienced workforce at some of our deep mines lead to lower production
            and
            productivity and a corresponding increase in cost. Also, we incurred
            increased
            costs for mine supplies and repairs (including higher costs for diesel
            fuel) and
            increased variable sales-related costs such as royalties and severance
            taxes
            partially offset by lower costs of surface mine production. The cost
            of sales
            per ton of our purchased coal was $54.54 per ton in the third quarter
            2006 and
            $56.14 per ton for the corresponding period of 2005. Of these purchased
            tons,
            approximately 61% was blended with our produced and processed tons prior
            to
            resale. The mark-to-market adjustment on forward purchase contracts on
            the OTC
            market increased cost of sales per ton for purchased coal by $0.27 in
            the third
            quarter of 2006.
 *Freight
          and Handling Costs.* Freight
          and handling costs decreased to $45.8 million for the three months ended
          September 30, 2006, a decrease of $0.9 million compared with the three
          months
          ended September 30, 2005 due to the change in the mix of steam customers
          shipped
          which resulted in a $1.55 lower average freight rates per ton which was
          partially offset by an average increase in the freight rate of $0.93 per
          ton for
          metallurgical coal customers
 
 *Cost
          of Other Revenues* .
          Our
          cost of other revenues decreased by 3% or $0.2 million in the third quarter
          of
          2006 when compared with the third quarter of 2005 which was partially offset
          by
          road construction costs by lower expenses at our subsidiary, Maxxim Rebuild
          Company, and lower coal processing expenses. The margin (other revenues
          less
          cost of other revenues) on other revenues increased by $4.2 million compared
          with the third quarter of 2005 due mainly to our road construction businesses
          and net gains related to settlements of certain forward purchase and sales
          contracts. This margin does not include related charges for depreciation
          and
          amortization.
 
 *Depreciation,
          Depletion and Amortization.* DD&A
          increased $20.1 million or 124%, to $36.4 million for the three months
          ended
          September 30, 2006 as compared with the same period in 2005 due mainly
          to the
          Nicewonder acquisition. DD&A per ton of coal sold increased from $2.42 per
          ton for the three months ended September 30, 2005 to $4.90 per ton in the
          same
          period of 2006.
 
 *Selling,
          General and Administrative Expenses.* These
          expenses increased by $4.7 million to $16.8 million in the third quarter
          of 2006
          from $12.1 million in the third quarter of 2005. Excluding our stock-based
          compensation charge of $5.1 million incurred in the third quarter of 2006
          and
          $3.4 million in the third quarter of 2005, ** these
          costs increased in the three months ended September 30, 2006 by $3.0 million
          from the third quarter of last year mainly due to increases in professional
          fees
          related to the implementation of the Sarbanes Oxley Act of 2002, personnel
          to
          support our staffing requirements as a public company, and accruals related
          to a
          retention plan for key employees. As a percentage of revenue excluding
          our stock
          based compensation charges, these costs were 2.5% and 2.2% for the third
          quarter
          of 2006 and 2005, respectively.
 
 *Interest
          Expense.* Interest
          expense increased $4.1 million to $10.7 million during the third quarter
          of 2006
          compared to the same period in 2005. The increase in interest expense is
          attributable to the additional debt we incurred to finance the Nicewonder
          acquisition and higher interest rates on our variable rate debt.
 
 *Interest
          Income.* Interest
          income decreased marginally in the three months ended September 30, 2006
          from
          the three months ended September 30, 2005. This decrease was attributable
          to
          less interest earned on a note due from a coal supplier as a result of
          repayments on the note.
 
 *Income
          Tax Expense:* Our
          provision for income taxes related to continuing operations increased by
          $1.2
          million from $3.5 million in the prior year’s third quarter to $4.7 million in
          this year’s third quarter. The effective tax rate of 24.6% for the third quarter
          of 2006 is lower than the 30.1% effective tax rate for the third quarter
          of 2005
          primarily due to differences in excess percentage depletion deductions
          and
          changes in the valuation allowance.
 
 -25-
 Table
              of Content
 ***Nine
          months Ended September 30, 2006 Compared to the Nine months Ended September
          30,
          2005***
 
 *Summary*
  For
          the
          nine months ended September 30, 2006, our total revenues were $1.453 billion,
          compared to $1.127 billion for the nine months ended September 30, 2005,
          an
          increase of $325.2 million. Net income increased from $8.8 million ($0.16
          per
          diluted share) in the 2005 period to $64.9 million ($1.01 per diluted share)
          for
          the 2006 period. Included in net income for the nine months ended September
          30,
          2006 and September 30, 2005 was stock-based compensation expense in the
          amount
          of $15.8 million ($14.1 million after-tax) and $43.2 million after tax,
          respectively. EBITDA, as adjusted for 2005 and as reconciled to our net
          income
          in the table above, was $223.5 million in the first three quarters of 2006,
          including the non-cash portion of the stock-based compensation charge in
          the
          amount of $15.8 million. EBITDA, as adjusted was $132.2 million more than
          the
          same period in 2005 which included the non-cash portion of stock-based
          compensation charges in the amount of $35.7 million.
 
 We
          sold
          22.0 million tons of coal during the first three quarters of 2006, 3.1
          million
          more than the comparable period in 2005. Our Callaway business unit and
          recently
          acquired Progress mines contributed 3.0 and 1.0 million tons, respectively,
          for
          the period. Coal margin increased from 16.7% in 2005 to 20.6% in 2006.
          Coal
          margin per ton was $11.95 in the nine months ended September 30, 2006,
          a 37.8%
          increase from the first three quarters of 2005.
 
