Table of Contents


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


Form 10-Q


(Mark
One)


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


For
the quarterly period ended March 31, 2008


OR


o
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
the transition period from
                                                            to


Commission
File No. 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.
      Employerincorporation
      or organization)
            
            Identification
      Number)One
      Alpha Place, P.O. Box 2345, Abingdon, VA
            
            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. þ Yes ̈ 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.





þ Large accelerated
filer     o Accelerated
filer      ̈ Non-accelerated
filer





Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).


 ̈ Yesþ  No





Number
of shares of the registrant’s Common Stock, $0.01 par value, outstanding as of
April 23, 2008— 70,301,997





Table of Contents


TABLE
      OF CONTENTSPART
      I
            
            PageItem 1.
      Financial StatementsCondensed Consolidated Balance Sheets
      (Unaudited)
            
            2Condensed Consolidated Statements of Income
      (Unaudited)
            
            3Condensed Consolidated Statements of Cash Flows
      (Unaudited)
            
            4Notes to Condensed Consolidated Financial Statements
      (Unaudited)
            
            6Item 2. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
            
            20Item 3. Quantitative and Qualitative Disclosures about
      Market Risk
            
            30Item 4. Controls and Procedures
            
            31PART
      IIItem 1. Legal Proceedings
            
            31Item 1A. Risk Factors
            
            32Item 6. Exhibits
            
            33EXHIBIT INDEXEX-12.1: Ratio of Earnings to Fixed
      ChargesEX-12.2: Computation of Other
      RatiosEX-31.A: CertificationEX-31.B: CertificationEX-32.A: CertificationEX-32.B: Certification





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Item 1.Financial
Statements





ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES


Condensed
Consolidated Balance Sheets (Unaudited)


(In
thousands, except share and per share amounts)


March
      31,
            
            
            December
      31,2008
            
            
            2007AssetsCurrent
      assets:Cash
      and cash equivalents
            
            $
            59,160
            
            
            $
            54,365Trade
      accounts receivable, net
            
            
            196,485
            
            
            
            183,969Notes
      and other receivables
            
            
            10,961
            
            
            
            11,141Inventories
            
            
            89,401
            
            
            
            70,780Prepaid
      expenses and other current assets
            
            
            87,802
            
            
            
            59,954Total
      current assets
            
            
            443,809
            
            
            
            380,209Property,
      plant, and equipment, net
            
            
            628,412
            
            
            
            640,258Goodwill
            
            
            20,547
            
            
            
            20,547Other
      intangibles, net
            
            
            8,400
            
            
            
            9,376Deferred
      income taxes
            
            
            93,622
            
            
            
            97,130Other
      assets
            
            
            61,150
            
            
            
            63,394Total
      assets
            
            $
            1,255,940
            
            
            $
            1,210,914Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Current
      portion of long-term debt
            
            $
            2,424
            
            
            $
            2,579Note
      payable
            
            
            12,673
            
            
            
            18,883Trade
      accounts payable
            
            
            106,697
            
            
            
            95,765Deferred
      income taxes
            
            
            8,505
            
            
            
            9,753Accrued
      expenses and other current liabilities
            
            
            103,529
            
            
            
            96,082Total
      current liabilities
            
            
            233,828
            
            
            
            223,062Long-term
      debt, net of current portion
            
            
            425,448
            
            
            
            425,451Workers’
      compensation benefit obligations
            
            
            8,586
            
            
            
            9,055Postretirement
      medical benefit obligations
            
            
            55,345
            
            
            
            53,811Asset
      retirement obligation
            
            
            83,665
            
            
            
            83,020Deferred
      gains on sale of property interests
            
            
            2,963
            
            
            
            3,176Other
      liabilities
            
            
            37,587
            
            
            
            30,930Total
      liabilities
            
            
            847,422
            
            
            
            828,505Minority
      interest
            
            
            1,169
            
            
            
            1,573Commitments
      and contingencies (Note 13)Stockholders’
      equity:Preferred
      stock — par value $0.01, 10,000,000 shares authorized, none
      issued
            
            
            —
            
            
            
            —Common
      stock — par value $0.01, 100,000,000 shares authorized, 66,128,148 and
      65,769,303 shares issued and outstanding at March 31, 2008 and December
      31, 2007, respectively
            
            
            661
            
            
            
            658Additional
      paid-in capital
            
            
            232,666
            
            
            
            227,336Accumulated
      other comprehensive loss
            
            
            (26,640
            )
            
            
            (22,290
            )Retained
      earnings
            
            
            200,662
            
            
            
            175,132Total
      stockholders’ equity
            
            
            407,349
            
            
            
            380,836Total
      liabilities and stockholders’ equity
            
            $
            1,255,940
            
            
            $
            1,210,914





See accompanying notes to
condensed consolidated financial statements.








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ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES


Condensed
Consolidated Statements of Income (Unaudited)


(In
thousands, except share and per share amounts)


Three
      months endedMarch
      31,2008
            
            2007Revenues:Coal
      revenues
            
            $
            445,679
            
            $
            380,150Freight
      and handling revenues
            
            
            59,172
            
            
            43,211Other
      revenues
            
            
            12,055
            
            
            7,230Total
      revenues
            
            
            516,906
            
            
            430,591Costs
      and expenses:Cost
      of coal sales (exclusive of items shown separately below)
            
            
            359,846
            
            
            312,273(Increase)
      decrease in fair value of derivative coal contracts, net
            
            
            (14,319
            )
            
            202Freight
      and handling costs
            
            
            59,172
            
            
            43,211Cost
      of other revenues
            
            
            10,015
            
            
            5,628Depreciation,
      depletion and amortization
            
            
            44,260
            
            
            35,789Selling,
      general and administrative expenses (exclusive of depreciation and
      amortization shown separately above)
            
            
            15,354
            
            
            13,239Total
      costs and expenses
            
            
            474,328
            
            
            410,342Income
      from operations
            
            
            42,578
            
            
            20,249Other
      income (expense):Interest
      expense
            
            
            (10,087
            )
            
            (9,993
            )Interest
      income
            
            
            789
            
            
            637Miscellaneous
      income, net
            
            
            129
            
            
            42Total
      other income (expense), net
            
            
            (9,169
            )
            
            (9,314
            )Income
      before income taxes and minority interest
            
            
            33,409
            
            
            10,935Income
      tax expense
            
            
            7,968
            
            
            2,629Minority
      interest
            
            
            (89
            )
            
            (43
            )Net
      Income
            
            $
            25,530
            
            $
            8,349Net
      income per shareBasic
      and diluted:
            
            $
            0.39
            
            $
            0.13





See accompanying notes to
condensed consolidated financial statements.








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ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES


Condensed
Consolidated Statements of Cash Flows (Unaudited)


(In
thousands)


Three
      months endedMarch
      31,2008
            
            
            2007Operating
      activities:Net
      income
            
            $
            25,530
            
            
            $
            8,349Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation,
      depletion and amortization
            
            
            44,260
            
            
            
            35,789Amortization
      of debt issuance costs
            
            
            600
            
            
            
            570Accretion
      of asset retirement obligation
            
            
            1,852
            
            
            
            1,556Change
      in fair value of derivative instruments
            
            
            (16,684
            )
            
            
            (449
            )Share-based
      compensation
            
            
            2,989
            
            
            
            2,650Amortization
      of deferred gains on sales of property interests
            
            
            (213
            )
            
            
            (228
            )Gain
      on sale of fixed assets and investments
            
            
            (672
            )
            
            
            (282
            )Minority
      interest
            
            
            (89
            )
            
            
            (43
            )Deferred
      income tax expense (benefit)
            
            
            3,681
            
            
            
            (402
            )Other
            
            
            (380
            )
            
            
            86Changes
      in operating assets and liabilities:Trade
      accounts receivable
            
            
            (12,506
            )
            
            
            14,457Notes
      and other receivables
            
            
            (657
            )
            
            
            (875
            )Inventories
            
            
            (18,621
            )
            
            
            (7,936
            )Prepaid
      expenses and other current assets
            
            
            3,789
            
            
            
            8,678Other
      assets
            
            
            6,125
            
            
            
            (2,552
            )Trade
      accounts payable
            
            
            11,819
            
            
            
            (1,334
            )Accrued
      expenses and other current liabilities
            
            
            (12,875
            )
            
            
            (5,107
            )Workers’
      compensation benefits
            
            
            (446
            )
            
            
            846Postretirement
      medical benefits
            
            
            2,149
            
            
            
            2,249Asset
      retirement obligation expenditures
            
            
            (1,120
            )
            
            
            (1,321
            )Other
      liabilities
            
            
            3,222
            
            
            
            (2,091
            )Net
      cash provided by operating activities
            
            $
            41,753
            
            
            $
            52,610








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ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES


Condensed
Consolidated Statements of Cash Flows (Unaudited) — (Continued)


(In
thousands)


Three
      Months endedMarch
      31,2008
            
            
            2007Investing
      activities:Capital
      expenditures
            
            $
            (33,797
            )
            
            $
            (44,577
            )Proceeds
      from disposition of property, plant, and equipment
            
            
            786
            
            
            
            508Investment
      and advances to investee
            
            
            (29
            )
            
            
            (71
            )Proceeds
      from sale of investment in coal terminal
            
            
            1,500
            
            
            
            —Other
            
            
            (5
            )
            
            
            (404
            )Net
      cash used in investing activities
            
            
            (31,545
            )
            
            
            (44,544
            )Financing
      activities:Repayments
      of note payable
            
            
            (6,210
            )
            
            
            (6,872
            )Repayments
      on long-term debt
            
            
            (158
            )
            
            
            (850
            )Decrease in
      bank overdraft
            
            
            (150
            )
            
            
            (2,704
            )Debt
      issuance costs
            
            
            (1,317
            )
            
            
            —Tax
      benefit from share-based compensation
            
            
            734
            
            
            
            —Proceeds
      from exercise of stock options
            
            
            1,688
            
            
            
            —Net
      cash used by financing activities
            
            
            (5,413
            )
            
            
            (10,426
            )Net
      increase (decrease) in cash and cash equivalents
            
            
            4,795
            
            
            
            (2,360
            )Cash
      and cash equivalents at beginning of period
            
            
            54,365
            
            
            
            33,256Cash
      and cash equivalents at end of period
            
            $
            59,160
            
            
            $
            30,896





See accompanying notes to
condensed consolidated financial statements.





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ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


March
31, 2008


(In
thousands, except percentages and share data)





(1) Business
and Basis of Presentation





Organization
and Business




Alpha Natural
Resources, Inc. and its consolidated subsidiaries (the “Company”) are primarily
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.





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. Significant items subject to such
estimates and assumptions include inventories; mineral reserves; allowance for
non-recoupable advanced mining royalties; asset retirement obligations; employee
benefit liabilities; future cash flows associated with assets; useful lives for
depreciation, depletion, and amortization; workers’ compensation and black lung
claims; postretirement benefits other than pensions; income taxes; revenue
recognized using the percentage of completion method; and fair value of
financial instruments.  Due to the subjective nature of these
estimates, actual results could differ from those estimates.  Results
of operations for the three months ended March 31, 2008 are not necessarily
indicative of the results to be expected for the year ending December 31,
2008. 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, 2007 included in the Company's Annual Report on Form 10-K
filed with the Securities and Exchange Commission.





Reclassifications




Prior period
coal revenues and cost of coal sales have been adjusted to exclude changes in
the fair value of coal derivative contracts to conform to the current year
presentation.  These reclassification adjustments had no effect on
previously reported income from operations or net income.





(2) New
Accounting Pronouncements




In March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS 161”), which amends SFAS No.
133,Accounting for
Derivative Instruments and Hedging Activities(“SFAS
133”).  SFAS 161 is intended to improve financial reporting about
derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity’s financial
position, financial performance, and cash flows. The new standard also improves
transparency about the location and amounts of derivative instruments in an
entity’s financial statements; how derivative instruments and related hedged
items are accounted for under SFAS 133; and how derivative instruments and
related hedged items affect its financial position, financial performance, and
cash flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The Company does not expect this guidance to have a significant
impact on our consolidated financial statements; however management is currently
assessing the impact of adopting SFAS 161.




In
December 2007, the Financial Accounting Standards Board
issued  SFAS 141(R), Business Combinations, and
SFAS No. 160, Accounting
and Reporting of Noncontrolling Interest in Consolidated Financial
Statements(“SFAS 160”), an amendment of ARB No. 51. SFAS 141(R) and SFAS 160
will significantly change the accounting for and reporting of business
combination transactions and noncontrolling (minority) interests in consolidated
financial statements. SFAS 141(R) retains the fundamental requirements in
SFAS 141while
providing additional definitions, such as the definition of the acquirer in a
purchase and improvements in the application of how the acquisition method is
applied. SFAS 160 will change the accounting and reporting for minority
interests, which will be recharacterized as noncontrolling interests, and
classified as a component of equity. These Statements become simultaneously
effective January 1, 2009. Early adoption is not permitted. The Company is
currently evaluating the impact this guidance will have on our consolidated
financial statements.




(3) Earnings
Per Share




Basic
earnings per share are computed by dividing net income by the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per share are computed using the treasury method by dividing net income by the
weighted average number of shares of common stock and dilutive common stock
equivalents outstanding during the period. Common stock equivalents include the
number of shares issuable upon exercise of outstanding options less the number
of shares that could have been purchased with the proceeds from the exercise of
the options based on the average price of common stock during the period.
Restricted shares which have not vested at the end of the reporting period are
excluded from the calculation of basic earnings per share.




The
computations of basic and diluted net income per share are set forth
below:





Three
      Months Ended March 31,2008
            
            2007Numerator:Net
      income
            
            $
            25,530
            
            $
            8,349Denominator:Weighted
      average shares — basic
            
            
            65,091,470
            
            
            64,579,163Dilutive
      effect of stock options and restricted stock awards
            
            
            791,886
            
            
            214,439Weighted
      average shares — diluted
            
            
            65,883,356
            
            
            64,793,602Net
      income per basic and diluted share:
            
            $
            0.39
            
            $
            0.13




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(4) Inventories





Inventories
consisted of the following:





March
      31,
            
            December
      31,2008
            
            2007Raw
      coal
            $
            8,724
            
            $
            8,754Saleable
      coal
            
            66,821
            
            
            48,928Equipment
      for resale
            
            823
            
            
            1,688Materials
      and supplies
            
            12,773
            
            
            11,410Lime
            
            260
            
            
            —Total
      inventories
            $
            89,401
            
            $
            70,780




(5) Income
Taxes





A
reconciliation of the statutory federal income tax expense at 35% to income
before income taxes and minority interest, and the actual income tax expense is
as follows:





Three
      Months EndedMarch
      31,2008
            
            2007Federal
      statutory income tax expense
            
            $
            11,693
            
            $
            3,842Increases
      (reductions) in taxes due to:Nondeductible
      stock-based compensation
            
            
            68
            
            
            184Percentage
      depletion allowance
            
            
            (3,370
            )
            
            (2,125
            )State
      taxes, net of federal tax impact
            
            
            894
            
            
            194Change
      in valuation allowance
            
            
            (1,467
            )
            
            491Deduction
      for domestic production activities
            
            
            (106
            )
            
            (34
            )Taxes
      not provided for minority interest
            
            
            16
            
            
            —Change
      in state rates
            
            
            247
            
            
            —Other,
      net
            
            
            (7
            )
            
            77Income
      tax expense
            
            $
            7,968
            
            $
            2,629




The Company
has concluded that it is more likely than not that deferred tax assets, net of
valuation allowances, currently recorded will be realized. The amount of the
valuation allowance takes into consideration the Alternative Minimum Tax system
as required by SFAS No. 109, Accounting for Income Taxes
(“SFAS 109”). The Company monitors the valuation allowance each quarter and
makes adjustments to the allowance as appropriate.





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(6) Long-Term
Debt




Long-term
debt consisted of the following:





March
      31,
            
            December
      31,2008
            
            2007Term
      loan
            
            $
            233,125
            
            $
            233,12510%
      Senior notes due 2012
            
            
            175,000
            
            
            175,000Capital
      lease obligations
            
            
            547
            
            
            705Gallatin
      project facility
            
            
            18,500
            
            
            18,500Other
            
            
            700
            
            
            700Total
      long-term debt
            
            
            427,872
            
            
            428,030Less
      current portion
            
            
            2,424
            
            
            2,579Long-term
      debt, net of current portion
            
            $
            425,448
            
            $
            425,451




On
October 26, 2005, Alpha Natural Resources, LLC (“ANR LLC”), entered into a
senior secured credit facility with a group of lending institutions led by
Citicorp North America, Inc., as administrative agent (the “Credit Agreement”).
The Credit Agreement consists of a $250,000 term loan facility and a $275,000
revolving credit facility. The revolving credit facility includes borrowing
capacity available for letters of credit.




In March
2008, the Company and our subsidiary, ANR LLC, entered into two amendments to
the Credit Agreement.  One of these amendments increased the amount
available under the revolving credit portion of the facility from $275,000 to
$375,000. The other amendment, among other things, removed Alpha Natural
Resources, Inc. from the application of most of the restrictive covenants and
added exceptions to certain other covenants relating to payment of dividends and
distributions.




The Credit
Agreement and the Senior Notes each place restrictions on the ability of ANR LLC
and its subsidiaries to make distributions or loans to the Company. At March 31,
2008, ANR LLC had net assets of $400,945 and, except for allowable distributions
for the payment of income taxes, administrative expenses and, in certain
circumstances, dividends or repurchases of common stock of the Company, the net
assets of ANR LLC are restricted.




All of the
Company borrowings under the Credit Agreement are at a variable rate, so the
Company is exposed to the effect of rising interest rates. As of March 31, 2008,
the Company has a $233,125 term loan outstanding with a variable interest rate
based upon the 3-month London Interbank Offered Rate (“LIBOR”) (2.67% at March
31, 2008) plus the applicable margin (1.75%, at March 31, 2008). To reduce the
Company's exposure to rising interest rates, effective May 22, 2006, the Company
entered into a pay-fixed, receive variable interest rate swap on the notional
amount of $233,125 for a period of approximately six and one-half years. In
effect, this swap converted the variable interest rates based on LIBOR to a
fixed interest rate of 5.59% plus the applicable margin defined in the debt
agreement for the remainder of our term loan. The Company accounts for the
interest rate swap as a cash flow hedge and changes in fair value of the swap
are recorded to other comprehensive income (loss). The critical terms of the
swap and the underlying debt instrument that it hedges coincide, resulting in no
hedge ineffectiveness being recognized in the income statement during the
quarter ended March 31, 2008.  The fair value of the swap at March 31,
2008 was $21,999 which was recorded in other liabilities in the condensed
consolidated balance sheet and the offsetting unrealized loss of $16,564, net of
tax benefit, was recorded in accumulated other comprehensive loss. As interest
expense is accrued on the debt obligation, amounts in accumulated other
comprehensive loss related to the derivative hedging instrument are reclassified
into earnings to obtain a net cost on the debt obligation of 5.59% plus the
applicable margin. For the three months ended March 31, 2008 and 2007, $448
and $133, respectively, of losses in accumulated other comprehensive loss were
reclassified into interest expense.




(7) Asset
Retirement Obligation


At March 31,
2008 and December 31, 2007, the Company had recorded asset retirement
obligation accruals for mine reclamation and closure costs totaling $91,852 and
$91,199, respectively. The portion of the costs expected to be incurred within a
year in the amounts of $8,187 and $8,179 at March 31, 2008 and December 31,
2007, respectively, is included in accrued expenses and other current
liabilities. These regulatory obligations are secured by surety bonds in the
amount of $144,273 at March 31, 2008 and $142,471 at December 31, 2007.
Changes in the reclamation obligation were as
follows:


Total
      asset retirement obligation at December 31, 2007
            
            $
            91,199Accretion
      for the period
            
            
            1,852Expenditures
      for the period
            
            
            (1,117
            )Revisions
      in estimated cash flows
            
            
            (82
            )Total
      asset retirement obligation at March 31, 2008
            
            $
            91,852




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(8) Share-Based
Compensation Awards





Stock
Options




Stock option
activity for the three months ended March 31, 2008 is summarized in the
following table:





Weighted-Weighted-
            
            AverageAverage
            
            RemainingNumber
      of
            
            Exercise
            
            ContractShares
            
            Price
            
            Life
      (Years)Outstanding
      at December 31, 2007
            
            
            744,692
            
            $
            17.51Exercised
            
            
            (96,031
            )
            
            17.87Outstanding
      at March 31, 2008
            
            
            648,661
            
            
            17.46
            
            6.83Exercisable
      at March 31, 2008
            
            
            222,967
            
            
            18.35
            
            6.86




The aggregate
intrinsic value of options outstanding at March 31, 2008 was $16,852 and the
aggregate intrinsic value of exercisable options was $5,594.  The
total intrinsic value of options exercised during the three months ended March
31, 2008 and 2007 was $2,048 and $0, respectively.  Cash received from
the exercise of stock options during the three months ended March 31, 2008 and
2007 was $1,688 and $0, respectively.  As of March 31, 2008, $2,686 of
unrecognized compensation cost related to stock options is expected to be
recognized as expense over a weighted-average period of 1.78
years.  The weighted average grant date fair value of options
outstanding at March 31, 2008 and 2007 was $7.38 and $7.57,
respectively.




Restricted
Stock Awards




Non-vested
share award activity for the quarter ended March 31, 2008 is summarized in the
following table:





Weighted-AverageNumber
      of
            
            Grant
      DateShares
            
            Fair
      ValueNon-vested
      shares outstanding at December 31, 2007
            
            
            880,232
            
            $
            15.93Granted
            
            
            265,057
            
            
            28.17Vested
            
            
            (206,958
            )
            
            16.58Forfeited
            
            
            (4,217
            )
            
            16.65Non-vested
      shares outstanding at March 31, 2008
            
            
            934,114
            
            
            19.26




The fair
value of non-vested restricted share awards is estimated based on the closing
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 March 31, 2008, there was $13,063 of unamortized compensation cost related
to non-vested shares, which is expected to be recognized as expense over a
weighted-average period of 2.17 years.




Performance
Share Awards




2008 Granted
Awards




The Company
granted 164,737 performance share awards in the first quarter of
2008.  Recipients of these awards can receive shares of the Company's
common stock at the end of a performance period which ends on December 31, 2010,
based on the Company's actual performance against pre-established operating
income goals, strategic goals, and total shareholder return goals. 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 shares of
common stock to be awarded based on the achievement of targeted performance and
may range from 0 percent to 150 percent of the targeted amount. The grant date
fair value of the awards related to operating income targets is based on the
closing price of the Company's common stock on the New York Stock Exchange on
the grant date of the award and is being amortized over the performance period.
The awards related to strategic goals do not meet the criteria for grant date
pursuant to SFAS No. 123(R), Share-based Payments (asamended), (“SFAS 123(R)”). The
fair value of the awards related to total shareholder return targets is based
upon a Monte Carlo simulation and is being amortized over the performance
period. For executive officers of the Company to receive these performance share
awards, the Company must achieve a pre-determined EBITDA level during the
performance period in addition to the criteria set for all other employees
participating in the plan.  The Company reassesses at each reporting
date whether achievement of each of the performance conditions is probable, as
well as estimated forfeitures, and adjusts the accruals of compensation expense
as appropriate. At March 31, 2008, the Company assessed the operating income and
total shareholder return targets as probable of achievement. As of March 31,
2008, there was $2,821 of unamortized compensation cost related to the
performance share awards for 2008.  This unamortized compensation cost
is expected to be recognized over the periods ending December 31,
2010.




Share-based
compensation expense measured in accordance with SFAS 123(R) totaled $2,989
($2,276 on a net-of-tax basis, or $0.03 per basic and diluted share) and $2,650
($1,994 on a net-of-tax basis, or $0.03 per basic and diluted share) for the
three months ended March 31, 2008 and 2007, respectively.





As of
March 31, 2008 and 2007, approximately 66% and 70%, respectively, of share-based
compensation expense is reported as selling, general and administrative
expenses, and approximately 34% and 30%, respectively, is reported as a
component of cost of sales, and both are included in the Corporate and
Eliminations category for segment reporting purposes (Note 14).  As of
March 31, 2008 and 2007, approximately $170 and $206, respectively, of
stock-based compensation costs was capitalized as a component of inventories.
Under SFAS 123(R), the Company is required to report the benefits of income tax
deductions that exceed recognized compensation as cash flow from financing
activities. The excess tax benefits for the quarters ended March 31, 2008 and
2007 were $734 and $0, respectively.




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(9)
Derivative Financial Instruments





Derivative
financial instruments are accounted for in accordance with SFAS 133, which
requires all derivative financial instruments to be reported on the balance
sheet at fair value. Changes in fair value are recognized either in earnings or
equity, depending on whether the transaction qualifies for hedge accounting and
if so, the nature of the underlying exposure being hedged and how effective the
derivatives are at offsetting price movements in the underlying
exposure.





The
Company accounts for certain forward purchase and forward sale coal contracts
that do not qualify under the “normal purchase and normal sale” exception of
SFAS 133 as derivatives and records these contracts as assets or liabilities at
fair value. Changes in fair value of these derivative contracts have been
recorded as an (increase) decrease in fair value of derivative coal contracts,
net, and included as a component of costs and expenses in the consolidated
statements of income.  At March 31, 2008, the Company had unrealized
gains (losses) on open purchase and open sales contracts of $43,609 and
($20,177), respectively. These amounts are recorded in prepaid expenses and
other current assets and accrued expenses and other current liabilities,
respectively.





The
Company has utilized interest rate swap agreements to modify the interest
characteristics of a portion of the Company's outstanding debt. The swap
agreements essentially convert variable-rate debt to fixed-rate debt and have
been designated as cash flow hedges.  Changes in the fair value of
interest rate swaps designated as hedging instruments of the variability of cash
flows associated with floating rate and long-term debt obligations are reported
in accumulated other comprehensive income (loss).  These amounts are
subsequently reclassified into interest expense in the same period in which the
related floating rate debt obligation affects earnings.





The
Company is also exposed to the risk of fluctuations in cash flows related to its
purchase of diesel fuel. The Company has entered into diesel fuel swap
agreements and diesel put options to reduce the volatility in the price of
diesel fuel for its operations. The diesel fuel swap agreements and put options
are not designated as hedges and therefore the changes in the fair value for
these derivative instrument contracts have been recorded in cost of sales. These
diesel fuel swaps and put options use the NYMEX New York Harbor #2 heating oil
as the underlying commodity reference price. Any unrealized loss is
recorded in other current liabilities and any unrealized gain is recorded in
other current assets.





As of
March 31, 2008 approximately 10,848 gallons or 54% of the Company's anticipated
2008 remaining diesel fuel usage has been capped with the swap agreements in
which the company has agreed to pay a fixed price and receive a floating price
per gallon of diesel fuel. The fixed prices for the notional quantity of
10,848 gallons range from $2.39 to $2.90 per gallon for the last nine months of
2008.  The fair value of these diesel fuel swap agreements is an asset
of $2,739 as of March 31, 2008.





As of
March 31, 2008, the Company entered into diesel fuel put options for 4,486
gallons at a price range of $2.20 to $2.45 per gallon for the last nine months
of 2008.  In the event that diesel prices decline below the strike
price, the Company can exercise the put options and sell the 4,486 gallons at
the strike price, therefore reducing the impact of the swap
agreements.  These put options provide downside protection and reduce
the fixed position risk of the outstanding diesel fuel swap agreements in the
event of a decline in diesel fuel prices below the strike price. The fair value
of these diesel fuel put options is an asset of $122 as of March 31,
2008.




(10) Fair
Value Measurements




The
Company adopted SFAS No. 157, Fair Value Measurements(“SFAS 157”)on January 1, 2008.
This statement defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. Additionally, on
January 1, 2008, the Company elected the partial adoption of SFAS
157 under the provisions of Financial Accounting Standards Board (“FASB”) Staff
Position (“FSP”) FAS 157-2, which amends SFAS 157 to allow
an entity to delay the application of
this statement until January 1, 2009 for certain
non-financial assets and liabilities. The adoption of SFAS 157 did not have
a material impact on our consolidated financial
statements.




The
Company adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities-Including an Amendment of FASB Statement
No. 115 (“SFAS 159”), on January 1, 2008. This standard permits
entities to choose to measure many financial instruments and certain other items
at fair value. The adoption of SFAS 159 did not impact our consolidated
financial statements, as the Company elected not to measure any additional
financial assets or liabilities at fair value other than those which were
recorded at fair value prior to adoption.





SFAS 157
clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants.  As such, fair value is a
market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset and liability.  As a
basis for considering such assumptions, SFAS 157 establishes a fair value
hierarchy that prioritizes the inputs used to measure fair value.  The
hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (level 1 measurement) and the lowest
priority to unobservable inputs (level 3 measurements).  The three
levels of the fair value hierarchy defined by SFAS 157 are as
follows:





Level 1 - Quoted
prices in active markets for identical assets or
liabilities;


Level
2 - Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active;
and


Level
3 -Unobservable inputs in
which there is little or no market data which require the reporting entity to
develop its own assumptions.
  - 10
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 Table of Contents
  The following
table sets forth by level within the fair value hierarchy the company's
financial assets that were accounted for at fair value on a recurring basis as
of March 31, 2008.  As required by SFAS 157, financial assets and
liabilities are classified in their entirety based on the lowest level of input
that is significant to the fair value measurement.  The company's
assessment of the significance of a particular input to the fair value
measurement requires judgment, and may affect the valuation of fair value assets
and liabilities and their placement within the fair value hierarchy
levels.