 *Revenues*
 
 **Nine
                    months Ended**
                  **September
                    30,**
                
                **Increase**
                  **(Decrease)****2006**
                
                **2005**
                
                **$
                    or Tons**
                
                %**(in
                    thousands, except per ton data)**Coal
                    revenues
                
                $
                1,279,939
                
                $
                982,383
                
                $
                297,556
                
                
                30
                %Freight
                    and handling revenues
                
                
                143,132
                
                
                126,650
                
                
                16,482
                
                
                13
                %Other
                    revenues
                
                
                29,638
                
                
                18,447
                
                
                11,191
                
                
                61
                %Total
                    revenues
                
                $
                1,452,709
                
                $
                1,127,480
                
                $
                325,229
                
                
                29
                %Tons
                    Sold:Steam
                
                
                14,344
                
                
                11,700
                
                
                2,644
                
                
                23
                %Metallurgical
                
                
                7,672
                
                
                7,237
                
                
                435
                
                
                6
                %Total
                
                
                22,016
                
                
                18,937
                
                
                3,079
                
                
                16
                %Coal
                    sales realization per ton:Steam
                
                $
                49.12
                
                $
                40.05
                
                $
                9.07
                
                
                23
                %Metallurgical
                
                
                75.00
                
                
                70.99
                
                
                4.01
                
                
                6
                %Total
                
                $
                58.14
                
                $
                51.88
                
                $
                6.26
                
                
                12
                %
 
 
 *Coal
          Revenues.* Coal
          revenues increased by $297.6 million, or 30% during the nine months ended
          September 30, 2006 over the comparable period of 2005 driven by an increase
          in
          sales volume as well as an increase in the sales realization per ton. Our
          Callaway (acquired in October 2005) and Progress (acquired in May 2006)
          operations contributed $156.5 million and $46.0 million, respectively,
          to coal
          revenues for the nine months ended September 30, 2006. The change in the
          mark-to-market open positions forward sales contracts on the OTC market
          increased revenues by $4.1 million or $0.19 per ton in 2006. Our met coal
          realization per ton increased from $70.99 per ton in the nine months ended
          September 30, 2005, to $75.00 per ton in the 2006 nine month period, or
          6%, and
          steam coal realization per ton increased from $40.05 to $49.12, or 23%,
          for the
          reasons discussed in the section titled “Coal Pricing Trends and Uncertainties”
above. The mark-to-market adjustment for forward sales contracts on the
          OTC
          market increased coal sales realization per ton for steam coal by $0.29
          for the
          nine months ended September 30, 2006. Met coal sales accounted for 35%
          of our
          coal sales volume in the nine months ended September 30, 2006 compared
          to 38% in
          the year ago period. Total tons sold during the first three quarters of
          2006
          were 22.0 million, including 7.7 million tons of met coal and 14.3 million
          of
          steam coal. Sales for the comparable period last year were 18.9 million
          tons of
          which 7.2 million were met coal and 11.7 million were steam
          coal.
 
 *Freight
          and Handling Revenues.* Freight
          and handling revenues increased to $143.1 million for the nine months ended
          September 30, 2006, an increase of $16.5 million compared with the nine
          months
          ended September 30, 2005 due to higher freight rates experienced during
          the nine
          months ended September 30, 2006 related to metallurgical customers. These
          increases were partially offset by a change in the mix of steam customers
          shipped which resulted in an average decrease of $0.35 per ton freight
          rate.
          These revenues are offset by equivalent costs and do not contribute to
          our
          profitability.
 
 *Other
          Revenues.* Other
          revenues increased by $11.2 million during the first three quarters of
          this year
          from the corresponding period last year mainly due to $20.3 million of
          road
          construction revenues and an increase in sales commissions of $2.0 million,
          partially offset by decreases in revenues from our Maxxim Rebuild operations
          ($5.4 million) and revenues from coal processing fees ($6.2 million). Maxxim
          Rebuild has concentrated its efforts on Company operations in 2006. In
          addition,
          a contract for coal processing terminated at the end of 2005.
 
  -26-
 Table
              of Content
  
 *Costs
          and Expenses*
 
 **Nine
                    months ended**
                  **September
                    30.**
                
                **Increase**
                  **(Decrease)****2006**
                
                **2005**
                
                $
                
                **%****(in
                    thousands, except per ton data)**Cost
                    of coal sales (exclusive of items shown separately below)
                
                $
                1,016,831
                
                $
                818,299
                
                $
                198,532
                
                
                24
                %Freight
                    and handling costs
                
                
                143,132
                
                
                126,650
                
                
                16,482
                
                
                13
                %Cost
                    of other revenues
                
                
                19,170
                
                
                16,327
                
                
                2,843
                
                
                17
                %Depreciation,
                    depletion and amortization
                
                
                104,263
                
                
                45,521
                
                
                58,742
                
                
                129
                %Selling,
                    general and administrative expenses (exclusive of depreciation
                    and
                    amortization shown separately above and including stock-based
                    compensation
                    expense in the amount of $14,196 in 2006 and $43,169 in
                    2005)
                
                
                52,229
                
                
                74,924
                
                
                (22,695
                )
                
                (30
                )%Total
                    costs and expenses
                
                $
                1,335,625
                
                $
                1,081,721
                
                $
                253,904
                
                
                23
                %Cost
                    of coal sales per ton:Company
                    mines
                
                $
                42.11
                
                $
                36.49
                
                $
                5.62
                
                
                15
                %Contract
                    mines (including purchased and processed)
                
                
                52.69
                
                
                50.54
                
                
                2.15
                
                
                4
                %Total
                    produced and processed
                
                
                43.82
                
                
                39.46
                
                
                4.36
                
                
                11
                %Purchased
                    and sold without processing
                
                
                59.92
                
                
                57.30
                
                
                2.62
                
                
                5
                %Cost
                    of
                    coal sales per ton
                
                $
                46.19
                
                $
                43.21
                
                $
                2.98
                
                
                7
                %
  
 *Cost
          of Coal Sales.* Our
          cost
          of coal sales increased by $198.5 million or $2.98 per ton, from $818.3
          million,
          or $43.21 per ton, in the nine months ended September 30, 2005 to $1.017
          billion, or $46.19 per ton, in the nine months ended September 30, 2006.
          The
          change in the mark-to-market open positions forward purchase contracts
          on the
          OTC market increased cost of sales by $1.8 million or $0.08 per ton in
          2006.
          Approximately $101.5 million and $47.3 million, respectively, of the nine
          months
          ended September 30, 2006 costs were associated with our Callaway (acquired
          in
          October 2005) and Progress (acquired in May 2006) operations, respectively.
          Our
          cost of sales per ton of our produced and processed coal was $43.82 per
          ton in
          the nine months ended September 30, 2006 as compared to $39.46 per ton
          in the
          comparable period in 2005. This increase is partly attributable to lower
          production and productivity caused by poorer geological conditions and,
          an
          inexperienced workforce at some of our deep mines. Other cost increases
          were for
          mine supplies and repairs (including higher costs for diesel fuel), higher
          trucking costs, and increased variable sales-related costs, such as royalties
          and severance taxes. Also, our cost for contract miner services and coal
          purchased and processed at our facilities increased 4% in the current period
          as
          compared to the prior year period. Increased proportion of lower cost surface
          mine production partially offset the above cost increases. The cost of
          sales per
          ton of our purchased coal was $59.92 per ton in the first three quarters
          of 2006
          and $57.30 per ton for the corresponding period of 2005. The $2.62 per
          ton
          increase in costs is mainly due to the general increase in coal prices
          since the
          first nine months of last year and the change in the mix of coal qualities
          purchased. Of these purchased tons, approximately 59% was blended with
          our
          produced and processed coal prior to resale. The mark-to-market adjustment
          on
          forward purchase contracts on the OTC market increased purchased coal cost
          per
          ton by $0.58 in 2006.
  *Freight
          and Handling Costs.* Freight
          and handling costs increased to $143.1 million for the nine months ended
          September 30, 2006, an increase of $16.5 million compared with the nine
          months
          ended September 30, 2005 due to higher freight rates experienced during
          the nine
          months ended September 30, 2006 related to metallurgical customers. These
          increases were partially offset by a change in the mix of steam customers
          shipped which resulted in an average decrease of $0.35 per ton freight
          rate.
 
 *Cost
          of Other Revenues* .
          Our
          cost of other revenues increased by 17% or $2.8 million in the first three
          quarters of 2006 when compared to the similar period in 2005 due to road
          construction costs partially offset by lower expenses at our subsidiary,
          Maxxim
          Rebuild Company and lower coal processing expenses. The margin (other revenues
          less cost of other revenues) on other revenues increased by $8.3 million
          in the
          first three quarters of 2006 when compared to the first nine months of
          2005 due
          mainly to our road construction projects. This margin does not include
          related
          charges for depreciation and amortization.
 
 *Depreciation,
          Depletion and Amortization.* DD&A
          increased $58.7 million, or 129%, to $104.3 million for the nine months
          ended
          September 30, 2006 as compared with the same period in 2005 due mainly
          to
          capital additions and the Nicewonder acquisition. DD&A per ton of coal sold
          increased from $2.40 per ton for the nine months ended September 30, 2005
          to
          $4.74 per ton in the same period of 2006.
 
 *Selling,
          General and Administrative Expenses.* These
          expenses decreased by $22.7 million to $52.2 million during the first nine
          months of 2006 over the corresponding period last year. Excluding our
          stock-based compensation charge of $14.2 million incurred in the first
          three
          quarters of 2006 and $43.2 million in 2005, ** these
          costs increased in the nine months ended September 30, 2006 by $6.3 million
          from
          the comparable period last year. The cost increase was mainly due to increases
          in professional fees related to the implementation of the Sarbanes Oxley
          Act of
          2002, personnel and facilities costs to support our staffing requirements
          as a
          public company, and accruals related to a retention plan for key employees.
          As a
          percentage of revenue, these costs (excluding our stock-based compensation
          charge) were 2.62% and 2.82% for the first nine months of 2006 and 2005
          respectively.
 
 *Interest
          Expense.* Interest
          expense increased $12.4 million to $31.8 million during the nine months
          ended
          September 30, 2006 compared with the same period in 2005. The increase
          in
          interest expense is attributable to the additional debt we incurred to
          finance
          the Nicewonder acquisition and higher interest rates on our variable rate
          debt.
 
 -27-
 Table
              of Content
  *Interest
          Income.* Interest
          income decreased by $0.2 million in the nine months ended September 30,
          2006
          over the nine months ended September 30, 2005. This decrease was attributable
          to
          less interest earned on a note due from a coal supplier as a result of
          repayments on the note.
 
 *Income
          Tax Expense:* Our
          provision for income taxes related to continuing operations increased by
          $7.9
          million from $15.1 million in the prior year’s first three quarters to $23.0
          million in this year’s first nine months. Because the condensed consolidated
          statements of operations for the nine months ended September 30, 2005 include
          activity both prior to and after the Internal Restructuring and initial
          public
          offering, the total income tax provision in the prior period is the sum
          of the
          provisions for the pre- and post-restructuring periods.
 