As
      of March 31, 2008Fair
      Value Measurements Using:QuotedPrices in
            
            
            SignificantOther
            
            
            SignificantCarrying
            
            
            Total
      Fair
            
            
            Active
      Markets
            
            
            Observable
      Inputs
            
            
            Unobservable
      InputsAmount
            
            
            Value
            
            
            (Level
      1)
            
            
            (Level
      2)
            
            
            (Level
      3)Financial
      Assets (Liabilities):Forward
      coal sales
            
            $
            (20,177
            )
            
            $
            (20,177
            )
            
            $
            —
            
            
            $
            (20,177
            )
            
            $
            —Forward
      coal purchases
            
            $
            43,609
            
            
            $
            43,609
            
            
            $
            —
            
            
            $
            43,609
            
            
            $
            —Diesel
      fuel derivatives
            
            $
            2,861
            
            
            $
            2,861
            
            
            $
            —
            
            
            $
            2,861
            
            
            $
            —Interest
      rate swaps
            
            $
            (21,999
            )
            
            $
            (21,999
            )
            
            $
            —
            
            
            $
            (21,999
            )
            
            $
            —








The
following methods and assumptions were used to estimate the fair values of the
assets and liabilities in the tables above.




Level 2
Fair Value Measurements




Forward Coal Purchases and
Sales — The fair value of the forward coal purchases and sales
contracts were estimated using discounted cash flow calculations based upon
forward commodity price curves.  The curves were obtained from
independent pricing services reflecting broker market quotes.




Diesel Fuelderivatives — Since the
Company’s diesel fuel derivative instruments are not traded on a market
exchange, the fair values are determined using valuation models which include
assumptions about commodity prices based on those observed in the underlying
markets.





InterestRateSwaps — The fair value of
the interest rate swaps were estimated using discounted cash flow calculations
based upon forward interest-rate yield curves.  The curves were
obtained from independent pricing services reflecting broker market
quotes.




(11) Postretirement
Benefits Other Than Pensions




The following
table details the components of the net periodic benefit cost for the Company’s
retiree medical plan (the Plan):


March
      31,2008
            
            
            2007Service
      cost
            
            $
            693
            
            
            $
            960Interest
      cost
            
            
            873
            
            
            
            706Amortization
      of net actuarial loss
            
            
            —
            
            
            
            47Amortization
      of prior service cost
            
            
            615
            
            
            
            568Net
      periodic benefit cost
            
            $
            2,181
            
            
            $
            2,281




Employer
contributions for postretirement medical benefits paid were $32 for the three
months ended March 31, 2008 and 2007. 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 1974 UMWA
Pension Plan and Trust and/or the 1993 UMWA Benefit Plan.  The
contributions that the Company made to these plans were $45 and $25 for the
three months ended March 31, 2008 and 2007, respectively.




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(12) Comprehensive
Income




Total
comprehensive income is as follows for the three months ended March 31,
2008:




Net
      Income
            
            $
            25,530Change
      in fair value of cash flow hedge, net of tax effect of ($1,578) for the
      period
            
            
            (4,831
            )Change
      in SFAS No. 158 adjustment related to postretirement medical
      obligations, net of tax effect of $151 for the period
            
            
            464Change
      in SFAS No. 158 adjustment related to black lung obligations, net of
      tax effect of $6 for the period
            
            
            17Total
      comprehensive income
            
            $
            21,180




The following
table summarizes the components of accumulated other comprehensive loss at March
31, 2008:




Fair
      value of cash flow hedge, net of tax effect of $5,435
            
            $
            16,564SFAS
      No. 158 adjustment related to postretirement medical obligations, net
      of tax effect of $3,102
            
            
            9,440SFAS
      No. 158 adjustment related to black lung obligations, net of tax
      effect of $209
            
            
            636Total
      accumulated other comprehensive loss
            
            $
            26,640




(13) Commitments
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 condensed 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 March 31, 2008 was $88,195. The amount
of surety bonds outstanding at March 31, 2008 related to the Company's
reclamation obligations is presented in Note 7 to the condensed consolidated
financial statements. The Company has provided guarantees for equipment
financing obtained by certain of its contract mining operators totaling
approximately $780 as of March 31, 2008. The estimated fair value of these
guarantees is not significant.




(b) Litigation





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





Nicewonder
Litigation




In December 2004,
prior to our Nicewonder Acquisition in October 2005, the Affiliated Construction
Trades Foundation brought an action against the West Virginia Department of
Transportation, Division of Highways (“WVDOH”) and Nicewonder Contracting, Inc.
("NCI"), which became our wholly-owned indirect subsidiary after the Nicewonder
Acquisition, in the United States District Court in the Southern District of
West Virginia. The plaintiff sought a declaration that the contract between NCI
and the State of West Virginia related to NCI's road construction project was
illegal as a violation of applicable West Virginia and federal competitive
bidding and prevailing wage laws. The plaintiff also sought an injunction
prohibiting performance of the contract but has not sought monetary
damages.




On September
5, 2007, the Court ruled that WVDOH and the Federal Highway Administration
(which is now a party to the suit) could not, under the circumstances of this
case, enter into a contract not requiring the contractor to pay the prevailing
wages as required by the Davis-Bacon Act. Although the Court has not yet decided
what remedy it will impose, the Company expects a ruling before mid-2008. 
The Company anticipates that the most likely remedy is a directive that the
contract be renegotiated for such payment. If that renegotiation occurs, WVDOH
has committed to agree, and NCI has a contractual right to insist, that
additional costs resulting from the order will be reimbursed by WVDOH and as
such neither NCI nor the Company believe, at this time, that they have any
monetary expense from this ruling. As of March 31, 2008, the Company had a
$6,600 long-term receivable for the recovery of these costs from WVDOH and a
long-term liability for the obligations under the ruling.




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(14) 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 March 31, 2008, consisted of
33 active underground mines and 24 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 revenues from the operation of its
road construction businesses which the Company acquired on October 26, 2005
as part of the Nicewonder Acquisition. The Corporate and Eliminations category
includes general corporate overhead and the elimination of intercompany
transactions. The revenue elimination amount represents inter-segment revenues.
The Company evaluates the performance of its segment based on EBITDA which the
Company defines as net income plus interest expense, income tax expense, and
depreciation, depletion and amortization, less tax benefit and interest
income.




Segment
operating results and capital expenditures for the three months ended March 31,
2008, and segment assets as of March 31, 2008 were as follows:





CorporateCoal
            
            All
            
            andOperations
            
            Other
            
            Eliminations
            
            ConsolidatedRevenues
            
            $
            506,778
            
            
            $
            23,087
            
            
            $
            (12,959
            )
            
            $
            516,906Depreciation,
      depletion, and amortization
            
            
            42,478
            
            
            
            1,374
            
            
            
            408
            
            
            
            44,260EBITDA
            
            
            99,243
            
            
            
            3,167
            
            
            
            (15,354
            )
            
            
            87,056Capital
      expenditures
            
            
            31,406
            
            
            
            2,031
            
            
            
            360
            
            
            
            33,797Total
      assets
            
            
            1,399,935
            
            
            
            132,159
            
            
            
            (276,154
            )
            
            
            1,255,940





Segment
operating results and capital expenditures for the three months ended March 31,
2007, and segment assets as of March 31, 2007 were as follows:





CorporateCoal
            
            All
            
            andOperations
            
            Other
            
            Eliminations
            
            ConsolidatedRevenues
            
            $
            424,232
            
            
            $
            15,420
            
            
            $
            (9,061
            )
            
            $
            430,591Depreciation,
      depletion, and amortization
            
            
            34,051
            
            
            
            1,491
            
            
            
            247
            
            
            
            35,789EBITDA
            
            
            66,788
            
            
            
            2,571
            
            
            
            (13,236
            )
            
            
            56,123Capital
      expenditures
            
            
            40,661
            
            
            
            3,504
            
            
            
            412
            
            
            
            44,577Total
      assets
            
            
            1,169,366
            
            
            
            104,785
            
            
            
            (143,015
            )
            
            
            1,131,136




Reconciliation of
total segment EBITDA to net income:





Three
      Months EndedMarch
      31,2008
            
            
            2007Total
      segment EBITDA
            
            $
            87,056
            
            
            $
            56,123Interest
      expense
            
            
            (10,087
            )
            
            
            (9,993
            )Interest
      income
            
            
            789
            
            
            
            637Income
      tax expense
            
            
            (7,968
            )
            
            
            (2,629
            )Depreciation,
      depletion and amortization
            
            
            (44,260
            )
            
            
            (35,789
            )Net
      income
            
            $
            25,530
            
            
            $
            8,349




The Company
markets produced, processed, and purchased coal to customers in the United
States and in international markets. Export revenues totaled $218,443,
approximately 43% of total coal and freight revenues, for the three months
ended March 31, 2008 and $146,482, approximately 35% of total coal and freight
revenues, for the three months ended March 31, 2007.





- 13
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 Table of Contents




(15)Supplemental Guarantor/Non-Guarantor
Financial Information




On June 28,
2007, Alpha NR Holding, Inc. ("Holdings") was merged into the Company and the
Company became a parent guarantor of the Senior Notes. The payment obligations
under the Senior Notes, issued jointly by our subsidiary ANR LLC and its
wholly-owned subsidiary Alpha Natural Resource Capital Corp. in 2004, are
unsecured, but are guaranteed fully and unconditionally on a joint and several
basis by the Company and all its subsidiaries other than the issuers of the
notes and our subsidiary, Gallatin.  The following financial information
sets forth separate financial information with respect to the Company, the
issuers, the guarantor subsidiaries and the non-guarantor subsidiary. The
principal elimination entries eliminate investments in subsidiaries and certain
intercompany balances and transactions.





ALPHA
      NATURAL RESOURCES, INC. AND SUBSIDIARIESSUPPLEMENTAL
      CONDENSED CONSOLIDATING BALANCE SHEETMarch
      31, 2008Parent
              
              Co-Issuers
              
              Guarantors
              
              Non-Guarantor
              
              Eliminations
              
              ConsolidatedAssets:Current
      assets:Cash
      and cash equivalents
              
              $
              42
              
              $
              77,450
              
              $
              (20,776
              )
              $
              2,444
              
              $
              -
              
              $
              59,160Trade
      accounts receivable, net
              
              
              -
              
              
              -
              
              
              196,160
              
              
              451
              
              
              (126
              )
              
              196,485Notes
      and other receivables
              
              
              2,480
              
              
              68,520
              
              
              22,360
              
              
              1
              
              
              (82,400
              )
              
              10,961Inventories
              
              
              -
              
              
              -
              
              
              89,014
              
              
              387
              
              
              -
              
              
              89,401Due
      from affiliates
              
              
              -
              
              
              -
              
              
              402,168
              
              
              -
              
              
              (402,168
              )
              
              -Prepaid
      expenses and other current assets
              
              
              5,232
              
              
              868
              
              
              81,698
              
              
              276
              
              
              (272
              )
              
              87,802Total
      current assets
              
              
              7,754
              
              
              146,838
              
              
              770,624
              
              
              3,559
              
              
              (484,966
              )
              
              443,809Property,
      plant, and equipment, net
              
              
              -
              
              
              -
              
              
              602,274
              
              
              26,138
              
              
              -
              
              
              628,412Goodwill
              
              
              -
              
              
              -
              
              
              20,547
              
              
              -
              
              
              -
              
              
              20,547Other
      intangibles, net
              
              
              -
              
              
              -
              
              
              5,560
              
              
              2,840
              
              
              -
              
              
              8,400Deferred
      income taxes
              
              
              84,877
              
              
              8,745
              
              
              -
              
              
              -
              
              
              -
              
              
              93,622Other
      assets
              
              
              406,562
              
              
              1,033,651
              
              
              47,387
              
              
              974
              
              
              (1,427,424
              )
              
              61,150Total assets
              
              $
              499,193
              
              $
              1,189,234
              
              $
              1,446,392
              
              $
              33,511
              
              $
              (1,912,390
              )
              $
              1,255,940Liabilities
      and Stockholder's Equity:Current
      liabilities:Current
      portion of long-term debt
              
              $
              -
              
              $
              14,900
              
              $
              67,869
              
              $
              2,056
              
              $
              (82,401
              )
              $
              2,424Note
      payable
              
              
              -
              
              
              12,673
              
              
              -
              
              
              -
              
              
              -
              
              
              12,673Due
      to affiliates
              
              
              79,388
              
              
              322,634
              
              
              -
              
              
              146
              
              
              (402,168
              )
              
              -Trade
      accounts payable
              
              
              1,817
              
              
              38
              
              
              103,324
              
              
              1,644
              
              
              (126
              )
              
              106,697Deferred
      income tax
              
              
              8,505
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              8,505Accrued
      expenses and other current liabilities
              
              
              1,861
              
              
              7,910
              
              
              93,167
              
              
              1,139
              
              
              (548
              )
              
              103,529Total
      current liabilities
              
              
              91,571
              
              
              358,155
              
              
              264,360
              
              
              4,985
              
              
              (485,243
              )
              
              233,828Long-term
      debt, net of current portion
              
              
              -
              
              
              408,125
              
              
              178
              
              
              20,957
              
              
              (3,812
              )
              
              425,448Workers'
      compensation benefit obligations
              
              
              -
              
              
              -
              
              
              8,586
              
              
              -
              
              
              -
              
              
              8,586Postretirement
      medical benefit obligations
              
              
              -
              
              
              -
              
              
              55,345
              
              
              -
              
              
              -
              
              
              55,345Asset
      retirement obligations
              
              
              -
              
              
              -
              
              
              83,665
              
              
              -
              
              
              -
              
              
              83,665Deferred
      gains on sales of property interests
              
              
              -
              
              
              -
              
              
              2,963
              
              
              -
              
              
              -
              
              
              2,963Other
      liabilities
              
              
              273
              
              
              22,009
              
              
              14,694
              
              
              611
              
              
              -
              
              
              37,587Total liabilities
              
              
              91,844
              
              
              788,289
              
              
              429,791
              
              
              26,553
              
              
              (489,055
              )
              
              847,422Minority
      interest
              
              
              -
              
              
              -
              
              
              -
              
              
              1,169
              
              
              -
              
              
              1,169Stockholders'
      equity
              
              
              407,349
              
              
              400,945
              
              
              1,016,601
              
              
              5,789
              
              
              (1,423,335
              )
              
              407,349Total liabilities and stockholders' equity
              
              $
              499,193
              
              $
              1,189,234
              
              $
              1,446,392
              
              $
              33,511
              
              $
              (1,912,390
              )
              $
              1,255,940


- 14
-
 Table of Contents






ALPHA
      NATURAL RESOURCES, INC. AND SUBSIDIARIESSUPPLEMENTAL
      CONDENSED CONSOLIDATING BALANCE SHEETDecember
      31, 2007Parent
            