 Prior
          to
          February 12, 2005, the minority interest owners and ANR Fund IX Holdings,
          L.P.
          owned interests in ANR Holdings, a limited liability company and pass-through
          entity for income tax purposes. As a pass-through entity, ANR Holdings
          provided
          information returns reflecting the allocated income (loss) to the minority
          interest owners and ANR Fund IX Holdings, L.P. based upon their respective
          ownership percentage and certain special allocations as provided by the
          limited
          liability company agreement and the Internal Revenue Code. The income tax
          consequences of the income (loss) allocated to these owners for the period
          from
          January 1, 2005 to February 11, 2005 is not reflected in the financial
          statements. For these periods, only the income tax expense associated with
          Alpha
          NR Holding, Inc., a taxable entity, is included. The primary source of
          the
          income tax impact is derived from the allocated income (loss) from ANR
          Holdings,
          Alpha Natural Resources, LLC and its operating subsidiaries, all of which
          are
          pass-through entities for tax purposes. Subsequent to the Internal Restructuring
          and initial public offering, all of the income of ANR Holdings is taxed
          to Alpha
          Natural Resources, Inc.
 
 Our
          effective tax rate of 26.2% for the first nine months of 2006 is significantly
          lower compared to the effective tax rate of 55.9% for the first nine months
          of
          2005 primarily due to a greater stock-based compensation charge in 2005
          which
          was not deductible for tax purposes offset by excess percentage depletion
          deductions.
  The
          effective tax rate of 55.9% for the first nine months of 2005 is greater
          than
          the federal statutory rate of 35% due primarily to the majority of the
          stock-based compensation charge associated with the issuance of common
          stock to
          management in connection with the Internal Restructuring and IPO not being
          deductible for tax purposes. The increase in income tax expense related
          to the
          stock-based compensation charge is offset in part by the tax benefits associated
          with percentage depletion, the extraterritorial income exclusion, and taxes
          not
          being provided for on the minority interest and pass-through entity owners’
respective shares for the period prior to the Internal Restructuring.
 
 -28-
 Table
              of Content
  **Liquidity
          and Capital Resources**
 
 Our
          primary liquidity and capital resource requirements are to finance the
          cost of
          our coal production and purchases, to make capital expenditures, pay income
          taxes, and to service our debt and reclamation obligations. Our primary
          sources
          of liquidity are cash flows from sales of our produced and purchased coal,
          other
          income and borrowings under our senior credit facility.
 
 At
          September 30, 2006, our available liquidity was $212.4 million, including
          cash
          of $11.5 million and $200.9 million available under our credit facility.
          Our
          total indebtedness was $428.4 million at September 30, 2006 a decrease
          of $57.4
          million from the year ended December 31, 2005.
 
 Our
          cash
          capital spending for the nine months ended September 30, 2006 was $110.5
          million, and we currently project cash capital spending for the full year
          of
          2006 of no more than $150.0 million. These forecasted expenditures will
          be used
          to develop new mines and replace or add equipment. We believe that cash
          generated from our operations and borrowings under our credit facility
          will be
          sufficient to meet our working capital requirements, anticipated capital
          expenditures and debt service requirements for at least the next twelve
          months.
  ***Cash
          Flows***
 
 Net
          cash
          provided by operations in the first nine months of 2006 was $148.3 million,
          an
          increase of $126.7 million from the $21.6 million of net cash provided
          by
          operations during the first nine months of 2005. This $126.7 million increase
          in
          cash provided by operations is due to an increase in net income of $56.1
          million, an increase in non-cash charges of $42.8 million, a decrease in
          cash
          required for working capital of $22.9 million, and a decrease in other
          assets
          and liabilities of $4.5 million.
 
 Net
          cash
          used by investing activities was $135.5 million during the first three
          quarters
          of 2006, $42.1 million more than the first three quarters of 2005 mainly
          due to
          increased capital expenditures for new mines and equipment in the amount
          of
          $14.6 million and the Progress acquisition of $28.3 million.
 
 Net
          cash
          used in financing activities was $40.9 million in the nine months ended
          September 30, 2006 compared with cash provided by financing activities
          of $64.5
          million in the nine months ended September 30, 2005. In the nine months
          ended
          September 30, 2005, we completed our previously discussed Internal Restructuring
          and initial public offering. The proceeds from the IPO were used to repay
          shareholders’ notes issued as part of the Internal Restructuring. During the
          nine months ended September 30, 2006, we made payments on notes payable
          in the
          amount of $55.5 million, net repayment of $2.6 million of long-term debt
          and
          paid $2.4 million in distributions to former members of ANR Holding, LLC.
 
 The
          combination of investing and financing activities exceeded cash generated
          by
          operations in the nine months ended September 30, 2006 leading to a decrease
          in
          cash and cash equivalents in the amount of $28.1 million.
  ***Credit
          Facility and Long-term Debt***
 
 As
          of
          September 30, 2006, our total long-term indebtedness, including capital
          lease
          obligations, consisted of the following (in thousands):
 
 **September
                    30,**
                  **2006**10%
                    Senior notes due 2012
                
                $
                175,000Term
                    Loan
                
                
                248,125Capital
                    lease obligation
                
                
                1,689Total
                    long-term debt
                
                
                424,814Less
                    current portion
                
                
                3,239Long-term
                    debt, net of current portion
                
                $
                421,575
  Our
          credit facility (including our term loan) and the indenture governing the
          senior
          notes each impose certain restrictions on our subsidiaries, including
          restrictions on our subsidiaries’ ability to: incur debt; grant liens; enter
          into agreements with negative pledge clauses; provide guarantees in respect
          of
          obligations of any other person; pay dividends and make other distributions;
          make loans, investments, advances and acquisitions; sell assets; make
          redemptions and repurchases of capital stock; make capital expenditures;
          prepay,
          redeem or repurchase debt; liquidate or dissolve; engage in mergers or
          consolidations; engage in affiliate transactions; change businesses; change
          our
          fiscal year; amend certain debt and other material agreements; issue and
          sell
          capital stock of subsidiaries; engage in sale and leaseback transactions;
          and
          restrict distributions from subsidiaries. In addition, the credit facility
          provides that we must meet or exceed certain interest coverage ratios and
          must
          not exceed certain leverage ratios.
 
 Borrowings
          under our credit facility will be subject to mandatory prepayment (1) with
          100%
          of the net cash proceeds received from asset sales or other dispositions
          of
          property by Alpha NR Holding Inc. and its subsidiaries (including insurance
          and
          other condemnation proceedings), subject to certain exceptions and reinvestment
          provisions, and (2) with 100% of the net cash proceeds received by Alpha
          NR
          Holding Inc. and its subsidiaries from the issuance of debt securities
          or other
          incurrence of debt, excluding certain indebtedness.
 
 -29-
 Table
              of Content
  ***Analysis
          of Material Debt Covenants***
 
 We
          were
          in compliance with all covenants under our credit facility and the indenture
          governing our senior notes as of September 30, 2006. However, as a result
          of the
          delay in filing the second quarter report on form 10-Q, we requested and
          received a waiver from the majority of the lenders under our credit facility
          of
          the second-quarter 2006 reporting deadline and related provisions while
          we
          completed our filing obligations. Under our credit facility, we are required
          to
          furnish quarterly financial statements to the lenders within 45 days after
          the
          end of each of the first three fiscal quarters of each year.
 
 
 The
          financial covenants in our credit facility require, among other things,
          that:
 
 ●  Alpha
          NR
          Holding Inc. must maintain a leverage ratio, defined as the ratio of
          consolidated adjusted debt (consolidated debt less unrestricted cash and
          cash
          equivalents) to Adjusted EBITDA (as defined in the credit agreement), of
          not
          more than 4.00 at December 31, 2005, March 31, June 30, September 30 and
          December 31, 2006, 3.75 at March 31, June 30, September 30 and December
          31, 2007
          and 3.50 at March 31, 2008 and each quarter end thereafter with Adjusted
          EBITDA
          being computed using the most recent four quarters; and
 
 ●  Alpha
          NR
          Holding Inc. must maintain an interest coverage ratio, defined as the ratio
          of
          Adjusted EBITDA, to cash interest expense, of 2.50 or greater on the last
          day of
          any fiscal quarter.
 
 Based
          upon Adjusted EBITDA (as defined in our credit agreement), Alpha NR Holding
          Inc.’s leverage ratio and interest coverage ratio for the twelve months ended
          September 30, 2006 were 1.52 (maximum of 3.50) and 8.17 (minimum of 2.50),
          respectively. Adjusted EBITDA, as defined in the credit agreement, is used
          to
          determine compliance with many of the covenants under the credit facility.
          The
          breach of covenants in the credit facility that are tied to ratios based
          on
          Adjusted EBITDA could result in a default under the credit facility and
          the
          lenders could elect to declare all amounts borrowed due and payable. Any
          acceleration would also result in a default under our indenture.
 
 Adjusted
          EBITDA is defined as EBITDA further adjusted to exclude non-recurring items,
          non-cash items and other adjustments permitted in calculating covenant
          compliance under our credit facility, as shown in the table below. We believe
          that the inclusion of supplementary adjustments to EBITDA applied in presenting
          Adjusted EBITDA is appropriate to provide additional information to investors
          to
          demonstrate compliance with our financial covenants.
 **Three
                        Months**
                      **Ended**
                      **December
                        31,**
                      **2006**
                    
                    **Three
                        Months**
                      **Ended**
                      **March
                        31,**
                      **2006**
                    
                    **Three
                        Months**
                      **Ended**
                      **June
                        30,**
                      **2006**
                    
                    **Three
                        Months**
                      **Ended**
                      **September
                        30,**
                      **2006**
                    
                    **Twelve
                        Month**
                      **Ended**
                      **September
                        30,**
                      **2006****(in
                        thousands)**Net
                        income
                    
                    $
                    12,413
                    
                    $
                    27,212
                    
                    $
                    23,128
                    
                    $
                    14,544
                    
                    $
                    77,297Interest
                        expense, net of interest income
                    
                    
                    10,155
                    
                    
                    10,089
                    
                    
                    10,615
                    
                    
                    10,579
                    
                    
                    41,438Income
                        tax expense
                    
                    
                    3,812
                    
                    
                    9,620
                    
                    
                    8,676
                    
                    
                    4,744
                    
                    
                    26,852Depreciation,
                        depletion and amortization expenses
                    
                    
                    27,600
                    
                    
                    33,634
                    
                    
                    34,207
                    
                    
                    36,422
                    
                    
                    131,863EBITDA
                    
                    
                    53,980
                    
                    
                    80,555
                    
                    
                    76,626
                    
                    
                    66,289
                    
                    
                    277,450Stock-based
                        compensation charge(1)
                    
                    
                    3,350
                    
                    
                    3,833
                    
                    
                    6,112
                    
                    
                    5,814
                    
                    
                    19,109Other
                        EBITDA Charges (1)
                    
                    
                    930
                    
                    
                    1,213
                    
                    
                    1,451
                    
                    
                    590
                    
                    
                    4,184Callaway
                        EBITDA before integration (1)
                    
                    
                    4,832
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    4,832Adjusted
                        EBITDA
                    
                    $
                    63,092
                    
                    $
                    85,601
                    
                    $
                    84,189
                    
                    $
                    72,693
                    
                    $
                    305,575Leverage
                        ratio(2)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1.52Interest
                        coverage ratio(3)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    8.17
 __________
 
 (1)
          We
          are required to adjust EBITDA under our credit facility for the stock-based
          compensation charge, the EBITDA related to our Callaway operations before
          integration into Alpha’s system, and other minor EBITDA charges such as
          secondary offering costs, accretion expense, and amortization of deferred
          gains.
 