            Co-Issuers
            
            Guarantors
            
            Non-Guarantor
            
            Eliminations
            
            ConsolidatedAssets:Current
      assets:Cash
      and cash equivalents
            
            $
            13
            
            $
            62,991
            
            $
            (15,850
            )
            $
            7,211
            
            $
            -
            
            $
            54,365Trade
      accounts receivable, net
            
            
            -
            
            
            -
            
            
            184,044
            
            
            -
            
            
            (75
            )
            
            183,969Notes
      and other receivables
            
            
            2,629
            
            
            68,186
            
            
            7,826
            
            
            -
            
            
            (67,500
            )
            
            11,141Inventories
            
            
            -
            
            
            -
            
            
            70,688
            
            
            92
            
            
            -
            
            
            70,780Due
      from affiliates
            
            
            -
            
            
            -
            
            
            394,571
            
            
            -
            
            
            (394,571
            )
            
            -Prepaid
      expenses and other current assets
            
            
            8,840
            
            
            959
            
            
            50,474
            
            
            4
            
            
            (323
            )
            
            59,954Total
      current assets
            
            
            11,482
            
            
            132,136
            
            
            691,753
            
            
            7,307
            
            
            (462,469
            )
            
            380,209Property,
      plant, and equipment, net
            
            
            -
            
            
            -
            
            
            616,306
            
            
            23,952
            
            
            -
            
            
            640,258Goodwill
            
            
            -
            
            
            -
            
            
            20,547
            
            
            -
            
            
            -
            
            
            20,547Other
      intangibles, net
            
            
            -
            
            
            -
            
            
            6,132
            
            
            3,244
            
            
            -
            
            
            9,376Deferred
      income taxes
            
            
            89,806
            
            
            7,324
            
            
            -
            
            
            -
            
            
            -
            
            
            97,130Other
      assets
            
            
            373,195
            
            
            986,912
            
            
            51,195
            
            
            880
            
            
            (1,348,788
            )
            
            63,394Total assets
            
            $
            474,483
            
            $
            1,126,372
            
            $
            1,385,933
            
            $
            35,383
            
            $
            (1,811,257
            )
            $
            1,210,914Liabilities
      and Stockholder's Equity:Current
      liabilities:Current
      portion of long-term debt
            
            $
            -
            
            $
            -
            
            $
            68,023
            
            $
            2,056
            
            $
            (67,500
            )
            $
            2,579Note
      payable
            
            
            -
            
            
            18,883
            
            
            -
            
            
            -
            
            
            -
            
            
            18,883Due
      to affiliates
            
            
            81,295
            
            
            313,172
            
            
            -
            
            
            104
            
            
            (394,571
            )
            
            -Trade
      accounts payable
            
            
            162
            
            
            208
            
            
            93,263
            
            
            2,207
            
            
            (75
            )
            
            95,765Deferred
      income tax
            
            
            9,753
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            9,753Accrued
      expenses and other current liabilities
            
            
            2,163
            
            
            3,604
            
            
            89,828
            
            
            810
            
            
            (323
            )
            
            96,082Total
      current liabilities
            
            
            93,373
            
            
            335,867
            
            
            251,114
            
            
            5,177
            
            
            (462,469
            )
            
            223,062Long-term
      debt, net of current portion
            
            
            -
            
            
            408,125
            
            
            182
            
            
            20,957
            
            
            (3,813
            )
            
            425,451Workers'
      compensation benefit obligations
            
            
            -
            
            
            -
            
            
            9,055
            
            
            -
            
            
            -
            
            
            9,055Postretirement
      medical benefit obligations
            
            
            -
            
            
            -
            
            
            53,811
            
            
            -
            
            
            -
            
            
            53,811Asset
      retirement obligations
            
            
            -
            
            
            -
            
            
            83,020
            
            
            -
            
            
            -
            
            
            83,020Deferred
      gains on sales of property interests
            
            
            -
            
            
            -
            
            
            3,176
            
            
            -
            
            
            -
            
            
            3,176Other
      liabilities
            
            
            274
            
            
            15,600
            
            
            14,841
            
            
            406
            
            
            (191
            )
            
            30,930Total liabilities
            
            
            93,647
            
            
            759,592
            
            
            415,199
            
            
            26,540
            
            
            (466,473
            )
            
            828,505Minority
      interest
            
            
            -
            
            
            -
            
            
            -
            
            
            1,573
            
            
            -
            
            
            1,573Stockholders'
      equity
            
            
            380,836
            
            
            366,780
            
            
            970,734
            
            
            7,270
            
            
            (1,344,784
            )
            
            380,836Total liabilities and stockholders' equity
            
            $
            474,483
            
            $
            1,126,372
            
            $
            1,385,933
            
            $
            35,383
            
            $
            (1,811,257
            )
            $
            1,210,914





- 15
-
 Table of Contents







ALPHA
      NATURAL RESOURCES, INC. AND SUBSIDIARIESSUPPLEMENTAL
      CONDENSED CONSOLIDATING STATEMENT OF INCOMEThree
      Months Ended March 31, 2008Parent
            
            Co-Issuers
            
            Guarantors
            
            Non-Guarantor
            
            Eliminations
            
            ConsolidatedRevenues:Coal
      revenues
            $
            -
            
            $
            -
            
            $
            445,679
            
            $
            -
            
            $
            -
            
            $
            445,679Freight
      and handling revenues
            
            -
            
            
            -
            
            
            59,172
            
            
            -
            
            
            -
            
            
            59,172Other
      revenues
            
            -
            
            
            -
            
            
            11,475
            
            
            580
            
            
            -
            
            
            12,055Total
      revenues
            
            -
            
            
            -
            
            
            516,326
            
            
            580
            
            
            -
            
            
            516,906Costs
      and expenses:Cost
      of coal sales (exclusive of items shown separately below)
            
            -
            
            
            -
            
            
            359,846
            
            
            -
            
            
            -
            
            
            359,846(Increase)
      decrease in fair value of derivative coal contracts, net
            
            -
            
            
            -
            
            
            (14,319
            )
            
            -
            
            
            -
            
            
            (14,319
            )Freight
      and handling costs
            
            -
            
            
            -
            
            
            59,172
            
            
            -
            
            
            -
            
            
            59,172Cost
      of other revenues
            
            -
            
            
            -
            
            
            8,137
            
            
            1,878
            
            
            -
            
            
            10,015Depreciation,
      depletion and amortization
            
            -
            
            
            -
            
            
            44,173
            
            
            87
            
            
            -
            
            
            44,260Selling, general
      and administrative expenses(exclusive of depreciation and amortization shown separately
      above)
            
            714
            
            
            2,219
            
            
            12,391
            
            
            30
            
            
            -
            
            
            15,354Total
      costs and expenses
            
            714
            
            
            2,219
            
            
            469,400
            
            
            1,995
            
            
            -
            
            
            474,328Income
      (loss) from operations
            
            (714
            )
            
            (2,219
            )
            
            46,926
            
            
            (1,415
            )
            
            -
            
            
            42,578Other
      income (expense):Interest
      expense
            
            -
            
            
            (10,083
            )
            
            (31
            )
            
            (193
            )
            
            220
            
            
            (10,087
            )Interest
      income
            
            47
            
            
            600
            
            
            324
            
            
            38
            
            
            (220
            )
            
            789Equity
      earnings
            
            34,165
            
            
            45,867
            
            
            (1,481
            )
            
            -
            
            
            (78,551
            )
            
            -Miscellaneous
      income, net
            
            -
            
            
            
            
            
            129
            
            
            -
            
            
            -
            
            
            129Total
      other income (expense), net
            
            34,212
            
            
            36,384
            
            
            (1,059
            )
            
            (155
            )
            
            (78,551
            )
            
            (9,169
            )Income
      (loss) from continuing operationsbefore
      income taxes and
      minority interest
            
            33,498
            
            
            34,165
            
            
            45,867
            
            
            (1,570
            )
            
            (78,551
            )
            
            33,409Income
      tax expense
            
            7,968
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            7,968Minority
      interest
            
            -
            
            
            -
            
            
            -
            
            
            (89
            )
            
            -
            
            
            (89
            )Net income (loss)
            $
            25,530
            
            $
            34,165
            
            $
            45,867
            
            $
            (1,481
            )
            $
            (78,551
            )
            $
            25,530





- 16
-
 Table of Contents





ALPHA
      NATURAL RESOURCES, INC. AND SUBSIDIARIESSUPPLEMENTAL
      CONDENSED CONSOLIDATING STATEMENT OF INCOMEThree
      Months Ended March 31, 2007Parent
            
            Co-Issuers
            
            Guarantors
            
            Non-Guarantor
            
            Eliminations
            
            ConsolidatedRevenues:Coal
      revenues
            $
            -
            
            $
            -
            
            $
            380,150
            
            $
            -
            
            $
            -
            
            $
            380,150Freight
      and handling revenues
            
            -
            
            
            -
            
            
            43,211
            
            
            -
            
            
            -
            
            
            43,211Other
      revenues
            
            -
            
            
            -
            
            
            7,230
            
            
            -
            
            
            -
            
            
            7,230Total
      revenues
            
            -
            
            
            -
            
            
            430,591
            
            
            -
            
            
            -
            
            
            430,591Costs
      and expenses:Cost
      of coal sales (exclusive of items shown separately below)
            
            -
            
            
            -
            
            
            312,273
            
            
            -
            
            
            -
            
            
            312,273(Increase)
      decrease in fair value of derivative coal contracts, net
            
            
            202
            
            
            -
            
            
            -
            
            
            202Freight
      and handling costs
            
            -
            
            
            -
            
            
            43,211
            
            
            -
            
            
            -
            
            
            43,211Cost
      of other revenues
            
            -
            
            
            -
            
            
            4,886
            
            
            742
            
            
            -
            
            
            5,628Depreciation,
      depletion and amortization
            
            -
            
            
            -
            
            
            35,789
            
            
            -
            
            
            -
            
            
            35,789Selling,
      general and administrative expenses(exclusive of depreciation and amortization shown separately
    above)
            
            274
            
            
            1,546
            
            
            11,389
            
            
            30
            
            
            -
            
            
            13,239Total
      costs and expenses
            
            274
            
            
            1,546
            
            
            407,750
            
            
            772
            
            
            -
            
            
            410,342Income
      (loss) from operations
            
            (274
            )
            
            (1,546
            )
            
            22,841
            
            
            (772
            )
            
            -
            
            
            20,249Other
      income (expense):Interest
      expense
            
            -
            
            
            (10,020
            )
            
            (71
            )
            
            -
            
            
            98
            
            
            (9,993
            )Interest
      income
            
            38
            
            
            538
            
            
            159
            
            
            -
            
            
            (98
            )
            
            637Equity
      earnings
            
            11,214
            
            
            22,240
            
            
            (729
            )
            
            -
            
            
            (32,725
            )
            
            -Miscellaneous
      income, net
            
            -
            
            
            2
            
            
            40
            
            
            -
            
            
            -
            
            
            42Total
      other income (expense), net
            
            11,252
            
            
            12,760
            
            
            (601
            )
            
            -
            
            
            (32,725
            )
            
            (9,314
            )Income
      (loss) from continuing operationsbefore
      income taxesand minority interest
            
            10,978
            
            
            11,214
            
            
            22,240
            
            
            (772
            )
            
            (32,725
            )
            
            10,935Income
      tax expense
            
            2,629
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,629Minority
      interest
            
            -
            
            
            -
            
            
            -
            
            
            (43
            )
            
            -
            
            
            (43
            )Net income (loss)
            $
            8,349
            
            $
            11,214
            
            $
            22,240
            
            $
            (729
            )
            $
            (32,725
            )
            $
            8,349





- 17
-
 Table of Contents







ALPHA
      NATURAL RESOURCES, INC. AND SUBSIDIARIESSUPPLEMENTAL
      CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWSThree
      Months Ended March 31, 2008Parent
            
            Co-Issuers
            
            Guarantors
            
            Non-Guarantor
            
            Eliminations
            
            ConsolidatedNet
      cash flows by operating activities
            $
            (2,393
            )
            $
            22,178
            
            $
            24,467
            
            $
            (2,499
            )
            $
            -
            
            $
            41,753Cash
      flows used in investing activities:Capital
      expenditures
            
            -
            
            
            -
            
            
            (31,529
            )
            
            (2,268
            )
            
            -
            
            
            (33,797
            )Proceeds
      from disposition of investments & property, plant,
      & equipment
            
            -
            
            
            -
            
            
            2,286
            
            
            -
            
            
            -
            
            
            2,286Investments
      and advances to investee
            
            -
            
            
            (29
            )
            
            -
            
            
            
            
            
            -
            
            
            (29
            )Other
            
            -
            
            
            (5
            )
            
            -
            
            
            -
            
            
            -
            
            
            (5
            )Net
      cash flows used in investing activities
            
            -
            
            
            (34
            )
            
            (29,243
            )
            
            (2,268
            )
            
            -
            
            
            (31,545
            )Cash
      flows (used in) provided by financing activities:Net
      draws (repayments) of notes payable
            
            -
            
            
            (6,210
            )
            
            -
            
            
            -
            
            
            -
            
            
            (6,210
            )Net
      draws (repayments) on long-term debt
            
            -
            
            
            (158
            )
            
            -
            
            
            -
            
            
            -
            
            
            (158
            )Debt
      issuance costs
            
            -
            
            
            (1,317
            )
            
            -
            
            
            -
            
            
            -
            
            
            (1,317
            )Proceeds
      from exercise of stock options
            
            1,688
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,688Tax
      benefit from share-based compensation
            
            734
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            734Decrease
      in bank overdraft
            
            -
            
            
            -
            
            
            (150
            )
            
            -
            
            
            -
            
            
            (150
            )Net
      cash (used in) provided by financing activities
            
            2422
            
            
            (7,685
            )
            
            (150
            )
            
            -
            
            
            -
            
            
            (5,413
            )Net
      increase (decrease) in cash and cash equivalents
            
            29
            
            
            14,459
            
            
            (4,926
            )
            
            (4,767
            )
            
            -
            
            
            4,795Cash
      and cash equivalents at beginning of period
            
            13
            
            
            62,991
            
            
            (15,850
            )
            
            7,211
            
            
            -
            
            
            54,365Cash
      and cash equivalents at end of period
            $
            42
            
            $
            77,450
            
            $
            (20,776
            )
            $
            2,444
            
            $
            -
            
            $
            59,160




ALPHA
      NATURAL RESOURCES, INC. AND SUBSIDIARIESSUPPLEMENTAL
      CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWSThree
      Months Ended March 31, 2007Parent
                  
                  Co-Issuers
                  
                  Guarantors
                  
                  Non-Guarantor
                  
                  Eliminations
                  
                  ConsolidatedNet
      cash flows by operating activities
                  $
                  -
                  