 (2)  Leverage
          ratio is defined as total debt (as defined by our credit facility, including
          overdrafts) divided by Adjusted EBITDA.
 
 (3)  Interest
          coverage ratio is defined in our credit facility as Adjusted EBITDA divided
          by
          cash interest expense.
 
 ***Other***
 
 As
          a
          regular part of our business, we review opportunities for, and engage in
          discussions and negotiations concerning, the acquisition of coal mining
          assets
          and interests in coal mining companies, and acquisitions of, or combinations
          with, coal mining companies. When we believe that these opportunities are
          consistent with our growth plans and our acquisition criteria, we will
          make bids
          or proposals and/or enter into letters of intent and other similar agreements,
          which may be binding or nonbinding, that are customarily subject to a variety
          of
          conditions and usually permit us to terminate the discussions and any related
          agreement if, among other things, we are not satisfied with the results
          of our
          due diligence investigation. Any acquisition opportunities we pursue could
          materially affect our liquidity and capital resources and may require us
          to
          incur indebtedness, seek equity capital or both. There can be no assurance
          that
          additional financing will be available on terms acceptable to us, or at
          all.
 
 -30-
 Table
              of Content
 
 **Outlook**
  While
              our
              business is subject to the general risks of the coal industry and specific
              individual risks, we believe that the long-term outlook for coal markets
              remains
              generally positive worldwide, however, there has recently been a slight
              softening of the market caused by a mild summer, increased coal production,
              a
              large inventory of natural gas and some railroad improvements. U.S.
              and
              worldwide coal demand fundamentals remain relatively tight due to high
              market
              demand as a result of electricity and steel production growth which
              is being
              stimulated by robust economies in the U.S. China, the Pacific Rim and
              Europe.
              The supply side is being limited by transportation constraints and
              production
              difficulties in some coal producing countries. Metallurgical coal is
              generally
              selling at a significant premium to steam coal, and we expect that
              pricing
              relationship to continue based upon the same assumptions made in the
“Coal
              Pricing Trends and Uncertainties” section above.
 
 More
          than
          80% and 35% of our expected production in 2007 and 2008 respectively, including
          production from the operations we acquired in the Progress acquisition,
          are
          committed and have been priced as of October 18, 2006.
  The
            availability of skilled miners and supervisors and the cost to attract
            and
            retain those people is an ongoing issue which we are addressing. This
            remains an
            area of concern particularly as related to individual productivity. We
            believe
            the industry will experience a drop-off in productivity until these new
            workers
            achieve a level of aptitude similar to that of more experienced
            miners.
 
 We
            anticipate continued challenges with railroad service throughout the
            remainder
            of this year. We are working with our customers and the railroads in
            an effort
            to address these issues in a timely manner.
  We
            expect
            continuing geological conditions and the productivity levels of inexperienced
            miners at some of our deep mines to impact production and cost in the
            fourth
            quarter.
 **Critical
          Accounting Estimates and Assumptions**
 
 The
          preparation of financial statements in conformity with U.S. generally accepted
          accounting principles requires management to make estimates and assumptions
          that
          affect reported amounts. These estimates and assumptions are based on
          information available as of the date of the financial statements. Accounting
          measurements at interim dates inherently involve greater reliance on estimates
          than at year-end. The results of operations for the quarter and year-to-date
          periods ended September 30, 2006 are not necessarily indicative of results
          that
          can be expected for the full year. Please refer to the section entitled
          “Critical Accounting Estimates and Assumptions” of “Management’s Discussion and
          Analysis of Financial Condition and Results of Operations” in our annual report
          on Form 10-K for the year ended December 31, 2005 for a discussion of our
          critical accounting estimates and assumptions.
 
 **Item
          3.** ***Quantitative andQualitative Disclosures About Market Risk***
 
 In
          addition to risks inherent in operations, we are exposed to market risks.
          The
          following discussion provides additional detail regarding our exposure
          to the
          risks of changing coal and diesel fuel prices, interest rates and customer
          credit.
 
 ***Commodity
          Price Risk***
 
 We
          are
          exposed to market price risk in the normal course of selling coal. As of
          October
          18, 2006, less than 20% and 65% of our estimated 2007 and 2008 expected
          production, respectively, including the operations we acquired in the Progress
          acquisition, was uncommitted. As compared to prior years, we have increased
          the
          proportion of our planned future production in 2006, 2007 and 2008 for
          which we
          have contracts to sell coal, which has the effect of lessening our market
          price
          risk. We use significant quantities of diesel fuel in our operations and
          are
          also exposed to risk in the market price for diesel fuel. We are currently
          exploring the possibility in the future of using one or more different
          types of
          hedging instruments in order to lessen our market price risk for diesel
          fuel.
 