                  $
                  2,233
                  
                  $
                  47,278
                  
                  $
                  3,099
                  
                  $
                  -
                  
                  $
                  52,610Cash
      flows used investing activities:Capital
      expenditures
                  
                  -
                  
                  
                  -
                  
                  
                  (41,642
                  )
                  
                  (2,935
                  )
                  
                  -
                  
                  
                  (44,577
                  )Proceeds
      from disposition of investments & property, plant, &
      equipment
                  
                  -
                  
                  
                  -
                  
                  
                  508
                  
                  
                  -
                  
                  
                  -
                  
                  
                  508Investments
      and advances to investee
                  
                  -
                  
                  
                  (36
                  )
                  
                  (35
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  (71
                  )Other
                  
                  -
                  
                  
                  (387
                  )
                  
                  -
                  
                  
                  (17
                  )
                  
                  -
                  
                  
                  (404
                  )Net
      cash flows used in investing activities
                  
                  -
                  
                  
                  (423
                  )
                  
                  (41,169
                  )
                  
                  (2,952
                  )
                  
                  -
                  
                  
                  (44,544
                  )Cash
      flows (used in) provided by financing activities:Net
      draws (repayments) of notes payable
                  
                  -
                  
                  
                  (6,872
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (6,872
                  )Net
      draws (repayments) on long-term debt
                  
                  -
                  
                  
                  1,275
                  
                  
                  (2,125
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  (850
                  )Decrease
      in bank overdraft
                  
                  -
                  
                  
                  -
                  
                  
                  (2,704
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  (2,704
                  )Net
      cash (used in) provided by financing activities
                  
                  -
                  
                  
                  (5,597
                  )
                  
                  (4,829
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  (10,426
                  )Net
      increase (decrease) in cash and cash equivalents
                  
                  -
                  
                  
                  (3,787
                  )
                  
                  1,280
                  
                  
                  147
                  
                  
                  -
                  
                  
                  (2,360
                  )Cash
      and cash equivalents at beginning of period
                  
                  -
                  
                  
                  27,101
                  
                  
                  5,414
                  
                  
                  741
                  
                  
                  -
                  
                  
                  33,256Cash
      and cash equivalents at end of period
                  $
                  -
                  
                  $
                  23,314
                  
                  $
                  6,694
                  
                  $
                  888
                  
                  $
                  -
                  
                  $
                  30,896
  - 18
-
 Table of Contents
  (16) Subsequent
Events




On April 7,
2008, the Company completed concurrent public offerings of 4,181,817 shares of
common stock at $41.25 per share and $287,500 aggregate principal amount of
2.375% convertible senior notes due 2015. The aggregate gross proceeds from the
common stock offering and the convertible notes offering, before commissions and
expenses, were approximately $460,000.  On April 15, 2008, the Company
used the net proceeds from the offerings in part to repurchase $173,680 of the
$175,000 aggregate principal amount of the 10% senior notes due 2012, co-issued
by ANR LLC and Alpha Natural Resources Capital Corp.  The Company has
given notice that we will redeem the remaining $1,320 aggregate principal amount
on June 1, 2008 for approximately $1,428.  In addition, the Company
amended the indenture governing the 10% senior notes due 2012 to eliminate or
make less restrictive substantially all of the restrictive covenants, as well as
certain events of default and related provisions in the indenture, and eliminate
certain conditions to defeasance.  The Company estimates its
second quarter charge relating to the repurchase of the senior notes to be
approximately $14,500 consisting of $10,600 in tender offer consideration and
$3,900 in write-off of unamortized deferred loan costs.




On April 30,
2008, the Company’s subsidiary, Alpha Terminal Company, LLC, increased its
equity ownership position in Dominion Terminal Associates (“DTA”) from 32.5% to
40.6% by making an additional investment of $2,824.  This transaction
maintains the Company’s majority ownership stake in the facility,
effectively increasing our coal export and terminaling capacity from
approximately 6.5 million tons to approximately 8.0 millions tons
annually.  DTA is a 20 million-ton annual capacity coal export
terminal located in Newport News, Virginia.








- 19
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 Table of Contents




Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





You should
read the following discussion and analysis in conjunction with our financial
statements and related notes included elsewhere in this report and our Annual
Report on Form 10-K for the year ended December 31, 2007.Unless
we have indicated otherwise, or the context otherwise requires, references in
this report to “Alpha,” “the Company,” “we,” “us” and “our” or similar terms are
to Alpha Natural Resources, Inc. and its consolidated subsidiaries.





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:




·
            worldwide
      market demand for coal, electricity and
steel;




·
            future
      economic or capital market
conditions;




·
            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;





·
            regulatory
      and court decisions;




·
            competition
      in coal markets;





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





·
            availability
      of skilled employees and other employee workforce
  factors;





·
            weather
      conditions or catastrophic weather-related
  damage;




·
            our
      production capabilities;




·
            the
      consummation of financing, acquisition or disposition transactions and the
      effect thereof on our business;




·
            our
      ability to successfully integrate the operations we have acquired and/or
      developed with our existing operations, as well as our ability to
      successfully integrate operations we may acquire and/or develop in the
      future;




·
            our
      plans and objectives for future operations and expansion or
      consolidation;




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





·
            timing
      of changes in customer coal
inventories;




·
            changes
      in, renewal of and acquiring new long-term coal supply
      arrangements;




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




·
            availability
      of mining and processing equipment and
parts;




·
            our
      assumptions concerning economically recoverable coal reserve
      estimates;





·
            our
      ability to mine properties due to defects in title on leasehold
      interest;






- 20
-
 Table of Contents





·
            future
      legislation and changes in regulations, governmental policies or
      taxes;




·
            changes
      in postretirement benefit
obligations;




·
            our
      liquidity, results of operations and financial
      condition;




·
            decline
      in coal prices;





·
            forward
      sales and purchase contracts not accounted for as a hedge that are being
      marked to market;




·
            indemnification
      of certain obligations not being
met;




·
            continued
      funding of the road construction
business;




·
            disruption
      in coal supplies;





·
            the
      ability to comply with new safety and health
  regulations;





·
            unfavorable
      government intervention in, or nationalization of, foreign
      investments;





·
            our
      third-party suppliers may not deliver coal we
  purchase;





·
            our
      reported interest expense may increase due to a proposed accounting change
      for cash settled convertible debt instruments like our convertible notes;
      and





·
            other
      factors, including the other factors discussed in “Overview - Coal Pricing
      Trends, Uncertainties and Outlook” below, Item 2 of this report, and the
      factors discussed in Part I, Item 1A, “Risk Factors,” of our annual report
      on Form 10-K for the year ended December 31,
  2007.




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 (met) coal from eight regional
business units, which, as of March 31, 2008, were supported by 33 active
underground mines, 24 active surface mines and 11 preparation plants located
throughout Virginia, West Virginia, Kentucky, and Pennsylvania, as well as a
road construction business in West Virginia and Virginia that recovers coal. We
also sell coal produced by others, the majority of which we process and/or blend
with coal produced from our mines prior to resale, providing us with a higher
overall margin for the blended product than if we had sold the coals separately.
For the three months ended March 31, 2008, sales of steam coal were 4.0 million
tons and accounted for approximately 58% of our coal sales
volume.  Sales of metallurgical coal, which generally sells at a
premium over steam coal, were 2.9 million tons and accounted for approximately
42% of our first quarter 2008 coal sales volume.  Our sales of steam
coal were made primarily to large utilities and industrial customers in the
Eastern region of the United States, and our sales of metallurgical coal 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 43% of our coal sales and freight revenue in the first three
months of 2008 was derived from sales made outside the United States, primarily
in Brazil, Russia, Italy, Ukraine, Belgium, and Spain.




We also
own 94% of Gallatin, a lime manufacturing business in Verona, Kentucky. Gallatin
completed the construction of the first of possibly two rotary pre-heater lime
kilns in the first quarter, which produces lime to be sold to coal burning
utilities as a scrubbing agent for removing sulfur dioxide from flue gas and to
steel producers for use as flux in electric arc and basic oxygen furnaces. The
minority owners were granted restricted membership interests in Gallatin,
which vest based on performance criteria over a period of approximately three
years from the closing date and which, if earned in their entirety, would reduce
our ownership to 77.5%.




In
addition, we generate other revenues from equipment and parts sales, equipment
repair, road construction, rentals, royalties, commissions, coal handling,
terminal and processing fees, and coal and environmental analysis fees. We also
record revenue for freight and handling charges incurred in delivering coal to
our customers, which we treat as being reimbursed by our customers. However,
these freight and handling revenues are offset by equivalent freight and
handling costs and do not contribute to our profitability.




Our
primary expenses are for wages and benefits, supply costs, repair and
maintenance expenditures, cost of purchased coal, royalties, freight and
handling costs, and taxes incurred in selling our coal. Historically, our cost
of coal sales per ton is lower for sales of our produced and processed coal than
for sales of purchased coal that we do not process prior to resale.




We have
one reportable segment, Coal Operations, which includes all of our revenues and
costs from coal production and sales, freight and handling, rentals,
commissions, coal handling and processing operations and coal recovery
incidental to our road construction operations. These revenues and costs
included in our Coal Operations segment are reported by us in our coal revenues
and cost of coal sales, except for the revenues and costs from rentals,
commissions, and coal handling and processing operations, which we report in our
other revenues and cost of other revenues, respectively.




In March
2008, we sold our equity interest in Fox River Dock Company, Inc., a coal
terminal, which we acquired with the acquisition of Coastal Coal Company, LLC on
March 11, 2003, to the majority holder of Fox River for $1.5 million in
cash.  We recognized a gain on the sale of $0.4 million from this
transaction.




In March
2008, we and our subsidiary, ANR LLC, entered into two amendments to our senior
secured credit facility.  One of these amendments increased the amount
available under the revolving credit portion of the facility from
$275.0 million to $375.0 million. The other amendment, among other
things, removed Alpha Natural Resources, Inc. from the application of most of
the restrictive covenants and added exceptions to certain other covenants
relating to payment of dividends and distributions.




- 21
-
 Table of Contents




On April 7,
2008, we completed concurrent public offerings of 4,181,817 shares of common
stock at $41.25 per share and $287.5 million aggregate principal amount of
2.375% convertible senior notes due 2015.  The aggregate gross
proceeds from the common stock offering and the convertible notes offering,
before commissions and expenses, were approximately
$460.0 million.  On April 15, 2008, we used the net proceeds from
the offerings in part to repurchase $173.7 million of the of $175.0 million
aggregate principal amount of the 10% senior notes due 2012, co-issued by ANR
LLC and Alpha Natural Resources Capital Corp.  We have given notice
that we will redeem the remaining $1.3 million aggregate principal amount on
June 1, 2008 for approximately $1.4 million.  In addition, we amended
the indenture governing the 10% senior notes due 2012 to eliminate or make less
restrictive substantially all of the restrictive covenants, as well as certain
events of default and related provisions in the indenture, and eliminate certain
conditions to defeasance.  We estimate our second quarter charge
relating to the repurchase of the senior notes to be approximately $14.5 million
consisting of $10.6 million in tender offer consideration and $3.9 million in
write-off of unamortized deferred loan costs.




On April
30, 2008, our subsidiary, Alpha Terminal Company, LLC, increased its equity
ownership position in Dominion Terminal Associates (“DTA”) from 32.5% to 40.6%
by making an additional investment of $2.8 million. DTA is a
20 million-ton annual capacity coal export terminal located in Newport
News, Virginia. The terminal, constructed in 1982, provides the advantages of
unloading/transloading equipment with ground storage capability, providing
producers with the ability to custom blend export products without disrupting
mining operations. This transaction maintains our largest ownership stake
in the facility, effectively increasing our coal export and terminaling capacity
from approximately 6.5 million tons to approximately 8.0 millions tons
annually.




On May 1,
2008, we granted almost all employees 25 shares of our stock with a 90-day sale
hold to reward them for their service and role in the Company’s financial
success and to enhance the Company’s retention efforts.  We estimate
the second quarter charge for the grants will be approximately $7.5
million.




Coal Pricing
Trends, Uncertainties and
Outlook




Coal supply
continues to tighten around the world. While traditional coal exporting nations
such as Australia, Poland, Indonesia and South Africa have been subject to
supply disruptions or voluntary cutbacks, U.S. exports of both thermal and
metallurgical coal have shown sustained strength, up 30% on a combined basis in
the first two months of 2008 after last year’s 19% gain.





Rising
natural gas prices and the U.S. dollar’s weakness are adding fuel to thermal
coal demand both domestically and overseas, while high steel prices have mills
searching the world for reliable supplies of metallurgical coal. U.S. steel
mills, in particular, finished 2007 with metallurgical coal inventories 34%
lower than in 2006, at a time when production is needed to restock service
center inventories and take advantage of record high steel prices.  In
this environment, Alpha continues its strategy of gradually layering in sales
commitments at favorable prices.





These
conditions in the thermal and the metallurgical coal markets mentioned above,
both in North America and worldwide, are solidly in favor of coal
producers.





As of
April 15, 2008, we had committed 99% of planned thermal coal production for 2008
while leaving approximately 24% of planned production uncommitted for 2009 and
67% for 2010. We are in active discussions with a number of U.S. utilities for
supply in 2009 and beyond.





With
steel prices rising at the end of 2007, and the domestic steel industry
expecting a strong rebound this year after a dramatic draw down of service
center inventories, demand for metallurgical coal has remained very strong.
Global supplies of hard coking coals for making steel have tightened
considerably due to production and logistical issues in Eastern Europe and
Australia. With world steel output climbing an estimated 5% in the first two
months of the year, prices for metallurgical coal have risen quickly as has
international demand.




As the
largest exporter of metallurgical coal out of the U.S., we have experienced a
surge of 430,000 tons in first-quarter exports, year-over-year, which boosted
total met coal sales to 42% of the company’s total sales volumes for the
quarter.  Due to the fact that pricing resets at the end of the first
quarter of every year for the majority of our contracted metallurgical business,
we expect to achieve a proportionally higher level of revenues in the second
through fourth quarters than in the first quarter as the higher-priced export
contracts phase in.  As of April 15, 2008, we had approximately 0.6
million tons of planned metallurgical production remaining to be contracted for
2008, mostly in the export market. Uncommitted and unpriced production stands at
approximately 10.5 million tons for 2009 and 11.2 million tons for
2010.
 
 While our
outlook on coal pricing remains positive, future coal prices are subject to
factors beyond our control and we cannot predict whether or for how long this
current coal pricing environment will continue. As of April 15, 2008, 97% of our
planned 2008 production was committed and priced and 3% was uncommitted and
unpriced, with approximately 0.8 million tons uncommitted. Committed steam coal
prices for 2008 average $51.19 per ton and met coal prices average $96.31 per
ton. Approximately 51% of our planned production in 2009 is
committed.