 We
          purchase coal in the over-the-counter market (OTC) and directly from third
          parties to supplement and blend with our produced and processed coal in
          order to
          provide coal of the quality and quantity to meet certain of our customer’s
          requirements. We also sell in the OTC market to fix the price of uncommitted
          future production from our mines. Certain of these purchase and sale contracts
          meet the definition of a derivative instrument. Any derivative instruments
          that
          we hold are held for purposes other than trading. Our risk management policy
          prohibits the use of derivatives for speculative purpose. The use of purchase
          and sales contracts which are considered derivative instruments could materially
          affect our results of operations as a result of the requirement to mark
          them to
          market at the end of each reporting period. However, we believe that use
          of
          these instruments will not have a material adverse effect on our financial
          position or results of operations because these transactions account for
          only a
          small portion of our business.
 
 These
          transactions give rise to commodity price risk, which represents the potential
          loss that can be caused by an adverse change in the price of coal. Outstanding
          purchase and sales contracts at September 30, 2006 that are considered
          derivative instruments are summarized as follows:
 
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  **Purchase
                      Contracts**
                  
                  **Purchase**
                    **Price
                      Range**
                  
                  **Tons**
                    **Outstanding**
                  
                  **Delivery
                      Period**
                  
                  **Mark-To-Market
                      Adjustment(In Millions)**$
                  40.00-$50.00
                  
                  
                  630,000
                  
                  
                  10/01/06-12/31/07
                  
                  $
                  (0.6
                  )$
                  51.00-$60.00
                  
                  
                  298,625
                  
                  
                  10/01/06-12/31/07
                  
                  $
                  (1.2
                  )928,625
                  
                  
                  
                  
                  $
                  (1.8
                  )
  **Sales
                      Contracts**
                  
                  **Selling**
                    **Price
                      Range**
                  
                  **Tons**
                    **Outstanding**
                  
                  **Delivery
                      Period**
                  
                  **Mark-To-Market
                      Adjustment(In
                      Millions)**$
                  45.00-$50.00
                  
                  
                  240,000
                  
                  
                  01/01/07-12/31/07
                  
                  $
                  (0.1
                  )$
                  51.00-60.00
                  
                  
                  590,000
                  
                  
                  10/01/06-12/31/07
                  
                  $
                  4.2830,000
                  
                  
                  
                  
                  $
                  4.1
  
 **Interest
          Rate Risk**
 
 All
          of
          our borrowings under our revolving credit facility are at a variable rate,
          so we
          are exposed to rising interest rates in the United States. As of September
          30,
          2006, we have a $248.1 million term loan outstanding with a variable interest
          rate based upon the 3-month London InterBank Offered Rate (“LIBOR”). To lessen
          our exposure to rising interest rates, effective May 22, 2006 we entered
          into a
          pay-fixed, receive variable interest rate swap on the notional amount of
          $233.1
          million for a period of approximately six and one-half years. In effect,
          this
          swap converted the variable interest rates based on the “LIBOR” to a fixed
          interest rate of 5.59% plus the applicable margin defined in the debt agreement
          (1.75%, at September 30, 2006) for a portion of our term loan. A one percentage
          point increase in interest rates would result in an annualized increase
          in
          interest expense of approximately $0.2 million based on our variable rate
          borrowings as of September 30, 2006 in excess of the notional amount of
          the
          interest rate swap of $233.1 million at September 30, 2006.
 
 **Item
          4.*****Controls and Procedures***
 
 *Evaluation
          of disclosure controls and procedures.* Under
          the supervision and with the participation of our management, including
          our
          Chief Executive Officer and our Chief Financial Officer, we evaluated the
          effectiveness of our disclosure controls and procedures, as such term is
          defined
          under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
          as
          amended, as of the end of the period covered by this report. Based upon
          that
          evaluation, our Chief Executive Officer and Chief Financial Officer concluded
          that our disclosure controls and procedures were effective, as of the end
          of the
          period covered by this report, in ensuring that material information relating
          to
          Alpha Natural Resources, Inc., required to be disclosed in reports that
          it files
          or submits under the Securities Exchange Act of 1934, is recorded, processed,
          summarized and reported within the requisite time periods and is accumulated
          and
          communicated to our management, including our Chief Executive Officer and
          our
          Chief Financial Officer, as appropriate to allow timely decisions regarding
          disclosure.
 
 *Changes
          in internal control over financial reporting.* In
          connection with our Sarbanes-Oxley Section 404 compliance project, during
          the fourth quarter of fiscal 2005 we began measures designed to improve
          our
          internal control over financial reporting in the following areas: documentation
          of controls and procedures; segregation of duties; timely reconciliation
          of
          accounts; methods of accounting for fixed assets; the structure of our
          general
          ledger; security systems and testing of our disaster recovery plan for
          our
          information technology systems; and the level of experience in public company
          accounting and periodic reporting matters among our financial and accounting
          staff. During the first, second, and third quarters of 2006 we continued
          to make
          changes in our internal control over financial reporting and expect to
          continue
          to do so from time to time during the period prior to December 31, 2006 in
          connection with our Section 404 compliance project.
 
 As
          a part
          of our review, which we undertook as part of our period-end close procedures
          for
          the quarter ended June 30, 2006, of our accounting for certain third-party
          coal
          purchases and sales that we had previously treated as falling within the
“normal
          purchases and normal sales” exception under SFAS No. 133, *Accounting
          for Derivative Instruments and Hedging Activities* ,
          we
          reviewed our accounting policies and practices related to these third-party
          coal
          transactions, particularly in the OTC market. We identified certain forward
          purchase and forward sale contracts that do not qualify under the “normal
          purchases and normal sales” exception and we corrected our accounting policies
          and practices for these transactions and strengthened the related controls
          to
          ensure that for our unaudited interim financial statements as of and for
          the
          period ended June 30, 2006 and subsequent periods, including the period
          ended
          September 30, 2006, all such transactions that meet the definition of a
          derivative and do not meet the normal exception criteria will be either
          marked-to-market or accounted for as a hedge in accordance with SFAS No.
          133.
 
 *Limitations
          of the effectiveness of internal control* .
          A
          control system, no matter how well conceived and operated, can provide
          only
          reasonable, not absolute, assurance that the objectives of the internal
          control
          system are met. Because of the inherent limitations of any internal control
          system, no evaluation of controls can provide absolute assurance that all
          control issues, if any, within a company have been detected. Notwithstanding
          these limitations, our disclosure controls and procedures are designed
          to
          provide reasonable assurance of achieving their objectives. Our Chief Executive
          Officer and Chief Financial Officer have concluded that our disclosure
          controls
          and procedures are, in fact, effective at the “reasonable assurance” level as of
          the end of the period covered by this report.
  
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  **PART
          II**
 
 **Item
          1A. Risk Factors**
 
 In
          addition to the other information set forth in this report, you should
          carefully
          consider the factors discussed in Part I, Item 1A “Risk Factors” in our Annual
          Report on form 10-K for the year ended December 31, 2005, together with
          the
          cautionary statement under the caption “Cautionary Note Regarding Forward
          Looking Statements” in “Management’s Discussion and Analysis of Financial
          Condition and Results of Operations” of this report. These described risks are
          not the only risks facing our Company. Additional risks and uncertainties
          not
          currently known to us or that we currently deem to be immaterial also may
          materially adversely affect our business, financial condition and/or operating
          results.
  **Item
            5. Other Information**
 
 On
            November 7, 2006, the AMCI Parties entered into a letter agreement (the
            “Stockholder Agreement Amendment”) that amends the terms of that certain Amended
            and Restated Stockholder Agreement dated as of October 26, 2005, as amended,
            by
            and among the Company, the AMCI Parties named therein and the other stockholders
            named therein (the “Stockholder Agreement”), to provide for the transfer, solely
            for bona fide estate planning purposes and subject to certain conditions,
            of
            certain unvested shares of common stock of the Company issued to certain
            employee stockholders. As of October 31, 2006, the AMCI Parties beneficially
            owned approximately 11% of the Company’s outstanding common stock. Hans J.
            Mende, a member of the Company’s board of directors, is affiliated with the AMCI
            Parties. Michael J. Quillen, Kevin S. Crutchfield, David C. Stuebe, Michael
            D.
            Brown, Vaughn R. Groves and Eddie W. Neely are executive officers of
            the Company
            who are also parties to the Stockholder Agreement. The preceding summary
            of the
            Stockholder Agreement Amendment does not purport to be complete and is
            qualified
            in its entirety by reference to the Stockholder Agreement Amendment,
            which is
            filed as Exhibit 10.2 to this report and incorporated herein by
            reference.
 
 **Item
          6.** ***Exhibits***
 
 See
          the
          Exhibit Index following the signature page of this quarterly
          report.
 ____________


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**SIGNATURE**
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
 
 **ALPHA
        NATURAL RESOURCES, INC.**
 
 By:
        /s/ David C. Stuebe
 Name:
        David C. Stuebe
 Title:  Vice
        President and Chief Financial Officer
 
 Date:
        November 9, 2006
 
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  **10-Q
        EXHIBIT INDEX**
 
 **Exhibit
                  No**
              **Description
                  of Exhibit**3.1
              Restated
                  Certificate of Incorporation of Alpha Natural Resources, Inc.
                  (Incorporated by reference to Exhibit 3.1 to the Annual Report on
                  Form 10-K of Alpha Natural Resources, Inc. (File No. 1-32423)
                  filed on March 30, 2005).3.2
              Amended
                  and Restated Bylaws of Alpha Natural Resources, Inc. (Incorporated
                  by
                  reference to Exhibit 3.2 to the Annual Report on Form 10-K of
                  Alpha Natural Resources, Inc. (File No. 1-32423) filed on
                  March 30, 2005).10.1
              Letter
                  Agreement, dated September 1, 2006, between Alpha Natural Resources,
                  Inc.
                  and D. Scott Kroh (Incorporated by reference to Exhibit 10.1 to the
                  Current Report on Form 8-K of Alpha Natural Resources, Inc. (File
                  No. 1-32423) filed on September 1, 2006).10.2*
              Letter
                  Agreement, dated November 7, 2006, by the
                  AMCI Parties, amending certain provisions of the Amended and Restated
                  Stockholder Agreement dated as of October 26, 2005, as amended,
                  by and
                  among Alpha Natural Resources, Inc., the AMCI Parties named therein
                  and
                  the other stockholders named therein.31(a)*
              Certification
                  Pursuant to Rule 13a-14(a) under
                  the Securities Exchange Act of 1934, as adopted pursuant to § 302 of the
                  Sarbanes-Oxley Act of 200231(b)*
              Certification
                  Pursuant to Rule 13a-14(a) under
                  the Securities Exchange Act of 1934, as adopted pursuant to § 302 of the
                  Sarbanes-Oxley Act of 200232(a)*
              Certification
                  Pursuant to 18 U.S.C. § 1350, As
                  Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of
                  200232(b)*
              Certification
                  Pursuant to 18 U.S.C. § 1350, As
                  Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of
                  2002
 
 ____________
 
 *
        Filed
        herewith.
 
 ‡
        Management contract or compensatory plan or arrangement.
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