At March
31, 2008, we had unrealized gains (losses) on open purchase and sale contracts
that meet the definition of a derivative under SFAS 133 in the amount of $43.6
million and ($20.2 million), respectively. These assets are recorded in prepaid
expenses and other current assets and $16.4 million of the liabilities are
recorded in accrued expenses and other current liabilities and the remaining
$3.8 million of liabilities are recorded in other liabilities on our balance
sheet, with periodic changes in fair value recorded to the income
statement.  Since we intend to take delivery or provide delivery
of coal under these contracts, the unrealized gains and losses recorded as
of March 31, 2008 will reverse into the income statement in future
periods. The reversal of the net unrealized gains related to these
contracts will result in higher costs of sales in future periods when we
ultimately take delivery of the coal under these contracts and sell it to our
customers. Due to market price fluctuations, we could experience
significant earnings volatility related to coal contracts classified as
derivatives.





We own a
24.5% interest in Excelven Pty Ltd., a coal mine development project located in
Venezuela accounted for under the equity method.  The
project, currently in the developmental stage, is challenged by political
risk. In particular, the Venezuelan government has expressed an interest in
increasing government ownership in Venezuelan natural resources. Any future
deterioration in the political environment in Venezuela or the government’s
denial of the Affectation of Resources permit could lead to a potential
impairment adjustment.  In addition, such political and economic
uncertainties could also lead to events such as civil
unrest, work stoppages or the nationalization or other expropriation of private
enterprises by the Venezuelan government, which could result in a loss of
all or a portion of our investment in Excelven, which is approximately $4.9
million to date.




For
additional information regarding some of the risks and uncertainties that affect
our business, see Item 2 of this report, and Item 1A “Risk Factors,” in our
Annual Report on Form 10-K.




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-
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Reconciliation
of Non-GAAP Measures




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





The following
unaudited table reconciles EBITDA to net income, the most directly comparable
GAAP measure.





Three
      months endedMarch
      31,2008
            
            
            2007Net
      income
            
            $
            25,530
            
            
            $
            8,349Interest
      expense
            
            
            10,087
            
            
            
            9,993Interest
      income
            
            
            (789
            )
            
            
            (637
            )Income
      tax expense
            
            
            7,968
            
            
            
            2,629Depreciation,
      depletion and amortization
            
            
            44,260
            
            
            
            35,789EBITDA
            
            $
            87,056
            
            
            $
            56,123







- 23
-
 Table of Contents




Results
of Operations





Three
Months Ended March 31, 2008 Compared to the Three Months Ended March 31,
2007





Summary





For the
quarter ended March 31, 2008, we recorded revenues of $516.9 million
compared to $430.6 million for the quarter ended March 31, 2007, an
increase of $86.3 million. Net income increased from $8.3 million or
$0.13 per diluted share in the first quarter of 2007 to $25.5 million ($0.39 per
diluted share) for the first quarter of 2008.  EBITDA, as reconciled to our
net income in the table under “Reconciliation of Non-GAAP Measures” above, was
$87.1 million and $56.1 million in the first quarter of 2008 and 2007,
respectively.  Our results for the first quarter 2008 include $16.7 million
in unrealized gains related to changes in the fair value of derivative contracts
($12.7 million net of tax or $0.19 per diluted share) consisting of $2.4 million
related to diesel fuel swap agreements and $14.3 million for certain forward
purchase and forward sales coal contracts.  The changes in fair value
related to derivative contracts for the first quarter of 2007 was not
significant.





We sold
6.9 million tons of coal during the first quarter of 2008, 0.2 million
more than the comparable period in 2007.  Coal margin, which we define
as coal revenues less cost of coal sales, divided by coal revenues, increased
from 18% in the first quarter of 2007 to 19% in the comparable period of 2008.
Coal margin per ton was $12.52 in the first quarter of 2008, a 22% increase from
the first quarter of 2007. Coal margin per ton is calculated as coal sales
realization (sales price) per ton less cost of coal sales per ton.








Revenues


Three
      months Ended
            
            IncreaseMarch
      31,
            
            (Decrease)2008
            
            2007
            
            $
      or Tons
            
            %(in
      thousands, except per ton data)Coal
      revenues
            
            $
            445,679
            
            $
            380,150
            
            $
            65,529
            
            17%Freight
      and handling revenues
            
            
            59,172
            
            
            43,211
            
            
            15,961
            
            37%Other
      revenues
            
            
            12,055
            
            
            7,230
            
            
            4,825
            
            67%Total
      revenues
            
            $
            516,906
            
            $
            430,591
            
            $
            86,315
            
            20%Tons
      Sold:Steam
            
            
            3,969
            
            
            4,260
            
            
            (291
            )
            (7%
            )Metallurgical
            
            
            2,883
            
            
            2,368
            
            
            515
            
            22%Total
            
            
            6,852
            
            
            6,628
            
            
            224
            
            3%Coal
      sales realization per ton:Steam
            
            $
            50.51
            
            $
            48.83
            
            $
            1.68
            
            3%Metallurgical
            
            $
            85.05
            
            $
            72.70
            
            $
            12.35
            
            17%Total
            
            $
            65.04
            
            $
            57.36
            
            $
            7.68
            
            13%





Coal
Revenues. Coal revenues increased by 17% ($65.5 million) for the
quarter ended March 31, 2008 over the comparable period of 2007, driven by a 3%
increase in coal sales volume and a 13% increase in sales realization from
$57.36 per ton in the first quarter of 2007 to $65.04 per ton in the first
quarter of 2008. Our met coal realization per ton increased by 17% from $72.70
per ton to $85.05 per ton, and steam coal realization per ton increased by 3%
from $48.83 per ton to $50.51 per ton. Met coal sales accounted for 42% of our
coal sales volume in the first quarter of 2008 compared with 36% in the first
quarter of 2007, due to an increase in first quarter exports of 0.4 million tons
compared to the same period in 2007.  This increase in met exports was
mainly attributable to the tightening of global supplies of hard coking coals
caused by production and logistics issues in Eastern Europe and Australia. Total
tons sold for the first quarter of 2008 were 6.9 million, including
2.9 million tons of met coal and 4.0 million of steam coal. Sales
volume for the first quarter of 2007 was 6.6 million tons, of which
2.4 million tons were met coal and 4.2 million were steam
coal.





Freight and Handling
Revenues. Freight and handling revenues were $59.2 million for the three
months ended March 31, 2008, an increase of $16.0 million compared with the
three months ended March 31, 2007.  This increase was due to
0.4 million more export tons as well as an increase in freight costs,
arising primarily from vessel freight and fuel surcharges.  These
revenues are offset by equivalent costs and do not contribute to our
profitability.




Other
Revenues. Other revenues increased by $4.8 million mainly due to
increases in revenues from our coal processing and terminal operations of $2.1
million, our Maxxim Rebuild business of $2.3 million, and our Gallatin lime
business of $0.6 million, partially offset by a decrease in our road
construction business of $0.2 million.


- 24
-
 Table of Contents


Costs and
Expenses





Three
      months ended
            
            IncreaseMarch
      31,
            
            (Decrease)2008
            
            2007
            
            $
            
            %(in
      thousands, except per ton data)Cost
      of coal sales (exclusive of items shown separately below)
            
            $
            359,846
            
            $
            312,273
            
            $
            47,573
            
            15%(Increase)
      decrease in fair value of derivative coal contracts, net
            
            
            (14,319
            )
            
            202
            
            
            (14,521
            )
            NMFreight
      and handling costs
            
            
            59,172
            
            
            43,211
            
            
            15,961
            
            37%Cost
      of other revenues
            
            
            10,015
            
            
            5,628
            
            
            4,387
            
            78%Depreciation,
      depletion and amortization
            
            
            44,260
            
            
            35,789
            
            
            8,471
            
            24%Selling,
      general and administrative expenses
            
            
            15,354
            
            
            13,239
            
            
            2,115
            
            16%Total
      costs and expenses
            
            $
            474,328
            
            $
            410,342
            
            $
            63,986
            
            16%Cost
      of coal sales per ton:Company
      mines
            
            $
            49.98
            
            $
            45.46
            
            $
            4.52
            
            10%Contract
      mines (including purchased and processed)
            
            $
            57.60
            
            $
            50.16
            
            $
            7.44
            
            15%Total
      produced and processed
            
            $
            50.95
            
            $
            46.22
            
            $
            4.73
            
            10%Purchased
      and sold without processing
            
            $
            61.30
            
            $
            54.51
            
            $
            6.79
            
            13%Cost
      of coal sales per ton
            
            $
            52.52
            
            $
            47.12
            
            $
            5.40
            
            12%




Cost of Coal
Sales. Our cost of coal sales increased by $47.6 million, or $5.40
per ton, from $312.3 million, or $47.12 per ton, in the first quarter of
2007 to $359.8 million, or $52.52 per ton, in the first quarter of 2008.
Our cost of coal sales per ton for our produced and processed coal was $50.95
per ton in the three months ended March 31, 2008 as compared to $46.22 per ton
in the comparable period in 2007. This $4.73 per ton increase is attributable
mainly to increased costs for supplies and maintenance, labor and benefits, and
an increase in price of coal purchases at our plants.  The cost of
sales per ton of our purchased coal was $61.30 per ton in the first quarter of
2008 and $54.51 per ton for the corresponding period of 2007. This $6.79 per ton
increase in costs is mainly due to the current market conditions which have
exerted upward pricing pressures due to a decrease in market supply and an
increase in market demand, both domestically and
internationally.  Approximately 52% of our purchased coal sold during
the first quarter of 2008 was blended with our produced and processed coal prior
to resale.




(Increase)
Decreasein Fair Value
ofDerivativeCoal Contracts, Net.The changes in fair
value for certain forward purchase and forward sale coal contracts which are
considered derivatives decreased cost of sales by $14.3 million in the
first quarter of 2008 and increased cost of sales by $0.2 million in the first
quarter of 2007.  As of March 31, 2008, we had unrealized losses of $20.2
million from our forward sales contracts and unrealized gains of $43.6 million
from our forward purchase contracts. Alpha intends to take delivery or
provide delivery of coal under these forward purchase and sale
contracts.  As a result, the net unrealized gains of $23.4 million
will reverse into the income statement in future periods when the company
ultimately takes delivery of the coal under these contracts and sells it to
customers, resulting in higher costs of sales in future periods.





Freight and Handling
Costs. Freight and handling costs increased to $59.2 million for the
three months ended March 31, 2008, an increase of $16.0 million compared
with the three months ended March 31, 2007. This increase was due to
0.4 million more export tons as well as an increase in freight costs,
arising primarily from vessel freight and fuel surcharges. These costs are
offset by equivalent revenues.




Cost ofOther Revenues. Cost of other
revenues increased $4.4 million, or 78%, to $10.0 million for the quarter
ended March 31, 2008 as compared to the first quarter of 2007 due to a $1.1
million increase in costs associated with our new Gallatin lime operations,
higher coal processing and terminal operation volumes in the amount of
$1.5 million, and increased costs associated with Maxxim Rebuild’s outside
sales activity in the amount of $2.3 million.  These were partially
offset by a decrease in our costs associated with our road
construction business of $0.5 million, due to higher coal recovery during the
period resulting in lower allocations to costs of other revenues.




Depreciation,
Depletion and Amortization. Depreciation, depletion, and
amortization increased $8.5 million, or 24%, to $44.3 million for the three
months ended March 31, 2008 as compared with the same period of 2007. The
increase is mainly due to $2.0 million depreciation from the Mingo Logan-Ben
Creek mining complex acquired on June 30, 2007, $3.3 million increase in
depletion due to a change in estimated recoverable coal reserves and higher
production at one of our mines, and the remainder is mainly due to an increase
in depreciation relating to capital expenditures additions.




Selling, General and
Administrative Expenses. Selling, general and administrative expenses
increased by $2.2 million to $15.4 million in the first quarter of 2008
from $13.2 million in the first quarter of 2007. This increase is mainly
due to increases in wages and benefits of $1.2 million and professional fees of
$0.5 million.  As a percentage of revenues, these expenses were 3% for
both the first quarter of 2008 and 2007.




Interest
Expense. Interest expense increased $0.1 million to
$10.1 million during the first quarter of 2008 compared to the same period
in 2007. The increase in interest expense is attributable to a slight increase
in interest rates on our debt in 2008 compared to the same period in
2007.




Interest
Income. Interest income increased by $0.2 million in the three
months ended March 31, 2008 from the three months ended March 31, 2007, mainly
due to additional interest earned on invested cash.




Income Tax Expense.Income tax expense for the quarter ended March 31, 2008 was
$8.0 million as compared to $2.6 million for the quarter ended March 31,
2007. Our effective tax rate for both the first quarter of 2008 and 2007 was
24%. This rate is lower than the statutory federal tax rate due primarily to the
tax benefits associated with percentage depletion, partially offset by state
income taxes, change in the valuation allowance, and share-based compensation
charges which are not deductible for tax purposes.




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Liquidity
and Capital Resources




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




At March 31,
2008, we had available liquidity of $346.0 million, including cash of $59.2
million and $286.8 million available under our credit facilities. Our total
indebtedness was $440.5 million at March 31, 2008, a decrease of $6.4 million
from the year ended December 31, 2007.  The decrease in the
indebtedness is primarily due to $6.2 million payment for our note
payable.




Our capital
expenditures for the three months ended March 31, 2008 were
$33.8 million.  We currently project capital expenditures for the
full year of 2008 to be in the range of $165.0 million to $175.0 million. These
expenditures have been and are forecasted to be used to develop new mines,
purchase required safety equipment, replace or add equipment and to possibly
construct the second lime kiln for the Gallatin lime venture.




Subsequent to
the end of the first quarter, on April 7, 2008, we completed concurrent
offerings of 4,181,817 shares of common stock and $287.5 million aggregate
principal amount of 2.375% convertible senior notes due 2015.  The
aggregate proceeds from the common stock offering and the notes offering, before
commission and expenses, were approximately $460.0 million.  On April
15, 2008, we used the net proceeds in part to repurchase $173.7 million of
the $175.0 million aggregate principal amount of 10% Senior Notes due 2012,
co-issued by ANR LLC and Alpha Natural Resources Capital Corp.  In
addition, on April 15, 2008, we amended the indenture governing the 10% senior
notes due 2012 to eliminate or make less restrictive substantially all of the
restrictive covenants, as well as certain events of default and related
provisions in the indenture, and eliminate certain conditions to
defeasance.  We have given notice that we will redeem the remaining
$1.3 million aggregate principal amount on June 1, 2008 for $1.4 million. In
addition, we have amended the credit facility to increase the amount available
under the revolving line of credit from $275.0 million to $375.0
million.




We believe
that cash generated from our operations and borrowings under our credit
facilities 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 operating activities during the three months ended March 31, 2008
was $41.8 million, a decrease of $10.8 million from the $52.6 million of
net cash provided by operations during the three months ended March 31, 2007.
Our cash from operating activities decrease is mainly driven by increases
in our inventories, changes in fair value of derivatives instruments, and trade
accounts receivables of $18.6 million, $16.7 million, and $12.5 million,
respectively, partially offset by increases in net income, trade payables, and
depreciation, depletion, and amortization of $17.2 million, $11.8 million,
and $8.5 million, respectively.




Net cash used
in investing activities during the three months ended March 31, 2008 was $31.5
million, a decrease of $13.0 million from the $44.5 million of net cash
used in investing activities during the three months ended March 31,
2007.  The decrease is primarily due to decreases in capital
expenditures, the sale of our investment in a coal terminal facility, and the
disposals of property, plant, and equipment.




Net cash used
in financing activities during the three months ended March 31, 2008 was $5.4
million, a decrease of $5.0 million from the $10.4 million of net cash
used in financing activities during the three months ended March 31,
2007.  The decrease is primarily due to lower debt payments and higher
proceeds from the exercise of stock options.





Credit
Agreement and Long-term Debt




As of March
31, 2008 our total long-term indebtedness, including capital lease obligations,
consisted of the following (in thousands):





March
      31,2008Term
      loan
            
            $
            233,12510%
      senior notes due 2012 (2)
            
            
            175,000Capital
      lease obligations
            
            
            547Gallatin
      project financing
            
            
            18,500Other
            
            
            700Total
      long-term debt (1)
            
            
            427,872Less
      current portion
            
            
            2,424Long-term
      debt, net of current portion (1)
            
            $
            425,448





(1
            )
            Does
      not include $287.5 million aggregate principal amount of 2.375%
      convertible senior notes due 2015, which we issued on April 7, 2008. (See
      Note 16 to condensed consolidated financial
  statements)





(2
            )
            ANR
      LLC and Alpha Natural Resources Capital Corp. repurchased
      $173.7 million of the $175.0 million aggregate principal amount of
      the senior notes in April 2008. (See Note 16 to condensed consolidated
      financial statements)




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Our senior
secured credit facility, originally entered into in October 2005, consists of a
$250.0 million term loan facility and a $275.0 million revolving credit
facility. The term loan will mature in October 2012, and the revolving credit
facility will terminate in October 2010.




On
March 28, 2008, Alpha Natural Resources, Inc. (the “Parent”) and ANR LLC
entered into an amendment to the related Credit Agreement to increase the amount
available under the revolving credit portion of the facility from
$275.0 million to $375.0 million.  As of March 31, 2008,
there was $286.8 million available under the revolving credit
facility.




On
March 31, 2008, the Parent and ANR LLC entered into another amendment to
the Credit Agreement to, among other things, delete the covenant that restricted
the Parent from engaging in any business or activity other than certain
specified activities, remove the Parent from the application of all of the other
negative covenants in the Credit Agreement and to impose on the Parent certain
other restrictive covenants in lieu of the original negative
covenants.




As amended,
the Credit Agreement imposes certain restrictions on ANR LLC and its restricted
subsidiaries, including, subject to certain exceptions, restrictions on their
ability to: incur debt; grant liens; enter into agreements with negative pledge
clauses; provide guarantees in respect of obligations of any other person; make
loans, investments, advances and acquisitions; sell assets; pay dividends or
make distributions, 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 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.  The Credit Agreement also requires ANR LLC to satisfy
two financial performance covenants:  a maximum leverage ratio and a
minimum interest coverage ratio, as described below.




The
restrictions imposed on the Parent include restrictive covenants that prohibit
the Parent from: (i) changing its fiscal year, (ii) acquiring capital
stock in any other person other than ANR LLC or granting liens on the capital
stock of ANR LLC, (iii) acquiring any division of or assets constituting a
line of business of any other person or engaging in any line of business and
(iv) incurring any debt, except that the Parent may incur debt as long as
ANR LLC would be in pro forma compliance with the Credit Agreement’s maximum
leverage ratio and minimum interest coverage ratio financial performance
covenants, which are tested based on our consolidated financial results. It also
provides that any of the Parent’s debt that would have been permitted under the
Credit Agreement had it been incurred by ANR LLC, will reduce on a
dollar-for-dollar basis the amount of debt that ANR LLC would otherwise be
permitted to incur under the Credit Agreement.




The
March 31, 2008 amendment to the Credit Agreement provides a new exception
to the covenant restricting dividends to permit ANR LLC to pay dividends or make
distributions to the Parent (i) to make scheduled payments of interest (and
fees and expenses) then due on the convertible notes issued in April 2008 or
then due in respect of any “qualified” debt (which means any debt, other than
the convertible notes, that could have been incurred instead by ANR LLC in
compliance with the Credit Agreement); (ii) to make payments of principal
or premium then due in respect of any “qualified” debt as long as such payments
would be permitted under the Credit Agreement at that time if ANR LLC or a
restricted subsidiary, rather than us, were the obligor of such “qualified” debt
and were making such payments; (iii) to make payments of principal or
premium on the convertible notes not to exceed $20.0 million in the
aggregate for the term of the Credit Agreement that become due solely as a
result of the conversion of convertible notes (and not as a result of any reason
other than conversion, such as mandatory repurchases of convertible notes in
connection with the occurrence of certain events); and (iv) so long as
immediately before and after such dividends or distributions are paid (1) ANR
LLC is in pro forma compliance with the Credit Agreement’s maximum leverage
ratio and minimum interest coverage ratio financial performance covenants, and a
new maximum senior secured leverage ratio test, all as described below,
(2) the liquidity test described below is satisfied and (3) no event of
default under the Credit Agreement has occurred and is continuing, to make
payments of principal or premium on the convertible notes in excess of
$20.0 million that become due solely as a result of the conversion of
convertible notes (and not as a result of any reason other than conversion, such
as mandatory repurchases of convertible notes in connection with the occurrence
of certain events).




The amendment
also (i) revised the covenant restricting the lines of business in which the
Parent and its subsidiaries may engage to clarify that any businesses or
activities that are within the mining and/or energy industries generally are
permitted lines of business as long as the core business remains coal mining and
(ii) creates a new exception to the lien covenant to permit the granting of
liens on the capital stock of the ANR LLC’s unrestricted subsidiaries to secure
debt of those subsidiaries.




Borrowings
under the Credit Agreement are subject to mandatory prepayment (1) with 100% of
the net cash proceeds received from asset sales or other dispositions of
property by ANR LLC 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 ANR LLC and
its subsidiaries from the issuance of debt securities or other incurrence of
debt, excluding certain indebtedness.




The indenture
governing the senior notes also imposed similar restrictions on our subsidiaries
as those described above.  However, on April 14, 2008, ANR LLC and
Alpha Natural Resources Capital Corp. amended the indenture to eliminate or make
less restrictive substantially all of the restrictive covenants, as well as
certain events of default and related provisions in the indenture, and eliminate
certain conditions to defeasance.  The amendments became operative on
April 15, 2008.  On April 15, 2008, ANR LLC and Alpha Natural
Resources Capital Corp. repurchased $173.7 million of the $175.0 million
aggregate principal amount of the senior notes.  We have given notice
that we will redeem the remaining $1.3 million aggregate principal amount on
June 1, 2008 for approximately $1.4 million.





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Analysis
of Material Debt Covenants




We were in
compliance with all covenants under our Credit Agreement and the indenture
governing our senior notes as of March 31, 2008.




The financial
covenants in our Credit Agreement as amended as of March 31, 2008 require,
among other things:




·
            We
      must maintain a maximum leverage ratio, defined as the ratio of
      consolidated debt less unrestricted cash and cash equivalents to EBITDA
      (as defined in the Credit
      Agreement, “Adjusted EBITDA”), of not more than 3.50:1.0 for the
      period of four fiscal quarters ended on March 31, 2008 and for each period
      of four fiscal quarters ending on each quarter end thereafter.




·
            We
      must maintain a minimum interest coverage ratio, defined as the ratio of
      Adjusted EBITDA to cash interest expense, of not less than 2.50:1.0 for
      the four fiscal quarters ending on the last day of any fiscal
      quarter.




A breach of
the covenants in the Credit Agreement, including these financial covenants that
are tied to ratios based on Adjusted EBITDA, could result in a default under the
Credit Agreement and the lenders could elect to declare all amounts borrowed due
and payable.  Any acceleration under our Credit Agreement would also
result in a default under the indentures governing our senior notes and our
convertible notes.




In addition,
in order for ANR LLC to be permitted to pay dividends or make distributions to
the Parent to make payments of principal or premium on the convertible notes in
excess of $20.0 million that become due solely as a result of the
conversion of convertible notes, among other things:




·
            We must maintain a
      maximum senior secured leverage ratio,defined as the ratio of
      consolidated debt that is secured by a lien less unrestricted cash and
      cash equivalents to Adjusted EBITDA, of 2.5:1.0 until January 1, 2009
      and 2.0:1.0 thereafter.




·
            We must satisfy a
      liquidity test,i.e., thesum of
      the unused commitments under the credit facility’s revolving line of
      credit plus our unrestricted cash and cash equivalents must not be less
      than $100.0 million.




At March 31,
2008, our leverage ratio and interest coverage ratio were 1.40 and 7.28,
respectively, the senior secured leverage ratio was 0.68, and the sum of the
unused commitments under the credit facility’s revolving line of credit plus our
unrestricted cash and cash equivalents was $343.5 million.




Adjusted
EBITDA is used in our Credit Agreement to determine compliance with many of the
covenants under the facility.  Adjusted EBITDA is defined in our
Credit Agreement as EBITDA, further adjusted to exclude non-recurring items,
non-cash items and other adjustments permitted in calculating covenant
compliance under our Credit Agreement, 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.





Twelve
      MonthsThree
      Months Ended
            
            EndedJune
      30,
            
            
            September
      30,
            
            
            December
      31,
            
            
            March
      31,
            
            
            March
      31,2007
            
            
            2007
            
            
            2007
            
            
            2008
            
            
            2008(in
      thousands)Net
      income
            
            $
            4,747
            
            
            $
            8,949
            
            
            $
            5,689
            
            
            $
            25,530
            
            
            $
            44,915Interest
      expense, net
            
            
            9,573
            
            
            
            9,836
            
            
            
            9,110
            
            
            
            9,298
            
            
            
            37,817Income
      tax expense
            
            
            1,502
            
            
            
            2,363
            
            
            
            2,135
            
            
            
            7,968
            
            
            
            13,968Depreciation,
      depletion and amortization
            
            
            37,855
            
            
            
            43,926
            
            
            
            42,009
            
            
            
            44,260
            
            
            
            168,050EBITDA
            
            
            53,677
            
            
            
            65,074
            
            
            
            58,943
            
            
            
            87,056
            
            
            
            264,750Unrestricted
      subsidiary
            
            
            628
            
            
            
            758
            
            
            
            1,031
            
            
            
            1,328
            
            
            
            3,745Change
      in fair value of derivative instruments, net
            
            
            (391
            )
            
            
            (1,413
            )
            
            
            (6,674
            )
            
            
            (16,684
            )
            
            
            (25,162
            )Other
      allowable adjustments
            
            
            (958
            )
            
            
            603
            
            
            
            1,452
            
            
            
            607
            
            
            
            1,704Accretion
      expense
            
            
            1,566
            
            
            
            1,838
            
            
            
            1,885
            
            
            
            1,852
            
            
            
            7,141Amortization
      of deferred gains
            
            
            (265
            )
            
            
            (214
            )
            
            
            (184
            )
            
            
            (213
            )
            
            
            (876
            )Stock-based
      compensation charges
            
            
            1,072
            
            
            
            2,341
            
            
            
            2,592
            
            
            
            2,911
            
            
            
            8,916Adjusted
      EBITDA
            
            $
            55,329
            
            
            $
            68,987
            
            
            $
            59,045
            
            
            $
            76,857
            
            
            $
            260,218Leverage
      ratio(1)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1.40Interest
      coverage ratio(2)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            7.28




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





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




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We are in
compliance with all covenants under the Gallatin loan facility.  The loan
facility requires that we report the financial covenants to Nedbank within 30
days of June 30 and December 31, and with each borrowing request.  The
financial covenants require that we maintain the following:





·
            Loan
      life coverage ratio greater than or equal to 1.30, defined as the ratio of
      the present value of future cash flow to aggregate principal amount of all
      outstanding loans;





·
            Gearing
      ratio less than 1.85, defined as the ratio of outstanding net
      interest-bearing indebtedness to total borrower equity;
  and





·
            Debt
      service cover ratio greater than 1.20, defined as the ratio of actual cash
      flow available for debt service to funded debt
    service.




At December
31, 2007, the loan life coverage ratio and the gearing ratio were 4.62 and 1.35,
respectively.  Phase one of the Gallatin project was not complete,
therefore, the debt service cover ratio was not
required.





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. These bids or
proposals, which may be binding or nonbinding, 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.




Critical
Accounting Policies and Estimates




The
preparation of financial statements in conformity with US GAAP 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 ended March 31, 2008 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, 2007 for a
discussion of our critical accounting estimates and assumptions.




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Item 3.Quantitative and Qualitative 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 and interest rates.





Commodity
Price Risk




We are
exposed to market price risk in the normal course of selling coal. As of March
31, 2008, approximately 4% and 45% of our planned production for 2008 and 2009,
respectively, was uncommitted.




We use
significant quantities of diesel fuel in our operations and are also exposed to
risk in the market price for diesel fuel. We have entered into swap agreements
and diesel put options to reduce the volatility in the price of diesel fuel for
our operations. The diesel fuel swap agreements and put options are not
designated as hedges and therefore the changes in the fair value for these
derivative instrument contracts are required to be recorded in cost of
sales.  These diesel fuel swaps and put options use the NYMEX New York
Harbor #2 heating oil as the underlying commodity reference price.




As of March
31, 2008, approximately 10.8 million gallons or 54% of our remaining
anticipated 2008 diesel fuel usage has been capped with the swap agreements in
which we have agreed to pay a fixed price and receive a floating price per
gallon of diesel fuel. The fixed prices for the notional quantity of 10.8
million gallons range from $2.39 to $2.90 per gallon for the last nine
months of 2008. The fair value of these diesel fuel swap agreements is an
asset of $2.7 million as of March 31, 2008.




As of March
31, 2008, we entered into diesel fuel put options for 4.5 million gallons
at a price range of $2.20 to $2.45 per gallon for the last nine months of
2008.  In the event that diesel prices decline below the strike price,
we can exercise the put options and sell the 4.5 million gallons at the
strike price, therefore reducing the impact of the swap agreements.  
These put options provide downside protection and reduce the fixed position risk
of the outstanding diesel fuel swap agreements in the event of a decline in
diesel fuel prices below the strike price. The fair value of these diesel fuel
put options are an asset of $0.1 million as of March 31, 2008.




We purchase
coal in the OTC market and directly from third parties to supplement and blend
with our produced and processed coal in order to provide coal of the quality and
quantity to meet certain of our customer's requirements. We also sell in the OTC
market to hedge the price risk of uncommitted future production from our mines.
Certain of these purchase and sale contracts meet the definition of a derivative
instrument. 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.




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 that are considered derivative instruments at March
31, 2008 and are marked to market each period are summarized as
follows:




Purchase
      Contracts
            Purchase
      Price Range
            
            Tons
      Outstanding
            
            Delivery
      Period
            
            Fair
      Value (In Millions) Asset/(Liability)$
            40.00-50.00
            
            630,643
            
            4/01/08-12/31/08
            
            $
            29.250.00-60.00
            
            343,967
            
            4/01/08-12/31/08
            
            
            14.4974,610
            
            
            
            $
            43.6Sales
      Contracts
            Selling
      Price Range
            
            Tons
      Outstanding
            
            Delivery
      Period
            
            Fair
      Value (In Millions) Asset/(Liability)$
            40.00-50.00
            
            179,432
            
            04/01/08-12/31/08
            
            $
            (8.0
            )50.00-60.00
            
            330,000
            
            04/01/08-12/31/09
            
            
            (8.3
            )60.00-70.00
            
            190,000
            
            04/01/08-12/31/09
            
            
            (3.5
            )70.00-80.00
            
            120,000
            
            01/01/09-12/31/09
            
            
            (0.4
            )819,432
            
            
            
            $
            (20.2
            )





Interest
Rate Risk




All of our
borrowings under our credit facility and the Gallatin loan facility are at a
variable rate, exposing us to the effect of rising interest rates in the United
States. As of March 31, 2008, our Credit Facility had a $233.1 million term loan
outstanding with a variable interest rate based upon the 3-month London
Interbank Offered Rate (“LIBOR”) (2.67% at March 31, 2008) plus an applicable
margin (1.75% at March 31, 2008).  To reduce our exposure to rising
interest rates, effective May 22, 2006 we entered into a pay-fixed, receive
variable interest rate swap on the notional amount of $233.1 million for a
period of approximately six and one-half years. In effect, this swap converted
the variable interest rates based on the LIBOR to a fixed interest rate of 5.59%
plus the applicable margin defined in the Credit Agreement (1.75% at March 31,
2008) for the remainder of our term loan. We account for the interest rate swap
as a cash flow hedge and accordingly changes in fair value of the swap are
recorded to other comprehensive income (loss).  The fair value of the swap
at the quarter ended March 31, 2008 was a liability of $22.0 million ($16.6
million net of tax). As of March 31, 2008, Gallatin had outstanding
borrowings under the Gallatin loan facility of $18.5 million at an interest rate
based upon the 6-month LIBOR (4.72% at March 31, 2008) plus an applicable margin
of 3.5%. 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 March 31, 2008.





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Item 4.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.





Additionally,
during the most recent fiscal quarter, there have been no changes to our
internal control over financial reporting that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.





PART
II


Item 1. Legal Proceedings





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





Nicewonder
Litigation





In
December 2004, prior to our Nicewonder Acquisition in October 2005, the
Affiliated Construction Trades Foundation brought an action against the West
Virginia Department of Transportation, Division of Highways (“WVDOH”) and
Nicewonder Contracting, Inc. ("NCI"), which became our wholly-owned indirect
subsidiary after the Nicewonder Acquisition, in the United States District Court
in the Southern District of West Virginia. The plaintiff sought a declaration
that the contract between NCI and the State of West Virginia related to NCI's
road construction project was illegal as a violation of applicable West Virginia
and federal competitive bidding and prevailing wage laws. The plaintiff also
sought an injunction prohibiting performance of the contract but has not sought
monetary damages.





On
September 5, 2007, the Court ruled that WVDOH and the Federal Highway
Administration (which is now a party to the suit) could not, under the
circumstances of this case, enter into a contract not requiring the contractor
to pay the prevailing wages as required by the Davis-Bacon Act. Although the
Court has not yet decided what remedy it will impose, we expect a ruling before
mid-2008.  We anticipate that the most likely remedy is a directive that
the contract be renegotiated for such payment. If that renegotiation occurs,
WVDOH has committed to agree and NCI has a contractual right to insist, that
additional costs resulting from the order will be reimbursed by WVDOH and as
such neither NCI nor the Company believe, at this time, that they have any
monetary expense from this ruling. As of March 31, 2008, we have a $6.6 million
long-term receivable for the recovery of these costs from WVDOH and a long-term
liability for the obligations under the ruling.




Consent
Decrees




Eleven of
the Company's subsidiaries entered into consent orders with the West Virginia
Department of Environmental Protection, effective April 28, 2008, to resolve
past violations of a number of their respective wastewater discharge
permits.  The consent orders call for payment of penalties totaling,
in the aggregate, approximately $0.75 million for the past
violations.  The consent orders also (1) require submission of plans
to show how the subsidiaries will "achieve compliance with permit limits for
which compliance cannot be immediately achieved"; (2) require the development of
plans to address issues related to the reporting requirements of their permits;
and (3) establish stipulated penalties for certain types of future wastewater
permit violations.  We do not believe that the consent orders or
related matters will have a material adverse effect on our business, financial
condition or results of operations.




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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, 2007,
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 and the
additional risks set forth below. 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.





Sales
of additional shares of our common stock could cause the price of our common
stock to decline.





Sales of
substantial amounts of our common stock in the open market and the availability
of those shares for sale could adversely affect the price of our common stock.
In addition, future issuances of equity securities, including pursuant to
outstanding options, could dilute the interests of our existing stockholders and
could cause the market price for our common stock to decline. We may issue
equity securities in the future for a number of reasons, including to finance
our operations and business strategy, to adjust our ratio of debt to equity, to
satisfy our obligations upon the exercise of outstanding warrants or options or
for other reasons.




As of
March 31, 2008, there were:




·
              648,661 shares
      of common stock issuable upon the exercise of stock options with a
      weighted-average exercise price of
$17.46;





·
              12,465
      restricted share units issued to directors to be converted to common stock
      upon separation of service;





·
              119,186 shares
      to be issued to recipients of performance share awards (assuming
      performance at a target level) at the end of a performance period which
      ends on December 31,
2008;





·
              333,492 shares
      to be issued to recipients of performance share awards (assuming
      performance at a target level) at the end of a performance period which
      ends on December 31, 2009;
and





·
              164,737 shares
      to be issued to recipients of performance share awards (assuming
      performance at a target level) at the end of a performance period which
      ends on December 31,
2010.





On April
7, 2008, we completed concurrent public offerings of 4,181,817 shares of common
stock and $287.5 million aggregate principal amount of 2.375% convertible
senior notes due 2015. Any conversion of any of the convertible notes could
dilute the interests of our existing stockholders and could cause the market
price for our common stock to decline. The price of our common stock could also
be affected by possible sales of our common stock by investors who view the
convertible notes as a more attractive means of equity participation in our
company and by hedging or arbitrage trading activity that we expect to develop
involving our common stock.





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Provisions
in our certificate of incorporation and bylaws and the indenture for our
convertible notes may discourage a takeover attempt even if doing so might be
beneficial to our stockholders.





Provisions
contained in our certificate of incorporation and bylaws could impose
impediments to the ability of a third party to acquire us even if a change of
control would be beneficial to our stockholders. Provisions of our certificate
of incorporation and bylaws impose various procedural and other requirements,
which could make it more difficult for stockholders to effect certain corporate
actions. For example, our certificate of incorporation authorizes our board of
directors to determine the rights, preferences, privileges and restrictions of
unissued series of preferred stock, without any vote or action by our
stockholders. Thus, our board of directors can authorize and issue shares of
preferred stock with voting or conversion rights that could adversely affect the
voting or other rights of holders of our common stock. These provisions may have
the effect of delaying or deterring a change of control of our Company, and
could limit the price that certain investors might be willing to pay in the
future for shares of our common stock.





If a
“fundamental change” (as defined in the indenture for the convertible notes as
issued in April 2008) occurs, holders of the convertible notes will have the
right, at their option, either to convert their convertible notes or require us
to repurchase all or a portion of their convertible notes. In the event of a
“make-whole fundamental change” (as defined in the indenture for the convertible
notes), we also may be required to increase the conversion rate applicable to
any convertible notes surrendered for conversion. In addition, the indenture for
the convertible notes prohibits us from engaging in certain mergers or
acquisitions unless, among other things, the surviving entity is a
U.S. entity that assumes our obligations under the convertible notes. Our
Credit Agreement and the indenture governing our existing senior notes imposes
similar restrictions on us, including with respect to mergers or consolidations
with other companies and the sale of substantially all of our assets. These
provisions could prevent or deter a third party from acquiring us even where the
acquisition could be beneficial to our stockholders.





Certain
terms of our convertible notes may adversely impact our liquidity.





Our
offering and sale of the convertible notes increased the amount of debt we have
outstanding, which was already significant. As adjusted to give effect to that
offering and the use of proceeds to repurchase $175.0 million of our senior
notes, as of March 31, 2008, we would have had approximately $553.0 million
of outstanding debt.





In
addition, upon conversion of the convertible notes, we will be required to pay
in cash the lesser of the principal amount of the converted notes and the sum of
a calculated daily conversion value over an averaging period. As a result, the
conversion of the convertible notes may significantly reduce our
liquidity.





A
proposed accounting change for cash settled convertible debt instruments like
the convertible notes would likely cause our reported interest expense to
increase.





In August
2007, the FASB issued an exposure draft of a proposed FASB Staff Position, or
Proposed FSP, reflecting new rules that would change the accounting for certain
convertible debt instruments, including the convertible notes. Under these
proposed new rules, an issuer of a convertible debt instrument that may be
settled entirely or partially in cash upon conversion will be required to
account for the liability and equity components of the instrument separately.
The debt component would be recorded at an estimated fair value, as of the
issuance date, of a similar debt instrument without the conversion feature, and
the difference between the proceeds for the convertible debt and the amount
reflected as a debt liability would be recorded as additional paid-in capital.
As a result, the debt would be treated as if it had been issued at a discount
and would subsequently be accreted to its par value over its expected life, with
a rate of interest that reflects the issuer’s nonconvertible debt borrowing
rate. The resulting interest expense would likely be significantly higher than
the actual cash interest expense payable on the instrument. The Proposed FSP was
discussed at recent FASB meetings and the FASB has approved the Proposed FSP,
although the final FSP has not been issued. The new rules would be effective for
fiscal years beginning after December 15, 2008 and would be applied
retrospectively to all periods presented.





We are
currently evaluating the new rules and cannot quantify the impact at this time.
However, we expect to have higher interest expense starting in 2009 due to the
non-cash interest expense accretion.  Prior period interest expense
associated with the convertible notes would also reflect higher than previously
reported interest expense due to retrospective application.





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. StuebeName:
            David
      C. StuebeTitle:
            
            Vice
      President and Chief Financial Officer





Date: May 5,
2008






































































































































Table of Contents





10-Q EXHIBIT INDEX




Pursuant
to the rules and regulations of the Securities and Exchange Commission, we have
filed certain agreements as exhibits to this Quarterly Report on Form 10-Q.
These agreements may contain representations and warranties by the parties.
These warranties have been made solely for the benefit of the other party or
parties to such agreements and (i) may have been qualified by disclosure made to
such other party or parties, (ii) were made only as of the date of such
agreements or such other date(s) as may be specified in such agreements and are
subject to more recent developments, which may not be fully reflected in the
Company’s public disclosure, (iii) may reflect the allocation of risk among the
parties to such agreements and (iv) may apply materiality standards different
from what may be viewed as material to investors. Accordingly, these
representations and warranties may not describe the Company's actual state of
affairs at the date hereof and should not be relied upon.




Exhibit
      No
            
            Description
      of Exhibit3.1
            
            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 1,
      2007)4.1
            
            Indenture
      dated as of April 7, 2008, between Alpha Natural Resources, Inc. (the
      “Company”) and Union Bank of California, N.A., as Trustee (the “Trustee”)
      (Incorporated by reference to Exhibit 4.1 to the Current Report on Form
      8-K (File No. 1-32423) filed on April 9, 2008)4.2
            
            Subordinated
      Indenture dated as of April 7, 2008, between the Company and the
      Trustee (Incorporated by reference to Exhibit 4.2 to the Current Report on
      Form 8-K (File No. 1-32423) filed on April 9, 2008)4.3
            
            Supplemental
      Indenture dated as of April 7, 2008, between the Company and the
      Trustee (Incorporated by reference to Exhibit 4.3 to the Current Report on
      Form 8-K (File No. 1-32423) filed on April 9, 2008)4.4
            
            Form
      of 2.375% Convertible Senior Note due 2015 (Incorporated by reference to
      Exhibit 4.4 to the Current Report on Form 8-K (File No. 1-32423) filed on
      April 9, 2008)4.5
            
            Seventh
      Supplemental Indenture dated as of July 12, 2007 among Alpha Natural
      Resources, LLC, Alpha Natural Resources Capital Corp., the existing
      Guarantors, Wells Fargo Bank, N.A., as Trustee, and Cobra Natural
      Resources, LLC (Incorporated by reference to Exhibit 4.16 to the
      Registration Statement on Form S-3 of the Company (File No. 333-134081)
      filed on April 1, 2008)4.6
            
            Eighth
      Supplemental Indenture dated as of April 14, 2008, among Alpha
      Natural Resources, LLC, Alpha Natural Resources Capital Corp., the
      guarantors named therein and Wells Fargo Bank, National Association, as
      trustee (Incorporated by reference to Exhibit 4.1 to the Current Report on
      Form 8-K (File No. 1-32423) filed on April 15, 2008)10.1
            
            Description
      of Compensation Payable to Independent Directors (Incorporated by
      reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of the
      Company (File No. 1-32423) filed on November 7,
  2007.)10.2
            
            Third
      Amendment and Joinder Agreement, dated as of March 28, 2008, among
      Alpha Natural Resources, Inc. (as successor by merger to Alpha NR Holding,
      Inc. (“Holdings”)), Alpha Natural Resources, LLC (“ANR LLC”), Citicorp
      North America, Inc., as administrative agent and as collateral agent (the
      “Agent”), and the Lenders and Issuing Banks (the “Banks”) party thereto
      from time to time, to the Credit Agreement (the “Credit Agreement”), dated
      as of October 26, 2005, among Holdings, ANR LLC, the Banks and the
      Agent, as amended (Incorporated by reference to Exhibit 10.1 to the
      Current Report on Form 8-K (File No. 1-32423) filed on April 3,
      2008)10.3
            
            Fourth
      Amendment and Consent, dated as of March 31, 2008, among the Company,
      ANR LLC, the Agent and the Banks party thereto from time to time, to the
      Credit Agreement (Incorporated by reference to Exhibit 10.2 to the Current
      Report on Form 8-K (File No. 1-32423) filed on April 3,
    2008)12.1
            *
            Ratio of Earnings to Fixed
      Charges12.2
            *
            Computation of Other
      Ratios31(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.